The interest rate applied by HMRC to the late payment of tax rises to 7.5% on 11 July, the highest level in 15 years, adding a significant financial burden to those who fail to pay their tax bills on time, according to BDO.
The increase comes as HMRC seeks to get tougher on late payers. Last week, the tax authority issued updated guidance which warns taxpayers that it may adjust their tax codes to collect up to 50% of gross income in order to recoup outstanding debts.
HMRC is under currently under significant pressure to recover outstanding tax debt. The latest figures released in February this year revealed that the level of tax debt owed to HMRC rose by 22% year-on-year to reach more than £48bn ($61bn) as at 31 December 2022.
This total debt comprised £7.8bn of ‘managed debt’ and £40.3bn in debt available for pursuit.
While the numbers of taxpayers in Time to Pay arrangements fell by 14% over the previous year to 730,617 at the end of December 2022, the level of managed debt rose considerably by 88% to £7.8bn, up from 4.1bn in December 2021.
Commenting on this, BDO head of tax dispute resolution, Dawn Register, said: “While some may have got used to paying modest interest rates on late payments in the past, the current rate of 7.5% can come as a real shock. As the late payment interest rate tracks 2.5 percentage points above the base rate, there is always the possibility that this will rise even further.
“In an effort to get tougher on the late payers, the tax authority is now warning people that it may tax up to half of their gross income via their tax code if they don’t pay their bills on time. This would be very unwelcome to most taxpayers and could seriously affect someone’s ability to meet their living costs. We would always advise those in genuine financial difficulty and unable to pay on time to seek an affordable Time to Pay arrangement with HMRC.
“While this latest initiative is a sign of HMRC’s desire to get tougher on tax debtors, there is still a mountain to climb. The tax authority is under huge pressure to reduce the £48bn in outstanding tax that remains unpaid but it continues to be hamstrung by a lack of resources. The Government should consider further investment in HMRC’s debt management unit to help it collect what’s due and boost the public coffers.”