Allocation dilemma

Appropriation of payments to VAT not yet due

The taxpayers ran into financial difficulties and were late paying their VAT liabilities. As a result they entered the default surcharge regime. To mitigate the effect of this they sought to make payments of current VAT liabilities rather than historic ones because this would avoid default surcharges arising on current periods. But problems arose with allocation of the payments. The taxpayers said default surcharges of £290 000 would not have arisen had HMRC allocated payments to current rather than historic VAT liabilities.

The taxpayers said the liability to VAT had arisen on making a supply. This constituted a debt even though the taxpayer was not obliged to pay it until the last day of the month after the end of the period and was entitled to offset input tax arising in the period. In essence no principle...