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HMRC internal manual

Debt Management and Banking Manual

Interest: Interest Review Unit (IRU): General principles: Repayment and Set-off

S130 FA2008 gives HMRC legal power to set-off amounts to be repaid to a person against debts owed to us by that person, including contract settlements.

We do not need to seek authority from taxpayers before set-off takes place. Set-off will be at our discretion (and will not be reversible without our consent) or at the taxpayer’s request. In particular, set off will mean that:

Repayments are set only against established debts. ‘Established debt’ is a quantified debt that is correctly payable either based on a return from the taxpayer or which has been assessed and either the appeal has been determined, or the period for appeal has passed.

  • Except in very limited circumstances we will not hold up repayments where we are not already aware of a debt. When pursuing debts, we will not in every case check for possible repayments unless we are aware that one is likely. However where we discover that an overpayment and an outstanding debt exist, every effort should be made to set one against the other..

Disputed Effective Date of Payment (EDP) of a set-off

There are many different variations on what the EDP will be for a repayment set-off. It is important that the relevant law and instructions are checked to find out what the correct repayment set-off treatment should be for the types of tax and set-off. It is only when the correct treatment is confirmed and the case checked against those rules that it can be established the case was handled incorrectly.

Normally the repayment set-off is done in a way that gives the same result as if the overpaid tax had been repaid to the customer and then paid back by them against the other amount due. In other words repayment supplement or interest will run from the relevant date, as stated in law, of the original payment up to the set-off EDP. Late payment interest will run from the reckonable date of the underpaid charge up to the EDP of set-off.

Care must be taken where the ‘Common Period’ rules apply. These exist in Corporation Tax (CT) and Income Tax Self Assessment (ITSA). If a potential repayment of CT or ITSA is to be reallocated against CT or ITSA arrears of the same customer (not interest or penalties) and there is a common period during which

  • repayable tax is attracting repayment interest; and
  • the underpayment is attracting late payment interest,

then for that common period, on the amount reallocated, the computer will not credit the customer with repayment interest or charge late payment interest.

On considering an objection to interest based on the disputed EDP of a set-off, it is necessary to obtain and review the relevant papers to find the earliest date on which the set-off could or should have been made.

Where it is appropriate to award an earlier EDP, theoretically amend the EDP of the set-off, recalculate the interest and set aside the balance.

Legislation states that a repayment of tax shall be increased by an amount known as ‘repayment supplement’ or ‘repayment interest’ on the amount to be repaid.

Where repayment supplement or interest has been paid along with the repayment, the setting aside of interest is to be limited to recover any repayment supplement or repayment interest that would not have been paid had the correct EDP been used.

Repayment could have been set-off but was repaid at a later date

A customer may claim that a repayment could have been used in set-off but it was repaid at a later date, causing the customer to pay the amount due by a direct payment that attracts an interest charge or increases an existing charge.

When you find that a repayment was made instead of being used in set-off, and we were aware that the debt existed that the set-off could have been made against, consider giving up interest on the amount that could have been set-off. The period of relief would run from:

  • the earliest possible date of set-off or interest charging date, whichever is later, to the date of direct payment; or
  • the date we first told the customer that the tax was still payable, if there is a delay in making direct payment.

If repayment supplement or repayment interest had been paid along with the repayment, the setting aside of interest should be limited to recover any repayment supplement or repayment interest that would not have been paid had the set-off been done correctly.

Repayment made in error

There will be cases where the customer paid on time in good faith, we held funds for a period of time (either in the correct record or on account) and then made a repayment by mistake. When the customer’s record is corrected at a later date, the same amount of tax is due for payment again.

When paid, interest will be charged from the original date the tax was paid until the later payment date. The interest charge covers the full period including the original period when funds were held.

  • where customer error caused the repayment, the interest is to be upheld. It is the customer’s duty to make sure everything they do when dealing with their tax affairs is correct and accurate. If they make a mistake that results in funds being repaid to them, we cannot be held responsible for the events that follow.
  • where HMRC error caused the repayment, interest is to be set aside from the due date or the date of original payment (where this is later) until the date of repayment. That is, for the period where we held the funds. However, if the time scale between the repayment and the tax being paid again is less than 30 days then set aside interest up to the date of receipt of the replacement payment. The amount being set aside is to be restricted to recover any excess repayment supplement or repayment interest included with the repayment. The customer is not entitled to this when interest is being set aside for the identical period.