In most cases, when taxpayers pay their tax bills it is clear to the taxpayer and HM Revenue and Customs (HMRC) as to which tax liability the payment relates. The payment is allocated accordingly.
However, in some circumstances it is unclear which liabilities a payment was intended to cover. For example, a taxpayer may have tax, interest and/or penalties outstanding for several tax years. How is the payment allocated?
HMRC acknowledges that taxpayers have the right to determine how a payment is allocated. The taxpayer needs to specify the allocation at the time of making the payment. In practice, the taxpayer will generally need to contact HMRC to do so. However, in some instances (e.g. where there is a ‘time to pay’ arrangement in place), HMRC may infer the allocation.
If the taxpayer does not exercise his or her right to allocate at the time of payment, HMRC guidance states that it has the right to do so (see HMRC’s Debt Management and Banking manual at DMBM210105).
There is no tax legislation explicitly covering the allocation of tax payments. However, in AJM Mansell Ltd v HMRC  UKFTT 602 (TC), the First-tier Tribunal 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 appropriation devolves on the creditor (The Mecca  AC 286).
- Running accounts: Where the debtor has a ‘running account’ with the creditor (e.g. a bank account), a payment is allocated to the earliest debt (Clayton’s case  1 Mer 572).
The AJM Mansell Ltd case concerned monthly PAYE and National Insurance contributions (NICs). The tribunal found that each month’s liability was a separate debt, so there was no ‘running account’. This meant that the rule in The Mecca applied, so the employer could allocate its PAYE and NICs payments in any way it chose, provided it did so before the money changed hands.
More recently, in Kritikos v Revenue and Customs  UKFTT 677 (TC), the taxpayer’s balancing payment of £1,010 for the tax year 2011/12 was paid late. Furthermore, HMRC allocated only £210 to the balancing payment. The remainder was allocated to penalties outstanding between 1999 and 2015. The appellant appealed against late payment penalties.
The appellant had not stated how the payments he made should be allocated. It was therefore left to HMRC’s discretion. The First-tier Tribunal found that, although HMRC’s allocation of money was done in a way which was detrimental to the appellant (in that it resulted in further penalties), HMRC was within the law to do so and in matching the payment to historic liabilities in the form of penalties.
Even if HMRC has allocated a payment initially, it may be possible to request a reallocation (e.g. to minimise interest on overdue tax). However, HMRC states that this reallocation must be requested before HMRC communicates the initial allocation to the taxpayer (see DMBM210120)
The above article was first published in Business Tax Insider (May 2020) (www.taxinsider.co.uk).