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HMRC internal manual

VAT Statutory Interest Manual

Processes and procedures: insolvency and set-off

Statutory interest (SI) is treated as a VAT credit for the purposes of set off by virtue of section 81 (1) VATA, see VSIM4600.

As a VAT credit the SI amount can normally be set off against a debt (section 81(3) VATA). If however the claimant is subject to an insolvency procedure this might not necessarily be appropriate.

Section 81 (4A) provides

‘Subsection (3) above shall not require any such amount as is mentioned in paragraph (a) of that section (‘the credit’) to be set against any such sum as mentioned in paragraph (b) of that subsection (‘the debit’) in any case where-

(a) an insolvency procedure has been applied to the person entitled to the credit;

(b) the credit became due after the procedure was so applied;

(c) the liability to pay the debt either arose before that procedure was so applied or (having arisen afterwards) relates to, or to matters occurring in the course of, the carrying on of any business at times before the procedure was so applied.’

This effectively means that any SI payable on a repayment claim submitted after the date of insolvency cannot be set off against a pre-relevant debt (debt accrued prior to the insolvency date). This is because it is not known if an interest credit is due until a claim for repayment of the principal sum is received and validated.