If you owe the tax man money...i.e. £1200...and you are paying £100 a month can the inland revenue charge you compound interest? I know someone who is in that position and just received a statement and it shows only £50 coming off the debt after 3 payments?
As far as I know, HMRC (the wonderful new name for the merged Inland Revenue and Customs and Excise) charge interest at a set rate for late payments. The actual rate payable depends on the type of tax and when it was originally due. It may be that the amount owing is already late by, say, 2 years; in which case HMRC have probably calculated the interest up to that point and added it to the principle.
There may also be penalties (as well as the interest), which they may have charged first (and so not reduced the debt by as much as you thought they have done).
I think that what I would do is to keep paying the instalments for the time being, keep all my records of payment, and write to HMRC and ask them to explain their statement. They may have got it wrong.
Apparently it relates to him having a company car which he actually informed them about....if it is compound interest it seems soo unfair, he'll never be free of it it seems.. thank you Martin and Ivanhoe, I looked at the website that you gave Martin and found it a bit confusing as I am not quite sure what bit to apply it to!...:-)
...and to think that HMRC (and the good old Inland Revenue before it) went through many years of trying to simplify the way they present their tax information!
I'm inclined to agree with Ivanhoe; it has probably had penalties added to it, or they've made a monumental cock-up.
Regarding compounding: well, all such interest is compounded in the sense that the longer it remains outstanding the interest will start to accumulate interest also. But thankfully the interest rates charged by HMRC are very low, so compounding has very little effect.
Suppose you had £100 outstanding and interest was 5%.
After one year (and assuming no payments) you would owe £105
After two years (and again assuming no payments) you would owe £105 + 5% of £105 = £110.25
(ie. the compounding effect has only added 25 pence to the amount owing).
Where compounding really gets awful is when high interest rates are charged:
Suppose you had £100 outstanding and interest was 30%.
After one year (and assuming no payments) you would owe £130
After two years (and again assuming no payments) you would owe £130 + 30% of £130 = £169
(ie. the compounding effect has added another £9 to the amount owing... or 9% of the original loan).
the higher the interest rate, the more the compounding effect hits you.
sorry for the rather crummy maths on this sunny Thursday.... I should get out more...
Jan, if it's a company car then the employer is obliged to inform the tax office as soon as the car is provided so that the tax office can make the necessary adjustment to the employees tax code so that tax is effectively paid on a monthly or weekly basis by reducing the employees tax code on PAYE. If this was not done then there is a good arguement that the company should pay the bill outright and deduct the payment monthly from salary thus avoiding penalties on the employee