HMRC prevented from imposing late payment penalties following reallocation of earlier payments made on time

In Jeremy Francis Herrmann v HMRC [2026] UKFTT 715 (TC), the First-tier Tribunal (FTT) allowed the taxpayer’s appeals against late payment penalties and surcharges, holding that subsequent reallocation of payments could not retrospectively create late payment where the tax had been paid by the relevant statutory dates.

Background

Jeremy Francis Herrmann entered into several tax avoidance schemes that were subsequently found to be ineffective, resulting in additional tax being due. 

In 2011, HMRC opened an enquiry into Mr Herrmann's tax return for the year ended 5 April 2009. In 2017, a closure notice was issued to Mr Herrmann, requiring an additional £9,960,157 of tax to be paid. Subsequently, consequential amendments were made to Mr Herrmann's return as a result of him being a partner in a limited liability partnership, resulting in a further £4,012 in tax being due.

In November 2023, Mr Herrmann's adviser requested that payments previously made by Mr Herrmann be reallocated to different periods. HMRC explained that, unless Mr Herrmann had clearly indicated at the time of payment that he wished the payments to be directed to other charges, there was "little scope" for them to be moved. The  agent subsequently requested a series of adjustments to the allocations. Additional payments of £2,363,062 and £1,348,760.66 were made on 17 and 23 November 2023, respectively. It was agreed that these payments satisfied the outstanding tax and interest for the relevant years.

On 22 December 2023, HMRC notified Mr Herrmann of late payment surcharges for 2008/09 and 2009/10, amounting to £611,673.92 and on 13 February 2024, HMRC issued late payment penalties for 2019/20, 2020/21 and 2021/22. The penalties for 2019/20 were later withdrawn. 

Mr Herrmann appealed to the FTT.

Mr Herrmann submitted that no late payment penalties or surcharges arose because there had been no late payment, within the meaning of paragraphs 1–3, Schedule 56, Finance Act 2009, and section 59C, Taxes Management Act 1970, respectively. At the dates that could trigger a surcharge or penalty, no tax remained unpaid. The legislation required consideration of whether tax was outstanding at a specific "snapshot" in time.

HMRC argued that, following the reallocations requested by Mr Herrmann in 2023, the amounts were subsequently shown as unpaid at the relevant trigger dates. HMRC submitted that the legislation should be read purposively to permit late payment surcharges and penalties to be applied retrospectively, following the reallocations.

Mr Herrmann submitted that the purpose of the legislation was to encourage timely payment and deter late payment, which was not defeated by the reallocations. HMRC argued that Parliament could not have intended a taxpayer to request reallocation to reduce interest without also bearing the consequences, including late payment surcharges and penalties.

It was common ground that the relevant tax had been paid by the applicable trigger dates. The dispute concerned whether the subsequent reallocation of those payments could retrospectively cause the tax to be treated as unpaid at those earlier dates.

FTT's decision

The appeals were allowed.

With regard to the surcharges, the question was whether any of the tax remained unpaid on the relevant date. For the penalties, the question was whether the taxpayer had failed to pay the tax by the relevant date.

The FTT considered the statutory language to be unambiguous. The question was whether the tax remained unpaid at the particular statutory point in time. In the view of the FTT, the statutory language did not permit HMRC's retrospective approach.

The FTT considered this conclusion to be reinforced by Thomson (Inspector of Taxes) v Minzly [2002] STC 450 (Minzly) and S W McMullan v HMRC [2009] UKFTT 367 (TCC) (McMullan). Minzly established that the question of whether tax remained unpaid had to be answered by reference to a particular point in time. McMullan applied this reasoning and supported the principle that the relevant question was whether the tax was unpaid at the statutory trigger point.

The FTT also considered the purpose of the legislation. It agreed that the regimes were intended to penalise late payment, encourage compliance and act as a deterrent. However, HMRC's interpretation went further, by treating a later allocation of payments as relevant to whether a penalty arose. The FTT noted that HMRC ultimately made the reallocation decisions and that the resulting allocations did not match that requested by Mr Herrmann. In at least one instance, HMRC's allocation created the supposed penalty trigger when a different allocation would not have done so.

Ultimately, the FTT noted that there was no legislative provision allowing a payment originally made for one tax year to be treated for all purposes as having been made for another, following an agreed reallocation. It therefore rejected HMRC's purposive interpretation, which would have treated a retrospective late payment "on paper" as an actual late payment.

Accordingly, the FTT found that neither the surcharges nor the penalties were validly issued. 

Comment 

This decision may have wider implications for taxpayers seeking reallocation of historic payments. HMRC is likely to approach requests for reallocation more cautiously where the reallocation could affect the application of late payment penalties or surcharges, particularly following the opening of an enquiry.

Read the decision in Herrmann.