In Swanfield Limited & Others v HMRC [2017] UKUT 0088 the Upper Tribunal (UT) held that VAT payments can be allocated to current period VAT in order to minimise default surcharges.

Under the VAT default surcharge regime:

  • A default occurs if either a VAT return or VAT payment is late.
  • The first default does not give rise to a penalty, but instead starts a ‘surcharge period’ which runs for 12 months.
  • A further default within the surcharge period triggers a penalty, calculated as a percentage of overdue VAT.

It doesn’t matter how late the VAT is paid after the due date, the surcharge penalty remains the same.  It may therefore be in the taxpayer’s interest for a payment to be allocated to VAT which is not yet overdue rather than to a historic liability: any existing surcharge won’t be increased, but it may be possible to prevent a new one arising, or lower its amount.

The case involved a number of companies which ran hotels:

  • Following financial difficulties, they were late in paying VAT over a number of periods and were charged over £290,000 of VAT default surcharges.
  • The taxpayers claimed these would not have arisen had HMRC allocated payments they had made to current, rather than historic, liabilities.

The First-tier Tribunal (FTT) rejected the taxpayer’s initial appeal on the grounds that they couldn’t allocate a payment to a liability that had not become a debt, and VAT doesn’t become a debt until the last date for payment.

The UT has now overturned the FTT’s decision, finding that:

  • Taxpayers have the right to allocate a payment to VAT that is not yet due for payment (i.e. to the current period).
  • Payments don’t have to be limited to the output tax that has arisen to date in the period: any excess can be treated as a payment on account of output tax yet to accrue.
  • If the taxpayer does not allocate a payment HMRC can choose how to allocate it: there is no requirement for HMRC to do this in a way which minimises surcharge liabilities.

The UT therefore set aside the FTT’s decision and remitted the case back to then to determine, based on the above, to what extent the surcharges should be reduced or cancelled.


Our subscriber guide: Penalties (VAT)

Case reference: Swanfield Limited & Others v HMRC [2017] UKUT 0088

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