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Corporation Tax – restitution award

Corporation Tax – restitution award CORPORATION TAX

A special 45% rate of Corporation Tax applies on any interest HMRC is required to pay to taxpayers who overpaid tax under ‘a mistake of law’. The new tax became effective on 21 October 2015 and applies to any payment categorised as a restitution award. A restitution award is the interest element of the award (i.e. the element which represents compensation for the time value of money).

The underlying legislation imposes an obligation on HMRC to withhold tax on any payments of restitution interest. The decision to introduce this new measure was taken following HMRC losing a landmark case. The case against Littlewoods concerned overpaid VAT and whether capital sums overpaid by a taxpayer should be calculated using simple or compound interest.

The measure does not apply to tax refunds for overpaid tax nor to statutory interest repayments, which continue to be liable to Corporation Tax. The measure ensures that the rate of Corporation Tax applicable to payments of restitution interest made by HMRC reflects both the rates of Corporation Tax over the period to which typical awards relate, and the effect of compounding interest not taxed in the year to which it relates.

New legislation is being put in place to remove charitable companies and the income of policyholders of with-profits funds from the scope of the rules.

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