An invariable feature of an HMRC enquiry ending in a contract settlement is that the tax ultimately agreed may be subject to interest and penalties.  

Much has been written about penalties and the various tariffs which HMRC will adopt in different situations and clearly there is scope for discussion on the amount of penalties to be charged. This will depend upon the circumstances and conduct of the client – and indeed sometimes the conduct of HMRC.  

Clients are naturally anxious for the penalty to be reduced as far as possible and they usually hope that some flexibility can also be secured regarding the interest element – which depending upon the amounts of tax involved, can sometimes be substantial.  

The invariable stance of HMRC regarding interest is that it is not negotiable at all. They often suggest that it is merely economic recompense for being out of their money. This reason always irritates the client who is fully aware that interest on unpaid tax is substantially more expensive than any commercial restitution.  

The recent decision in Gretton v HMRC TC 776 might have given some hope in this connection because in that case the taxpayer was relieved of both penalties and interest by the First Tier Tribunal .  

However, this was false hope. The Upper Tribunal have now overturned the decision and confirmed that interest under Section 86 Taxes Management Act 1970 is mandatory. The Tribunal explained that it had no jurisdiction or discretion to determine that interest should not be payable.  

This is not new and should not have been a surprise because it follows the High Court decision in Duffy v CIR (2003). It is not clear in the face of this authority, how the First Tier Tribunal were able to conclude that the taxpayer could be relieved of the Section 86 interest.