Income Tax (Trading and Other Income) Act 2005 section 54

Penalties, interest and VAT surcharges

Section 54 prevents businesses from deducting tax penalties, statutory interest on unpaid tax, and VAT default surcharges when calculating their trading profits for income tax purposes.

• No deduction is allowed for penalties or interest arising from a wide range of taxes including income tax, capital gains tax, corporation tax, VAT, excise duties, insurance premium tax, landfill tax, climate change levy, aggregates levy, customs duties, and stamp duty land tax.
• The prohibition also covers penalties for errors and failures to notify under the cross-tax penalty regimes in Finance Acts 2007, 2008, and 2017, as well as construction industry scheme interest.
• VAT default surcharges imposed under section 59 of the VAT Act 1994 are similarly non-deductible when calculating trading profits.
• The same disallowance rules apply to property income (via section 272) and to non-trading income (via section 869), ensuring consistent treatment across all income categories.