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VAT: How to allocate payments to HMRC

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23rd Mar 2017
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Neil Warren discusses whether a taxpayer could pay VAT before the end of a VAT period, in order to avoid a potential default surcharge for that period.

Big questions

When does a VAT debt become due to HMRC? Is this the due payment date of the VAT return in question, or is a debt established as soon as a business makes a taxable supply and charges a customer VAT? Does a taxpayer have the right to pay VAT on account before the end of a VAT period because the taxable supply (or supplies) has established a liability to HMRC?

All these questions were considered in the upper tribunal case of Swanfield Ltd and others (2017 UKUT 0088).

The facts

The company made advance payments on account to HMRC before the end of some VAT quarters, in order to avoid any default surcharges for these periods. But HMRC allocated the payments instead to unpaid tax in earlier quarters (where the default surcharge position had already been established), on the basis that they could not allocate a payment to a period where the return had not been submitted and was not due.

The outcome was that further default surcharges were issued for the later periods (a total of £290,000). In most cases, the taxpayer had specifically asked for the payments on account to be allocated to the current quarter.

Example

Bill owed £10,000 on his February 2016 VAT return but only paid £5,000 by the due date, therefore incurring a 15% default surcharge penalty of £750. On 10 May, he paid £3,000 on account towards his May 2016 liability, and specifically asked HMRC to allocate the money to this period. But HMRC ignored this request and allocated the £3,000 to the outstanding debt for the February 2016 period.

The law

The tribunal agreed that; “the law allows a debtor to choose which of two debts or more he is paying” (para 37). It also confirmed that “when the taxpayer makes a taxable supply, a liability for output VAT arises, even though it does not have to be then paid” (para 38).

The taxpayer had the right to make advance VAT payments on the basis that a debt had been established, and there was no problem if the payment exceeded the total output tax charged to customers up to the date of payment.

This is similar to someone borrowing £100 from a friend which he has promised to repay in 12 months’ time. There is nothing to stop the borrower repaying his friend before this date – a debt exists even though it is not due.

No instructions

What is the position if a taxpayer makes a payment on account but does not specify the VAT period to which the payment should be allocated? The taxpayer felt that in such cases HMRC should have allocated the payments to the period which gave the most favourable result in terms of default surcharges ie the current period. The court disagreed; HMRC was justified in allocating the payment to the oldest debt on file, i.e. the earlier periods. So the appeal failed on this issue.

Best approach

The ideal outcome is to agree a time to pay arrangement with HMRC’s Business Payment Support Service before a return is legally due for payment (by calling: 0300 200 3835). If a time to pay agreement is established, this will avoid a default surcharge, and also gives certainty to the payment arrangements.

When making payments on account to HMRC, always specify which periods the tax should be set against.

Conclusion

It is important for taxpayers to have the opportunity to make payments in advance to avoid the temptation of spending the ‘tax money’ before it is due. Many years ago, I had a client who could not manage cash flow (he loved buying new vehicles as soon as there was spare cash in his bank account). I always arranged for him to pay his annual corporation tax bill of £60,000 in 10 advance instalments of £6,000 each. It worked perfectly.

Replies (1)

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All Paul Accountants in Leeds
By paulinleeds
27th Jan 2023 23:43

This is a very helpful article and discusses very clearly a situation that my client is now in; they are accruing numerous 15% default surcharges as they are behind with their VAT, partly due to Covid.

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