The increase in HMRC interest rates from 22 August 2023 will make it harder for taxpayers to clear these debts.
HMRC is seeing more taxpayers getting into debt and the average value of those debts is increasing as the economic situation remains challenging. The majority of tax debt is owed by small and medium-sized businesses.
HMRC’s debt balance at the end of June 2023 was £44.5bn, a reduction from £45.9bn at the end of March 2023, but higher than the £42.0bn figure in June 2022. HMRC forecasts that the figure will remain close to this level in 2023/24.
The pandemic-related peak debt figure hit £67bn in August 2020. For context, the balance just before the pandemic was £16bn (in January 2020).
At the end of March 2020, HMRC had £2bn worth of debt, spread across 647,000 taxpayers with time to pay arrangements. By the end of March 2023, HMRC had around £5.7bn split between 912,000 taxpayers with time to pay arrangements. This means that most debt is not included in a time to pay arrangement.
HMRC has indicated that while it is resolving debts at levels significantly above the pre-pandemic average, the volume of new debt exceeds the level that it is able to resolve. The value of new debt was over 50% higher in 2021/22 than the average for the period April 2017 to March 2020. The flow of new debt remained at this elevated level throughout 2022/23.
From 22 August 2023 HMRC interest rates stand at 7.75% for late payments of tax (other than corporation tax instalments) and 4.25% for overpayments.
The higher interest rate on late payments will increase the balances owed by taxpayers and makes it more difficult for them to clear these debts. Existing time to pay arrangements may be insufficient to clear the debt and need to be revisited.
The rate for repayments is now better than some rates offered by banks.
Subject to certain criteria, taxpayers can now make time to pay arrangements online for self assessment, employers’ PAYE and VAT. While late payment interest is charged on balances in time to pay arrangements, late payment penalties can be avoided by setting up a time to pay arrangement before a penalty trigger date.
ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.