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HMRC internal manual

Debt Management and Banking Manual

Interest: Interest Review Unit (IRU): General principles: Conditions attached to a payment

A customer may send a payment ‘in full and final settlement’ of a debt and then claim that taking of the payment shows acceptance of the conditions and HMRC has no right to charge interest.

Legal precedent shows that where a payment is sent with some condition attached to it, for example it is in satisfaction of some larger amount, HMRC do not need to:

  • keep it on the terms on which it is sent; or
  • return it.

The payment can be retained, the conditions refused and the balance due requested. The courts have confirmed the position that, in law, payment of a lesser amount does not satisfy a larger debt.

The conditions need to be rejected within a reasonable period of time, relevant to the case circumstances, or HMRC must show by its actions that the conditions have not been accepted. For example, by continually sending statements, payslips and other documents or pursuing other methods of debt recovery showing the balance of debt is still unpaid. If these actions are followed then the interest charge can be upheld.

A customer cannot include in a payment for ‘full and final settlement’ a debt that has not yet been set up. The customer can only offer a lesser payment in settlement of a larger debt already in place. So a further debt arising for a given year, or an interest charge that can only be made once the full tax payment has been received, cannot be claimed to have been part of the payment condition. Any such claim should be refused and the interest upheld in full.