In Jeremy Francis Herrmann v HMRC [2026] UKFTT 715 (TC), the First-tier Tribunal allowed appeals against late payment surcharges of roughly £612,000 and late payment penalties of roughly £202,000. The holding is operationally sharp: where tax was actually paid by the statutory trigger dates, a later HMRC reallocation of those payments cannot rewrite history and manufacture a “late payment on paper.”
If you settle multi-year enquiry packs, run group cash to HMRC, own PE portfolio self-assessment exposure, or sit on an audit committee that still treats payment allocation as a junior treasury chore, treat this as a process control note — not a niche personal-tax curiosity. The same logic bites corporation tax, PAYE/NIC settlements, accelerated payment notice (APN) stacks and any multi-charge ledger where Debt Management moves money after the event.
Commentary is already out via Mondaq’s note on Herrmann. Read the judgment on Find Case Law alongside HMRC’s Debt Management manual on payment allocation, Schedule 56 Finance Act 2009 and TMA 1970 s59C.
What actually happened
Mr Herrmann had entered avoidance arrangements that later failed. An enquiry into 2008/09 opened in 2011. A 2017 closure notice assessed additional tax of about £9.96 million. Further consequential LLP amendments added a small sum in July 2023 after the Ingenious litigation. By late 2023 the parties were closing multi-year balances; some amounts had been stood over while figures were finalised.
On 2 November 2023 the adviser asked HMRC to reallocate historic payments across periods — including 2005–2009 payments and APN monies from 2013. HMRC’s caseworker initially pointed to the Debt Management manual: unless the taxpayer had clearly directed allocation at the time of payment, there was “little scope” to move money. The agent then went to Debt Management with a detailed schedule. Fresh cash of about £2.36 million and £1.35 million cleared remaining tax and interest in mid-November. Everyone agreed the economic debt was then paid.
The paper trail then turned hostile. On 22 December 2023 HMRC issued late payment surcharges for 2008/09 and 2009/10 totalling £611,673.92. In February 2024 it issued Schedule 56 penalties for later years (2019/20 was withdrawn as out of time; 2020/21 and 2021/22 remained at about £202,205). HMRC’s theory was retrospective: after the 2023 reallocations, the ledger “showed” unpaid tax at the historic trigger dates, so the charges crystallised.
The FTT rejected that theory.
The statute is a snapshot, not a rewrite tool
For surcharges under TMA 1970 s59C, liability turns on whether tax “remains unpaid” on the day after 28 days from the due date (and again after six months). For Schedule 56 penalties, liability turns on whether the taxpayer “fails to pay” by the penalty date — generally 30 days after the due date under TMA 1970 s59B — with further 5% tranches at five and eleven months. See HMRC’s Compliance Handbook late payment overview and tax appeals and penalties guidance.
Both sides accepted the critical fact: at each relevant historic trigger date, the tax had been paid. The only dispute was whether November 2023 reallocations could be wound back so those amounts were treated as unpaid at the earlier dates.
The Tribunal held the language is unambiguous. You ask whether tax remained unpaid at the statutory point in time. You do not ask whether, years later, a Debt Management reallocation can make the account “show” unpaid tax as if the original payment never landed on that charge. That reading is reinforced by Thomson (Inspector of Taxes) v Minzly [2002] STC 450 and S W McMullan v HMRC [2009] UKFTT 367 (TCC): the unpaid-tax inquiry is answered by reference to a particular moment, not by a later paper reconstruction.
HMRC’s purposive argument — that Parliament cannot have intended taxpayers to reallocate to cut interest without also taking late-payment consequences — failed. The purpose of the regimes is to deter actual late payment. It is not to invent a late payment after the taxpayer has already paid on time and HMRC has later moved the money. The FTT also noted that HMRC controlled the final allocations, which did not always match the agent’s request; in at least one instance HMRC’s own choice created the supposed trigger that a different allocation would have avoided. There is no statutory provision that treats a payment originally applied to one year as unpaid for all purposes once it is moved to another.
Result: surcharges and penalties invalid. Appeals allowed.
Why CFOs should care
Strip the self-assessment labels and the control failure is corporate.
- Multi-charge ledgers are normal in groups. CT instalments, PAYE/NIC, CIS, VAT, APNs, discovery assessments and Time to Pay plans sit on the same customer record. Treasury sweeps and agent reallocations are daily tools. Herrmann says the late-payment clock does not automatically restart just because money is moved later.
- Interest optimisation is not free of process risk. Reallocating to stop interest on the oldest charge can still be commercially right. What is not right is assuming HMRC can re-paper historic penalty triggers without a clear statutory foothold. Document purpose, request and HMRC’s final map.
- HMRC still owns the allocation decision. The manuals are clear that customer-directed allocation at the time of payment binds more tightly than after-the-event requests — see DMBM210120 and DMBM519325. Silent payment instructions default to HMRC’s stack.
- PE diligence still misses payment maps. Buyers price tax debt and known penalties. They rarely price the risk that a post-completion reallocation, made to tidy interest, becomes the pretext for a seven-figure surcharge letter. Lock the allocation schedule in the data room and completion accounts tax schedule.
- New late payment architecture is arriving for ITSA via MTD. HMRC’s late payment and interest harmonisation programme is live for VAT and phasing for ITSA as MTD mandates bite from April 2026 for higher-income cohorts. Snapshot timing will still matter.
What to lock this month
1. Payment instruction discipline. Every material payment should state, in writing on the reference and covering email: entity, UTR/Accounts Office reference, tax type, period, and charge ID if known. “On account of outstanding liabilities” is how silent allocations become expensive archaeology. Use Pay tax reference rules deliberately.
2. Reallocation protocol before you ask. Before any historic reallocation, model three outputs: interest saved; whether any charge will appear underpaid at a historic penalty or surcharge trigger; whether HMRC’s alternative allocation could create a worse map than yours. Herrmann shows HMRC’s final choice can diverge from the agent’s schedule.
3. Snapshot file for every settled enquiry. When a multi-year settlement closes, retain a contemporaneous schedule: amounts paid by date, statutory due dates, penalty trigger dates, and evidence that nothing was unpaid at those triggers. If HMRC later reallocates, you need the pre-reallocation truth.
4. Separate economic clearance from penalty clearance. Paying the last pound of tax and interest is not the same as closing penalty risk. In Herrmann the economic debt cleared in November 2023; surcharge letters arrived in December. Build a 30–60 day post-settlement watch and diary the appeal window immediately via Tax appeals.
5. Validity first; excuse second. The taxpayer also ran reasonable excuse, special reduction, mitigation and time-limit arguments. The FTT did not need them once validity failed. Win on the charge existing at all before you negotiate hardship — but keep reasonable excuse evidence current. See also Self Assessment penalties and if you cannot pay / Time to Pay.
6. Group and PE portfolio sweep. Ask each portfolio CFO three questions this quarter: Where have we requested reallocations in the last 36 months? Which touched years with open or recently closed enquiries, APNs or stand-overs? Do we hold HMRC’s written confirmation of the final map, or only our request letter? Name one owner for allocation changes above a de minimis.
Bottom line
HMRC will not stop reallocating. The manuals still allow moves for incorrect automatic allocations, enforcement contexts, clear contemporaneous customer direction and certain PAYE charge moves. What Herrmann constrains is the leap from “we moved the money in 2023” to “you were late in 2011.” Expect Debt Management to become more cautious where a move could be spun into penalty exposure. Monitor updates via ICAEW Tax News, CIOT and tribunal decisions.
Herrmann is not a free pass to game allocations. Penalty statutes look at real unpaid tax at real dates. If you paid on time, a later ledger reshuffle does not conjure a late payment. If you did not, no reallocation theatre will save you.
For CFOs the control is non-negotiable: direct every material payment; model reallocations before you request them; keep a snapshot file when settlements close; and treat post-settlement penalty letters as a designed watch item. That is how you keep six- and seven-figure “paper late” charges out of the audit committee pack — and out of the completion accounts.
Tanous Limited advises PE-facing CFOs and boards on tax, treasury and compliance operating risk. This article is general information, not advice on any specific reallocations, penalties or settlements.