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D7: Set off and allocation

HMRC general right of set off across taxes

 

"(1)  This section applies where there is both a credit and a debit in relation to a person.
(2)  The Commissioners may set the credit against the debit (subject to section 131 and any obligation of the Commissioners to set the credit against another sum).
(3)  The obligations of the Commissioners and the person concerned are discharged to the extent of any set-off under subsection (2).
(4)  “Credit”, in relation to a person, means—
(a)  a sum that is payable by the Commissioners to the person under or by virtue of an enactment, or
(b)  a relevant sum that may be repaid to the person by the Commissioners.
(5)  For the purposes of subsection (4), in relation to a person, “relevant sum” means a sum that was paid in connection with any liability (including any purported or anticipated liability) of that person to make a payment to the Commissioners under or by virtue of an enactment or under a contract settlement.
(6)  “Debit”, in relation to a person, means a sum that is payable by the person to the Commissioners under or by virtue of an enactment or under a contract settlement.
(7)  In this section references to sums paid, repaid or payable by or to a person (however expressed) include sums that have been or are to be credited by or to a person.
(8)  This section has effect without prejudice to any other power of the Commissioners to set off amounts." (FA 2008, s.130)

See s.131.

Guidance in DMBM700000

HMRC general right of set off across taxes

HMRC set off before paying VAT claim

 

"(2A)     Where—

(a)     as a result of a claim under this section by virtue of subsection (1) or (1A) above an amount falls to be credited to a person, and

(b)     after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit,

the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains." (VATA 1994, s.80(2A))

HMRC set off before paying VAT claim

HMRC set off before paying amounts under VATA

 

"(3)     Subject to subsection (1) above, in any case where—

(a)     an amount is due from the Commissioners to any person under any provision of this Act, and

(b)     that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the person concerned shall be discharged." (VATA 1994, s.81(3))

(1)     Any interest payable by the Commissioners (whether under an enactment or instrument or otherwise) to a person on a sum due to him under or by virtue of any provision of this Act shall be treated as an amount due by way of credit under section 25(3).

 

​(2)     Subsection (1) above shall be disregarded for the purpose of determining a person's entitlement to interest or the amount of interest to which he is entitled." (VATA 1994, s.81(1) - (2))

“It will be seen from section 88 of the 1994 Act, that in principle both the taxpayer and the Revenue are entitled to set off amounts due from the one to the other. “ (Igmusic Ltd v. HMRC [2014] UKFTT 447 (TC), §8, Judge Cornwell-Kelly - presumably should refer s.81). 
 

VAT input credit only arises when right exercised

 

“It is clear that the entitlement to deduct input tax is only exercised, and becomes effective, by claiming it on the return. Unless and until it is claimed, which it need not be, the full amount of output tax is due. It is only by completing the VAT return that the entitlement to input tax is crystallised and deducted from output tax. This means that, even after the VAT period has ended, the precise amount due is not ascertained, and will not be until the return is completed and submitted.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §51(1), Nugee J and Judge Falk).

But see Directive 2006/112 Art 167 and Art 206

Set off against amounts due arising out of the same mistake irrespective of whether HMRC are in time to assess

"(3A)     Where—

(a)     the Commissioners are liable to pay or repay any amount to any person under this Act,

(b)     that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person, and

(c)     by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,

any limitation on the time within which the Commissioners are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to be set against the amount mentioned in paragraph (a) above." (VATA 1994, s.81(3A))

No set off where insolvency procedure commenced

(4B)     Subject to subsection (4C) below, the following are the times when an insolvency procedure is to be taken, for the purposes of this section, to be applied to any person, that is to say—

(a)     when a bankruptcy order or winding-up order or award of sequestration is made or an administrator is appointed in relation to that person;

(b)     when that person is put into administrative receivership;

(c)     when that person, being a corporation, passes a resolution for voluntary winding up;

(d)     when any voluntary arrangement approved in accordance with Part I or VIII of the Insolvency Act 1986 or Part II or Chapter II of Part VIII of the Insolvency (Northern Ireland) Order 1989 comes into force in relation to that person;

(e)     when a deed of arrangement registered in accordance with or Chapter I of Part VIII of that Order of 1989 takes effect in relation to that person;

(f)     when that person's estate becomes vested in any other person as that person's trustee under a trust deed.

 

(4C)     In this section, references to the application of an insolvency procedure to a person do not include—

(a)     the application of an insolvency procedure to a person at a time when another insolvency procedure applies to the person, or

(b)     the application of an insolvency procedure to a person immediately upon another insolvency procedure ceasing to have effect.

 

(4D)     For the purposes of this section a person shall be regarded as being in administrative receivership throughout any continuous period for which (disregarding any temporary vacancy in the office of receiver) there is an administrative receiver of that person, and the reference in subsection (4B) above to a person being put into administrative receivership shall be construed accordingly.

 

(5)     In this section—

(a)     “administration order” means an administration order under Part II of the Insolvency Act 1986 or an administration order within the meaning of Article 5(1) of the Insolvency (Northern Ireland) Order 1989;4

(b)     “administrative receiver” means an administrative receiver within the meaning of section 251 of the Insolvency Act 1986 or Article 5(1) of the Insolvency (Northern Ireland) Order 1989;

(ba)     “administrator” means a person appointed to manage the affairs, business and property of another person under Schedule B1 to that Act or to that Order; and

(c)     “trust deed” has the same meaning as in the Bankruptcy (Scotland) Act 2016." (VATA 1994, s.81(4B) - (5))

HMRC set off before paying amounts under VATA

Restriction on set off by taxpayers

 

"(2)     Provision shall be made by rules of court with respect to the following matters:

[...]

(g)     for providing:

(i)     that a person shall not be entitled to avail himself of any set-off or counter-claim in any proceedings by the Crown for the recovery of taxes, duties or penalties, or to avail himself in proceedings of any other nature by the Crown of any set-off or counterclaim arising out of a right or claim to repayment in respect of any taxes, duties or penalties;" (Crown Proceedings Act 1947, s.35(2)(g)(i) - also applies to certain penalties and interest - see TMA 1970 s.69)

Restriction on set off by taxpayers

No set off of tax wrongly self-assessed against tax correctly assessed

“I do not consider that the Darvel and self-assessments are alternative assessments. The latter were, and are, final and conclusive. This Tribunal has no jurisdiction to consider the self-assessment returns for Services and Retail… For all these reasons I find that the Tribunal has no power to order HMRC to set off or credit the corporation tax paid by Services and Retail against the Darvel assessments.” (James H Donald (Darvel) Ltd v. HMRC [2017] UKFTT 446 (TC), §§57…60, Judge Anne Scott).

No set off of tax wrongly self-assessed against tax correctly assessed

Amounts paid under a confiscation order

"HMRC’s position is that Mr Martin’s tax liability is for the full amount and that is the amount which falls to be assessed under section 29. It is only at the enforcement stage that account is taken of amounts paid pursuant to the Confiscation Order… However, for the taxpayer to pay tax on the profit of £X which had already been confiscated would be to effect double recovery in relation to the offence: the taxpayer would lose the benefit of his criminal activity and yet still be liable to pay tax on it as though he had retained it. It is not because payment under the confiscation order discharges the tax that the taxpayer avoids double recovery; rather it is because it would be unjust for the Crown to recover twice. Whether this injustice is avoided as a matter of legal right once the taxpayer has met his obligations under the confiscation order or whether it is a matter of concession on the part of HMRC does not matter. The point is that the tax liability for which an assessment can be raised is a liability in respect of the profit of £X.” (Martin v. HMRC [2015] UKUT 161 (TCC), §§41…42, Warren J).
 

Amounts paid under a confiscation order

Allocation of payments

Ordinary principles of payment apply

“Both parties accepted before us that general legal principles apply to payments in respect of VAT debts…” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §18, Nugee J and Judge Falk).

Each debt is a separate debt (no running account)

“Both parties accepted before us that … the VAT due in respect of each VAT quarter is a separate debt rather than there being a “running account” between HMRC and the taxpayer.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §18, Nugee J and Judge Falk).
 

"[72] As part of its discussion, the Upper Tribunal considered general legal principles that apply to payments in respect of VAT, and that the VAT due in respect of each VAT quarter is a separate debt rather than there being a “running account” between HMRC and the taxpayer. Accordingly, the principles established in The Mecca applied. In contrast, where there is a running account, the rule in Clayton’s Case (1816) 1 Mer 585, 608 applies and credits are allocated to the earliest debits automatically, with no different appropriation being possible." (Desser & Co Ltd v. HMRC [2023] UKFTT 662 (TC), Judge Manyarara)

Allocation of payments

- Taxpayer may allocate a payment made to a specific debt

“Accordingly, the principles established in Cory Bros v Owners of the Steamship Mecca (“The Mecca”) [1897] AC 286 apply. As Lord Macnaghten said at 293: 
‘When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he made the payment, the right of application devolves on the creditor…[T]he creditor has the right of election ‘up to the very last moment’…”
In contrast, where there is a running account the rule in Clayton’s Case (1816) 1 Mer 585, 608 applies, and credits are allocated to the earliest debits automatically, with no different appropriation being possible.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §§18…19, Nugee J and Judge Falk).

 

“Through specifying the period to which their cheque related, the appellants accept that they made an allocation.” (Bilaman Management Services LLP v. HMRC [2014] UKFTT 270 (TC), §38, Judge Raghavan).

 

Allocation by debtor cannot be made after the time of the payment

"[65] In respect of the issue of allocation, in Cory Bros v Owners of the Steamship Mecca (“The Mecca”) [1897] AC 286, the debtor’s right to appropriation was found to expire at the time of payment. The creditor has much greater flexibility and can even delay appropriation until a case is being heard. The result of a conclusion that the debtor is not entitled to allocate a payment to an amount that is not presently due is that the debtor never has the chance to allocate a payment made in advance of the due date, whereas the creditor acquires that right as from the due date." (Desser & Co Ltd v. HMRC [2023] UKFTT 662 (TC), Judge Manyarara)

"[35] It is argued that a request to allocate can be made no later than the payment: see 'The Mecca'; Cory Brothers and Company Ltd v The Owners of the Turkish Steamship 'Mecca' [1897] AC 286, esp at 293 per Lord Macnaghten. When a debtor is making a payment to his creditor, he may appropriate the money as he pleaded, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time he makes the payment, the right of appropriation devolves on the creditor." (Crawford v. HMRC [2022] UKFTT 37 (TC), Judge McNall)

 

Except perhaps if the creditor allows/does not object to reallocation

 

"[36] In principle, that may be right. It is an easy rule to apply in a clear-cut situation. But this situation, to my eyes, and in the context of an interlocutory hearing, is not so clear-cut...

[37] HMRC's own internal Self-Assessment notes at page 36 of bundle 2 give some corroborative detail for the letters, and its own internal actions, such as faxing a note to another section on 28 March 2012 'requesting numerous reallocations'. If HMRC is now right, then HMRC did not have to do any of those things, and indeed could not have been made to do them. That introduces doubt as to the validity of its position now." ​(Crawford v. HMRC [2022] UKFTT 37 (TC), Judge McNall)

- Taxpayer may allocate a payment made to a specific debt

Allocation to debt before payment becomes due​

 

Taxpayer can allocate to debts prior to payment becoming due

 

“We do not see any reason why a person should not appropriate a payment to a debt that has been incurred even if the due date for payment of that debt has not arrived. Any other view would be likely to give rise to serious inconvenience.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §37, Nugee J and Judge Falk).

 

Debt can exist even if payment not yet due

 

“In our view it is clear that an amount that is owed but that has not yet fallen due for payment is properly described as a debt. This is an entirely standard and normal usage of the term debt. For example if A borrows £100 from B on terms that it is repayable in 12 months’ time, it would be normal to regard A as owing B a debt of £100 even though the 12 months had not expired.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §34, Nugee J and Judge Falk).

"[66] We have found that it is correct that the concept of a “debt” does not appear in the relevant VAT legislation. It is relevant only insofar as common law principles on appropriation of payments apply and a distinction is drawn between amounts that are debts and amounts that are not. It is clear that an amount that is owed but that has not yet fallen due for payment is properly described as a debt." (Desser & Co Ltd v. HMRC [2023] UKFTT 662 (TC), Judge Manyarara)

 

VAT debt exists from time to time

 

“The taxpayer who makes a taxable supply becomes thereby liable to pay the output tax on the supply to HMRC, even though he does not have to actually pay it until the due date for payment, which in the normal case (and ignoring rules applying to electronic returns) is the last day of the month following the relevant quarter. That seems to us to be a present obligation, albeit one that is to be discharged in the future, and on normal principles is a debt.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §35, Nugee J and Judge Falk).

 

Debt exists even if it may be reduced prior to payment becoming due (e.g. input tax credit)

 

“That seems to us to establish that an obligation to pay a sum can properly be regarded as a debt even though it was not only payable in the future but was liable, by the time that it fell to be paid, to be reduced, or even extinguished. We agree.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §41, Nugee J and Judge Falk).
 

Allocation to debt before payment becomes due​

Taxpayer can allocate payment to anticipated liability

“We conclude on limb (2) of [the taxpayer’s] argument that a taxpayer can allocate payments to VAT for the current period whether or not the payment exceeds the cumulative output tax to that date. If the payment does exceed the then accrued amount, the balance is to be regarded as a payment on account of the tax still due to accrue during the current period. If HMRC accept such payments (and we have difficulty seeing that HMRC would ever have a good reason not to) then having accepted the payment as a payment towards the current period’s liability, HMRC cannot allocate it as a payment to a historic liability.” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §50, Nugee J and Judge Falk).
 

Taxpayer can allocate payment to anticipated liability

Not disproportionate for penalty to arise from taxpayer’s failure to choose most favourable allocation

“We have concluded that it is not disproportionate for a penalty to arise from the manner in which HMRC chooses to allocate a payment, in circumstances where the taxpayer could have but failed to make a different allocation at or before the time of payment, as we have decided that it could. Such a system might appear harsh in some cases but is not “plainly unfair”, and is not in our view so disproportionate as to be an obstacle to the aim of fiscal neutrality (Total Technology at [63]).” (Swanfield Limited v. HMRC [2017] UKUT 88 (TCC), §58, Nugee J and Judge Falk).
 

Not disproportionate for penalty to arise from taxpayer’s failure to choose most favourable allocation

Exceptional cases where HMRC ought to allocate in the taxpayer’s best interests

“Where exceptionally you feel the customer’s allocation would not be in their best interests, for example because a different debt is about to be enforced, you can suggest to the customer that it would be in their best interests to allocate differently” (DMBM210105)

“In other words having not had the money to pay early in May for April as he would normally have done when he paid in early June that payment was attributed to April rather than May and so on throughout the year, the payments were constantly allocated to a month behind that to which they actually related…  Referring to DMBM210105 we found that this was a case where exceptionally the “customer’s allocation was not in their best interests and the staff ought to have suggested that he allocate differently”.” (Kelcey and Hall Solicitors v. HMRC [2012] UKFTT 662 (TC), §§16…34, Judge Radford).

“Accordingly in relation to the failures where the appellant says the late payment arose because HMRC did not allocate the previous month’s payment to that month (in advance of the due date) we do think that an employer such as the appellant who specified that allocation could reasonably expect that HMRC would go against that allocation and reallocate the payment. Even if on its terms a statement in an HMRC manual suggests that reallocation would be possible exceptionally we do not think an employer in the appellant’s circumstances could reasonably think its situation was exceptional and would fall under that treatment.” (Bilaman Management Services LLP v. HMRC [2014] UKFTT 270 (TC), §58, Judge Raghavan).
 

Exceptional cases where HMRC ought to allocate in the taxpayer’s best interests

Permissible to challenge allocation of payments on late payment penalty appeal

 

"[17] In my view, this is a dispute about 'the amount of the penalties' within the proper meaning and effect of the statutory provisions set out above, meaning that the Tribunal does have jurisdiction to consider these penalties. Contrary to Paragraph 55 of HMRC's composite statement of case, I do not consider that it would be 'outwith the jurisdiction of the Tribunal to make [the allocation of payments] via the circuitous route of quantum of penalties'.

[18] These are my reasons.

[19] Reason 1: The fact that there is a dispute about allocation does not mean that this dispute cannot be a justiciable dispute about amount.. The route is not 'circuitous': it is dead straight. There is direct and immediately proximate cause and effect: the allocation is the cause, and the amount of the penalties is the effect. But consideration of the effect does not preclude consideration of the cause; and indeed is artificial without consideration of the underlying cause. 20. Reason 2: This is a common-sense reading of the legislation. The legislation providing for appeals against penalties is expressed in simple language. There is no expressed reservation or carve-out. The obvious Parliamentary purpose inherent in the plain reading of Schedule 56 Paragraph 13 is that penalties should be capable of being appealed to this Tribunal, and that the scope of appeal is wide. As such, I would be very hesitant to impose any reading on the Paragraph which would in effect impose any limitation not otherwise clearly expressed in it.

...

[24] Reason 6: I find further support for my conclusion as to justiciability in the Tribunal's decisions in Bilaman Management Services LLP [2014] UKFTT 270 (TC) (Judge Swami Raghavan and Mrs Shameem Akhtar) and C & DDH Ltd [2014] UKFTT 688 (TC) (Presiding Member Mr Peter Sheppard and Dr Heidi Poon). Although both are first instance decisions, and neither binds me, both are full reserved decisions. Both were decisions following substantive hearings (albeit both hearings were assymetric, in the sense that the Appellant neither appeared nor was represented). Both involved challenges to the size of the penalties inter alia on the basis of mis-allocation of payments: see Paragraph [27] of Bilaman; and Paragraphs [37-38] of C & DDH. In neither appeal does HMRC seem to have argued, unlike here, that the appeals, insofar as they raised issues of (mis)allocation were non-justiciable. Although both appeals were dismissed (for other reasons), it seems to me that both hearings proceeded on the footing that allocation was justiciable, and was capable, at least in principle, of amounting to a reasonable excuse." (Crawford v. HMRC [2022] UKFTT 37 (TC), Judge McNall)

Permissible to challenge allocation of payments on late payment penalty appeal
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