HMRC close off an avoidance loophole in cases of overpaid VAT reclaims.
A recent judgment in a tax case has triggered a swift re-think of part of the Finance Bill currently before parliament, as introduced in the Budget in March. The case centres on repayment claims by people who have overpaid or overdeclared VAT.
Formerly, HMRC’s official position was that the right to make these repayment claims was not transferrable – i.e. that only the person who have overpaid or overdeclared the VAT was entitled to make a claim to recover it. The usual practice is for HMRC to offset the claim against any outstanding liabilities.
However, the Court in Commissioners of Revenue & Customs v Midlands Co-operative Society  EWCA Civ 305 held that a right to make a repayment claim can be transferred, assigned or even sold. This potentially gives rise to an avoidance opportunity as there is no provision under current law for HMRC to offset the liabilities of the person who originally overstated the VAT liability if the claim is made by somebody else. As a consequence, by transferring the right to make a claim, taxpayers can avoid the set-off procedures.
The new clause has the effect that the person making the repayment claim stands in the shoes of the person who overstated the VAT liability for the purposes of the claim only – that is, they do not become liable for their debts, or replace their interests in any other way, but critically they cannot receive a sum greater than the amount the original creditor would have received had they made the claim. The clause achieves this by making provision that the amount due to be paid by HMRC on a transferred claim will be set off against the outstanding liabilities of the original transferor, and then any liabilities of the transferee.
The new clause will apply to all taxes administered by HMRC (i.e. including excise as well as VAT) and will apply to all transfers of rights to make a claim for overpaid tax which take place on or after 25 June 2008.