Evonik UK Holdings Limited and others v Commissioners of Inland Revenue & Anor

Where simple interest accrues on a debt, a part payment should ordinarily be allocated to accrued interest before principal. This preserves the practical value of simple interest as compensation for late payment and avoids the anomalous result that continued non-payment of principal produces no further interest consequence. The approach is not confined to contractual debts and may apply where payment is made pursuant to a court order. A possible benefit from having use of the payment does not make the allocation excessive or create an unprincipled windfall, particularly where the claimant’s actual return is uncertain. The court must assess the allocation when determining the interest due, even if interest had not crystallised into a liquidated sum when the part payment was made.

The claimants had succeeded in recovering sums from HMRC in connection with unlawfully paid advance corporation tax. HMRC had paid £6.4 million in 2016 pursuant to High Court summary judgment orders. The remaining issue was how that payment should be apportioned between the principal sum and interest accrued on the claimants’ successful claim.

HMRC argued that the payment had to be allocated entirely to principal because no liquidated interest claim existed in 2016 and because allocation to interest would provide more than an adequate indemnity. The court determined the apportionment question by written submissions.

1. Apportionment of interest. HMRC’s argument that no part of the 2016 payment could be allocated to interest because interest was not then a liquidated sum was rejected. Section 85(3)(b) of the Finance Act 2019 required simple interest to accrue on the principal amount until that amount was paid. The allocation therefore had to be considered at the date of assessment, by identifying when any part of the principal amount had been paid.
2. Adequate indemnity and compounding. The possibility that Evonik had obtained a compounding effect from receiving £6.4 million did not make allocation to interest excessive. There was no guarantee that Evonik had in fact earned any return on the money. Moreover, Evonik had been deprived of the use of £8.8 million of advance corporation tax and could itself have obtained a similar benefit had it retained that money.
3. Rule of thumb. In a simple-interest environment, part payments should ordinarily be allocated against accrued interest before principal. This avoids the anomaly that allocating a payment to principal would excuse the debtor from further interest consequences while unpaid interest itself accrued no interest. The approach preserves the utility of simple interest as a remedy for late payment and is not confined to contractual relationships.
4. Order. The £6.4 million was ordered to be allocated against the totality of interest accrued when the summary judgment orders were made. The parties were invited to agree an order implementing that conclusion and any agreed amendments to the quantum of the FID Claim, for sealing by 8 August 2024.