VAT on interst on overdue debts

[Gregorypeck]

We are proposing to charge some dilatory payers interest on their late-paid debts together with the appropriate administration charge under the Late Payments of Commercial Debts Act.

Are such charges VAT exempt, zero-rated or Outside the Scope of VAT please?

[pugwash4x4]

You could consider it OUtside scope, but the VAT man would try and and say it wsa just exempt.

Unless your business is related to the supply of finance?

[Eric Mc]

Standard Rated - unless you are a financial institution, such as a bank.

If in doubt, charge at Standard Rate. Most of your customers can recover it.

[Gregorypeck]

We're a recruitment agency supplying staff to the NHS. I don't think they can recover VAT, so can we argue outside scope?

[Eric Mc]

Are you sure thay cannot recover VAT?

I bet they are VAT registered but they may have problems recovering all their Input VAT due to the Partial Exemption rules.

The VAT you charge your customers is based on the VAT rules relating to what YOU are supplying, not the basis on whether your customer can or cannot recover it.

And as it is a government agency who seem to be the culprits - stuff it - just go ahead and whack them with as much VAT as you can.

[JustinP1]

Eric Mc said:

Standard Rated - unless you are a financial institution, such as a bank.

If in doubt, charge at Standard Rate. Most of your customers can recover it.

I seem to remember that there is no VAT on the compensatory charge or interest.

[Eric Mc]

You may be correct - but the question is, if no VAT is charged, is that because it is Zero, Exempt or Outside the Scope?

A few minutes Googling indicates the following -

The interest is charged to the defaulting customer on the VAT Inclusive Value of the debt

There is no VAT charged on the interest

The interest is treated as a VAT Exempt supply

Be aware that generating Exempt Supplies can restrict the amount of Input VAT you reclaim on your costs, although I would expect that interest charges to defaulting customers would never generate enough Exempt Supplies to take you above the Partial Exemption de minimus levels.


One scenario where things would be different would be when the business operates the VAT Flat Rate Scheme.

If the business charging the interest is on the VAT Flat Rate Scheme, then Outoput VAT at the correct Flat Rate Percentage should be charged on the interest.

[pugwash4x4]

As per first post

you'll end up arguing with a customs officer about it- you'll say its outside scops (as it is), but they'll be difficult and claim its exempt.

Stick it thorugh as outside of scope and worry about it later!

[Eric Mc]

The VAT legislation says it's exempt.