Customs faces VAT interest storm

Customs & Excise has run into a storm of criticism over its decision to hike up interest charges on those businesses which underpay or delay payment of VAT.

The rise in rates, from 6.25% to 9.5%, was widely seen by tax experts as a way of penalising companies that withheld VAT payments during disputes.

The new rate widens the gap between these and interest charges paid on compensation payments made by Customs, pegged at 6%.

Customs said the changes followed from its adoption of the interest rate calculation method used by the Inland Revenue. The Revenue uses a system called the ?reference rate? which moves with a basket of interest rates set by the high street banks.

The formula was adjusted upwards by 2.5 percentage points to punish VAT defaulters, while interest paid by Customs was adjusted downwards by one percentage point.

A spokesman for Customs said the formula would allow the interest base rate to be changed quickly to keep pace with market rates.

He added: ?The higher rate is also designed to be punitive and act as a deterrent against late payment and underpayment. The rate attached to compensation payments [by Customs] is a more accurate reflection of what the banks actually charge companies.?

But Kevin Ahern, a Deloitte & Touche VAT partner, said Customs had failed to follow the Revenue?s formula. He pointed out the Revenue reduced the rate for corporate tax by 2%, taking into account ?that most companies obtain tax relief for interest paid on any borrowing?.

John Arnold, a VAT partner at Ernst & Young, said Customs wanted to punish those companies that withheld VAT payments during disputes.

?But the only reason companies don?t pay VAT during disputes is because there is the three-year rule and the companies won?t get back their money or interest beyond three years if they win.?

He said it was ?unacceptable tax collection? to make tax money more valuable to Customs than business, using interest rates in order to correct ?a situation created by Customs in the first place?.

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