UK sets 2-year window on 45% restitution interest

Let’s get to the point: the Treasury has signed off rules to tidy up how the 45% corporation tax on ‘restitution interest’ works. The instrument was made on 1 December 2025, laid the same day, and takes effect from 15 January 2026.

What is ‘restitution interest’? It’s the interest HMRC pays when a company successfully proves that tax was taken in error and the claim is finally decided by a court or settled with HMRC. If the interest isn’t capped at a simple statutory rate, it’s treated as restitution interest under Part 8C.

That category matters because the law applies a ring‑fenced 45% corporation tax to it. You can’t offset other reliefs against this charge, and the rate is set directly in statute. This special treatment was designed for large, often compound, awards linked to long periods.

The first change is a clean exclusion. Awards of simple interest at a rate equivalent to or lower than a statutory rate set for tax purposes are now outside Part 8C. In plain English: if the interest you’re paid is simple and at an official tax‑law rate (or lower), it won’t be hit by the 45% regime. HMRC’s policy paper trails this clarification and the draft text spells it out.

To keep things consistent, the duty on HMRC to deduct tax at source from restitution interest is aligned with that exclusion. The withholding rule does not apply where the payment is only simple interest at a statutory rate or below.

The second change is a clearer assessment clock. HMRC will have up to two years after the end of the accounting period in which a claim is finally determined to make an assessment, unless another law gives a longer window, in which case that later limit applies. The policy paper and draft instrument set out this timetable.

Here’s a classroom sketch. Imagine a company overpays VAT, starts its claim in 2023 and the court gives a final decision in July 2026. If only simple statutory‑rate interest is due, Part 8C doesn’t apply. If the court awards compound interest above the statutory rate, the 45% charge applies and HMRC’s two‑year clock starts from that accounting period.

Why make these tweaks? HMRC says the aim is to confirm that Part 8C only bites on awards above statutory rates and to ensure the assessment rules work the same way for everyone once a case ends. It’s a clarification of scope and timing, not a widening of who pays.

Who should pay attention? HMRC notes this mainly affects companies that have made, or may receive, restitution interest following common‑law claims about tax paid under a mistake of law or unlawfully collected tax. For most businesses, nothing changes in routine tax returns.

For learners and teachers, the takeaways are practical. Restitution interest is about returning money with interest after a legal error; simple statutory interest is treated as a baseline and kept outside the 45% charge; and there is now a clear, teachable two‑year window for HMRC to assess once a case is finally resolved.