The Tax and Customs Administration does not charge tax interest as compensation for losses incurred. This has been Court of Appeal of The Hague confirmed once again recently.
A strange arrangement
We already knew that tax interest is a somewhat odd arrangement. Just take the rate, for example. After all, who is currently paying 4% (or even 8% in the context of corporation tax) in interest? And as part of the efforts to tackle the coronavirus crisis, this rate has suddenly been set at 0.01% for a few months (because a rate of 0% is not possible).
Moreover, it is very strange that you do pay tax interest on tax due, but that interest is (virtually) never paid on a tax refund. That is, to say the least, unfair.
Compensation
The case in which the Court of Appeal in The Hague ruled concerns a taxpayer who submitted an incorrect tax return. On the basis of that incorrect tax return, the Tax and Customs Administration issued a provisional assessment. However, the amount due under that assessment was not paid out, simply because the taxpayer had not provided the Tax and Customs Administration with his bank account number.
When issuing the final tax assessment, the Tax and Customs Administration corrects the assessment. The amount of the provisional assessment must be refunded. The Tax and Customs Administration charges tax interest on the tax calculated in the final assessment. The taxpayer does not consider this reasonable, as he never received the tax in his bank account. The Tax and Customs Administration offsets the tax due against the refund that was not received.
The Court has ruled that the tax interest charged is in accordance with the law. The tax interest is not calculated to compensate for the loss of interest suffered by the State. The scheme is based on the principle of default.
The Court also ruled that the Tax and Customs Administration had not acted negligently. A key factor in this regard is that the provisional assessment, setting out the amount to be received, was issued following an incorrect tax return submitted by the taxpayer.
Which lesson?
Given the temporarily very low rate of 0.01%, we did not need to pay attention to tax interest for the time being. With effect from 1 October 2020, the rate will be set back to 4% (including for corporation tax). At such a rate, the interest due can mount up quickly. To avoid any surprises in this regard, it is important to monitor closely whether the provisional assessments are in line with the (expected) taxable income.