HM Revenue and Customs Brief 31/08
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Issued 26 June 2008
Set off where right to claim overdeclared tax is transferred
A new clause has been introduced into the Finance Bill currently before
Parliament. The purpose of the new clause is to close off a potential avoidance
opportunity that has arisen as a result of a recent judgment of the Court of
In Commissioners of Revenue & Customs v Midlands Co-operative Society 
EWCA Civ 305, the Court held that a right to make a claim for overpaid or
overdeclared VAT can be transferred, assigned or sold. Prior to this judgment,
HM Revenue & Customs (HMRC) had taken the view that only the person who had
overpaid or overdeclared the VAT was entitled to make a claim to recover it.
Where a person makes such a claim HMRC are required to set-off against it any
outstanding liabilities of the claimant.
The avoidance opportunity arises because there is no provision under current
law for HMRC to set-off the liabilities of the person who originally overstated
the VAT liability (‘the original creditor’) if the claim for the VAT overpaid or
overdeclared is made by somebody else (‘the current creditor’), as a result of
the transfer of the right to make a claim. As a consequence, by transferring the
right to make a claim, taxpayers can avoid the set-off procedures.
Set-off and unjust enrichment
The new clause operates by putting the current creditor in the shoes of the
original creditor for the purposes of setting off liabilities. It provides that,
where the original creditor transfers the right to claim overpaid or
overdeclared tax to the current creditor, the latter will not receive any more
from HRMC than if the original creditor had made the claim.
Whilst the Midlands judgment concerned VAT, it has wider implications; the
current procedure for claiming overpaid VAT is replicated for all of the
indirect taxes administered by HMRC. The potential for avoidance therefore
exists for all indirect taxes. We also consider that the avoidance opportunity
may also exist in relation to claims for error or mistake relief for direct
The avoidance opportunity that arises as a result of this judgment is not
restricted to set-off. HMRC has the power to refuse any indirect tax claim where
it can show that meeting the claim would unjustly enrich the claimant, because
the economic burden of the overcharged tax has been passed on to customers.
However, this defence against payment of a claim does not apply where the
claimant was not the person who originally overpaid or overdeclared the tax
being claimed. It is therefore possible for the original creditor to sidestep
the unjust enrichment provisions by transferring the right to make a claim to
The new clause addresses this by again putting the current creditor in the
shoes of the original creditor for the purposes of the unjust enrichment
provisions. HMRC will be able to refuse to pay a current creditor’s claim where
they can establish that payment of the claim to the original creditor would have
unjustly enriched that original creditor.
Practical effects of the new clause
The new clause does not make the current creditor liable for the debts of the
original creditor. It simply ensures that the current creditor cannot receive a
sum greater than the amount the original creditor would have received had they
made the claim.
The new clause provides that the amount due from HMRC on a claim on a
transferred right will be determined by first setting off the amount of the
outstanding liabilities of the original creditor and then any liabilities of the
current creditor. The set-off of the original creditor’s amounts due to HMRC
will discharge the obligations of the original creditor to HMRC and vice versa.
Set-off will be of amounts still outstanding at the time when the claim is met.
A current creditor will be able to appeal to a Tribunal or to the Special
Commissioners against a decision of HMRC to refuse to pay a claim in whole or in
part. Any such appeal would be against the refusal to pay the claim or the
decision to reduce it.
The provisions of the new clause will apply to all of the taxes (including
excise) administered by HMRC. It will apply to all transfers of rights to make a
claim for overpaid tax taking place on or after 25 June 2008.
Please follow the link below for details of the New Clause (NC) 16.
House of Commons - Notices of Amendments given on Wednesday 25 June 2007
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Article Published/Sorted/Amended on Scopulus 2008-06-28 00:11:18 in Tax Articles