Taxpayers right to allocate VAT payments to current periods even when in arrears

Taxpayers Right to Allocate VAT Payments to Current Periods Even When in Arrears

This article concerns a significant legal precedent regarding VAT payment allocation that has important implications for businesses with outstanding VAT liabilities.

The Historical Position

Historically, HMRC controlled how VAT payments were applied. When companies had arrears, HMRC would direct incoming payments to the oldest outstanding balances first. This had a damaging knock-on effect: because the current period remained unpaid, it triggered Default Surcharge Penalties, adding further financial burden to businesses already struggling with their VAT obligations.

The High Court Decision

In the 2017 High Court case of QN Hotels Limited, Justice Nugee determined that taxpayers retain discretion over how their VAT payments are allocated. As long as the taxpayer states which period a payment is for, it is their decision — not HMRC’s.

This is a landmark ruling. It means that businesses can direct their payments to current periods, avoiding the accumulation of Default Surcharge Penalties, even while they have outstanding arrears from earlier periods.

The Impact

In a single case, this principle reduced penalties by over £100,000. The savings for businesses across the country who find themselves in arrears are potentially enormous.

Key Takeaway

If your business is in VAT arrears and making payments to HMRC, make sure you clearly state which period each payment relates to. Do not allow HMRC to allocate your payments to older periods if doing so would trigger surcharge penalties on your current returns.