Set-off and net-off: Claims by assignees and transferees: Section 133 of the Finance Act 2008
Section 133 of the Finance Act 2008 applies where a person who has overstated his VAT liability (the original creditor) assigns the right to make the consequent claim to another person (the current creditor).
It provides that, in dealing with a claim from a current creditor, HMRC are entitled to set off the following against the amount due under the claim in the following order
- any amounts that would have been required to have been set off against a claim by the original creditor under Sections 81(3) and (3A) of the VAT Act 1994;
- any amounts that would have been set off against a claim by the original creditor under Section 130 of the Finance Act 2008;
- any amounts that are required to have been set off against the claim by the current creditor under Sections 81(3) and (3A) of the VAT Act 1994; and
- any amounts that HMRC are entitled to set off against the claim by the current creditor under Section 130 of the Finance Act 2008.
For the purposes of Section 133, the outstanding liabilities at issue are those liabilities that are outstanding on the date on which HMRC authorise payment of the claim to the current creditor.
For the purposes of Sections 81(3) and (3A) of the VAT Act, the following are treated as outstanding VAT liabilities:
- any unpaid assessment for any accounting periods;
- any unpaid returns for any accounting periods;
- any overclaim of input tax in the accounting periods covered by the claim;
- any underdeclaration of output tax in the accounting periods covered by the claim; and
- any amount (whether relating to input tax or output tax) that could have been assessed as VAT, interest, surcharge or penalty (even if it’s now out-of-time) for whatever accounting period provided that any assessment would have been founded on the same mistake that led to the claim
As a matter of policy, where a claim is not considered to be ‘abusive’, the section 81(3A) set-off should only be applied to liabilities in the accounting periods which are covered by the claim - see the sections in this guidance on abusive claims for further guidance.
This ensures that the current creditor cannot be paid any more on the claim than would have been paid to the original creditor had he made the claim himself at the same time and received payment on the same date.
This section applies whether the right to claim is assigned, transferred or sold on its own or whether it constitutes part of a business that is transferred as a going concern from one person (the transferor or original creditor) to another (the transferee or current creditor).
However, the FST has given an assurance in Parliament that the provisions of Section 133 will not be used simply as an easy way of enforcing the original creditor’s outstanding debts. On 1 July 2008 in the debate on the introduction of Section 133, she said:
“It is not my intention that HMRC should rely solely on the new clause to recover the original creditor’s liabilities. When the right to claim a repayment from HMRC is transferred, the set-off mechanisms in the new clause will not be applied to a payment to the current creditor until HMRC has taken all reasonable steps to recover any outstanding liabilities from the original creditor.” (Hansard, 1 July 2008, column 806)
All reasonable attempts must be made to recover outstanding debts-on-file from the original creditor before they are set off against any payment due to the current creditor. This applies to outstanding debts in relation to all taxes.
Those liabilities that are out-of-time for assessment and would normally be set off under Section 81(3A) of the VAT Act 1994 should be set off against the amount due to the current creditor under the claim in any event.