Cmrc

Terdoo

how do you work this: small companies charge interest rate of 8% above base rate ( vat 20%) what is the interest chargeable on net £3000 which is 60 days late when the base is is 1%?
This is cbt task 1.3b

Thanks in advance

uknitty

Firstly we are given the Net amount of the debt but told that interest is payable on the gross. So the first thing to do is calculate the gross value of the debt - £3000 * 120 % = £3600 gross.

We are then told that interest is charged at 8 % above the base of 1 % - so it is charged at 9% per annum.

9% of a £3600 debt is £324 interest due in the whole year.

However, the debt is only outstanding for a part of the year though so we have to pro rata it as follows - 60/365 * £324 = £53.26

I'm not sure if that is how a textbook would teach you how to do it, but this is how I would attempt the question!

coojee

Why is interest charged on the gross amount? That means interest is being charged on the VAT which isn't a debt to the company. Isn't interest only charged on the net amount? I haven't seen the question so maybe it says in there that interest is charged on the gross but it doesn't specifically say that in the OP's post.

uknitty

If you look at the question the OP is refering to (question 1.3 on CBA2) The question states interest is charged on the gross amount.

Terdoo

Re cmrc

Hi thank you for replying, I have got similar question but as follows;
The bank of England charge interest rate at 2% a company have a late payment of £3000.00 when the base is 2% how do you calculate that? do you add the small company interest rate on?

Thank you in advance

uknitty

Here is an interesting link about how small businesses should apply interest to overdue debts.

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073792170&type=RESOURCES

Interest can be charged at a maximum of up to 8% above base rate and should definitely be calculated on the gross amount.

Thinking this through I would imagine it is help out small businesses who will have recorded the sale and are required to pay the over the VAT on a debt that is delinquent but yet not a bad debt written off(i.e. eligible for a rebate) It doesn't seem to be a huge help, but the interest may compensate in some small part for any finance charges incurred by the business in paying over tax on a sale for which they had not recieved payment.

With relation to the second question you have posted, have you posted it word for word from the question book ? There is no mention in the above about the business charging above base rate so, based purely on what you said above I would work it out at just 2% (as the question makes no mention of any amount above base rate being charged)

A small business has the right to charge interest at up to 8% above base rate, but they are not obliged to do so. So, they could charge 5% or they could charge nothing at all. The answer to the above question could just a equally be Nil if the business choose not to charge interest