A new clause has been introduced into the Finance Bill currently before Parliament, with the purpose of closing off a potential avoidance opportunity that has arisen as a result of CRC v Midlands Co-operative Society.
In that case, the Court of Appeal held that a right to make a claim for overpaid or overdeclared VAT can be transferred, assigned or sold.
Prior to the judgment, 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.
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 HMRC than if the original creditor had made the claim.
While 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 exist in relation to claims for error or mistake relief for direct taxes.
The avoidance opportunity that arises as a result of this judgment is not restricted to set-off. HMRC have the power to refuse any indirect tax claim where they 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 another.
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.
The new clause does not make the current creditor liable for the debts of the original creditor. It ensures that the current creditor cannot receive a sum greater than the amount the original creditor would have received had he 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.
