The Bottom Line
- Potential Tax Relief: Certain interest payments from HMRC on tax refunds will no longer be subject to the punitive 45% corporation tax rate, potentially increasing the net value of successful claims.
- Extended Assessment Window: HMRC now has a longer timeframe to issue a tax assessment on these interest payments, creating a longer period of potential scrutiny for corporate accounts.
- Crucial Distinction: The tax treatment now depends on the interest rate awarded; only simple interest at or below a statutory rate benefits from the lower tax, while higher or compound interest awards remain subject to the 45% charge.
The Details
New regulations coming into force on 15th January 2026 will amend the tax treatment of interest payments made by HMRC to corporations following successful tax reclaims. Historically, under Part 8C of the Corporation Tax Act 2010, any “restitution interest” paid by HMRC—typically interest awarded by a court in a dispute over overpaid tax—was subject to a special 45% corporation tax charge. This high rate was designed to counteract any perceived benefit of prolonged tax litigation. The new amendment significantly refines this rule, creating a clearer distinction between standard compensatory interest and more exceptional awards.
The most significant change is the creation of a crucial exemption. Under the new rules, if a company receives an award of simple interest from HMRC that is calculated at a rate “equivalent to or lower than” the statutory rate for tax purposes, it will no longer fall under the 45% tax regime. Instead, it will be taxed at the main rate of corporation tax. This is a welcome clarification for businesses receiving standard interest on tax repayments, ensuring they are not penalised by the higher rate. However, awards of compound interest or simple interest at a rate above the statutory threshold will still be caught by the 45% charge.
While The Treasury has given with one hand, it has taken with the other. The regulations also extend the time limit for HMRC to make an assessment of the tax due on restitution interest. HMRC will now have until the later of two dates: two years after the end of the accounting period in which the interest is finalised, or the end of any other standard assessment period under the Taxes Acts. This provides HMRC with greater flexibility to make adjustments, particularly in complex cases where interest may be accounted for before a final settlement is reached. This means companies will need to keep these matters on their risk register for a longer period.
Source
Source: The Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations 2025
