AJM Mansell Ltd v Revenue & Customs

Factual and Procedural Background

This appeal concerns a penalty imposed on Company A for late payment of monthly Pay As You Earn (PAYE) and Class 1 employees' National Insurance Contributions (NICs) during the tax year ending 5 April 2011. The penalty amount was £2,144.97. The company disputed the penalty, arguing that the payments had been incorrectly allocated by HM Revenue & Customs (HMRC) to the previous tax month rather than the current tax month, which increased the number of defaults and thus the penalty. The company also claimed a reasonable excuse for late payment based on cash flow difficulties caused by delayed payments from a government department.

The procedural history includes the company being issued penalty warning letters and estimated assessments (P101s) by HMRC throughout 2010 and 2011. The company made payments on various dates, some late, and engaged solicitors who appealed the penalty to the First-tier Tribunal. The hearing took place on 23 August 2012 in London, with HMRC represented by Attorney Weare. The company was unrepresented at the hearing but submitted written arguments shortly before the hearing via its solicitors acting pro bono and a director’s letter.

Legal Issues Presented

1. Whether the payments made by the company had been correctly allocated to the appropriate tax months (the First Issue).
2. Whether HMRC had an obligation to allocate the payments in a manner more favourable to the company or to advise the company of a more favourable allocation method (the Second Issue).
3. Whether the company had a reasonable excuse for the late payments (the Third Issue).

Arguments of the Parties

Appellant's Arguments

• The company contended that HMRC had allocated payments to the previous tax month, causing penalties for late payment that would not have arisen if payments had been allocated to the current tax month.
• The company asserted that payments were made prior to the due date of the current month’s PAYE, so if allocated accordingly, no penalty would have been due except for the first month.
• The company argued that HMRC should have either allocated payments to the current month or advised them of this option to avoid penalties.
• The company claimed a reasonable excuse for late payment due to cash flow difficulties caused by consistent late and inaccurate payments from a government department, supported by a letter from that department and newspaper articles describing industry-wide financial pressures.

Respondent's Arguments

• HMRC submitted that it was the company’s responsibility to allocate payments to the correct tax month by using the prescribed 13-character reference number with an additional four-digit code for the relevant month, as set out in HMRC guidance.
• HMRC argued that no evidence showed the company had used this procedure to allocate payments to the current month, and the payments were therefore allocated to the previous tax month by default.
• HMRC maintained that it had no power under common law to reallocate payments once made, citing established case law on payment appropriation.
• HMRC disputed the reasonable excuse claim, noting the lack of concrete financial evidence from the company and that insufficiency of funds is only a reasonable excuse if caused by events outside the taxpayer's control.
• HMRC pointed out that the company could have contacted them to arrange a Time to Pay agreement and that the company’s improved payment record after October 2012 was due to awareness of penalties rather than external improvements.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal first examined whether PAYE and NIC payments constituted debts due from the employer to HMRC. Citing statutory regulations and dictionary definitions, it found that each month’s PAYE and NICs are separate debts with no running account, thus the rule from The Mecca applies: the debtor (employer) may allocate payments before transfer, otherwise the creditor (HMRC) may allocate.

HMRC’s guidance requires employers to specify the tax month for payment allocation by using a unique reference number with a four-digit code. The Tribunal found no evidence that the company had used this procedure to allocate payments to the current tax month. Instead, payments were allocated by default to the previous tax month.

The Tribunal rejected the company’s argument that HMRC should have reallocated payments or advised the company to do so, as common law and precedent prohibit HMRC from reallocating payments once made.

Regarding the reasonable excuse claim, the Tribunal acknowledged the company’s evidence of late payments from a government department and industry-wide cash flow difficulties. However, it found the evidence insufficiently specific or persuasive to establish that the company’s late payments were caused by events outside its control. The Tribunal noted the absence of financial documents supporting the claim and that the company had opportunities to mitigate the issue, such as arranging payment plans with HMRC.

Consequently, the Tribunal concluded there was no reasonable excuse for the late payments, and the penalty was properly imposed.

Holding and Implications

The Tribunal DISMISSED the appeal brought by Company A and CONFIRMED the penalty of £2,144.97 for late payment of PAYE and NICs.

The direct effect of this decision is that the company must pay the penalty as assessed. The Tribunal’s ruling clarifies that employers must allocate PAYE and NIC payments correctly using HMRC’s prescribed procedure to avoid penalties, and HMRC is not obliged to reallocate payments or advise employers to do so. No broader precedent altering the law on payment allocation or reasonable excuse was established beyond the application of existing principles and legislation.