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Corporation tax on restitution interest

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The government has introduced a 45% rate of corporation tax on restitution interest paid by HMRC arising from a mistake of law in specific circumstances with effect from 21 October 2015. This is intended to reflect the historic rates of corporation tax over the period to which typical awards relate, as well as the effect of compound interest. HMRC will also be obliged to withhold tax on payments of restitution interest from 26 October 2015. The changes are contained in a proposed new clause 8 that was added to the Finance (No. 2) Bill 2015 at report stage.

Chris Morgan, KPMG tax partner, told Tax Journal: ‘This is a retrograde step for many reasons. While the commentary published with the amendment says the increased rate was to take account of the differing tax rates in previous years to which the claims relate, there is no transparency over why it is set at 45%. Also, when the government is asking companies to abide by the spirit of legislation, it risks undermining its appeal if it tries to “move the goal posts” to claw back part of the compensation due to taxpayers under EU law. A more than 200% increase in the tax rate risks undermining certainty and stability and so risks damaging the business climate. There’s a strong chance this will spawn more litigation and create further instability in the tax system.’

The changes affect legal disputes where HMRC’s treatment of cross-border transactions allegedly breached EU law. High-profile cases of this nature involve Littlewoods, BAT and Prudential.

An article on this topic will be published shortly. For the tax impact information note, see