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Allocate Your Tax Payments – Before HMRC Does!

Mark McLaughlin points out that failing to inform HM Revenue and Customs how tax payments should be allocated could have unfortunate consequences.

Taxpayers (e.g. property landlords) generally pay the specific amounts of tax they owe, and it is normally straightforward for HM Revenue and Customs (HMRC) to identify and allocate payments to the relevant tax liabilities.

However, in some cases (e.g. if the taxpayer has various unpaid tax liabilities, and makes a payment that is not sufficient to satisfy those liabilities in full; or if an employer’s PAYE payments are made sporadically), HMRC may find the exercise of matching payments with liabilities more difficult. In some cases, HMRC’s payment allocation could possibly be to the taxpayer’s detriment.

Don’t leave it to HMRC!
In Brown v Revenue & Customs [2015] UKFTT 571 (TC), the taxpayer received from HMRC late payment surcharges and penalties for various tax years. She appealed, arguing (among other things) that HMRC’s allocation of tax payments resulted in an increase in the amount of late payment penalties and surcharges.

The First-tier Tribunal found that when making her various tax payments, the taxpayer did not request any of those payments to be allocated to her tax liability for any particular tax year. The tribunal therefore had to determine which payments should be allocated to which tax years’ liabilities, which was of potential relevance to the calculation of the late payment penalties and surcharges.

How payments are allocated
The tribunal in Brown referred to another case (AJM Mansell Ltd v HMRC [2012] UKFTT 602 (TC)). The tribunal in that case noted the following principles, derived from 19th century common law cases:

  • separate debts - Where a debtor makes a payment to a creditor he may appropriate the money as he pleases; however, if the debtor does not make any appropriation, the right of application devolves on the creditor (The Mecca [1897] AC 286); and
  • running accounts - A different rule applies when the debtor has a ‘running account’ with the creditor, such as a bank account; in that situation, a payment is allocated to the earliest debt (Clayton’s case [1816] 1 Mer 572).

Which rule applies?
The tribunal in Brown held that the rule in Clayton’s case was not applicable in the present case, as the taxpayer’s tax liability for each tax year resulted in a separate debt becoming due to HMRC, so she had no ‘running account’ with HMRC. The tribunal therefore concluded that, in the absence of any allocation by the taxpayer, HMRC could allocate the payments as it saw fit (although HMRC’s public law duties would preclude it from making an unreasonable allocation).

In the context of monthly PAYE and NIC, the tribunal in AJM Mansell Ltd found that each month’s liability was a separate debt, so there was also no ‘running account’. This meant that the rule in The Mecca applied, as opposed to the rule in Clayton’s case. In other words, the employer is allowed to allocate its PAYE and NIC payments in any way it chooses, provided that it does so before the money changes hands.

Thus if the taxpayer wishes to allocate a tax payment, (s)he should notify HMRC at the time of making it. Alternatively, if HMRC choose how to allocate, the taxpayer can request that the payment be reallocated at any point up to when HMRC communicates the allocation of the payment to the taxpayer. However, after this point (or once the taxpayer has exercised their right of allocation) HMRC guidance states that both parties are bound by it (see HMRC’s Debt Management and Banking manual at DMBM210105).

There is no right of appeal against HMRC’s payment allocation. The taxpayer could apply for judicial review (see DMBM210120), but this might prove to be expensive.

Practical Tip :

The taxpayer in the Brown case was a self-employed prison doctor, but the same principles concerning payment allocations generally apply to property landlords. To avoid uncertainty and possibly mitigate late payment interest and penalty charges, it is probably better to play safe and ask HMRC (preferably in writing) to allocate payments, where appropriate. Tax overpayments can also generally be allocated in accordance with the taxpayer’s request (see DMBM210100).

This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.