A new clause has been introduced into the Finance Bill currently before Parliament. The purpose of the new clause is to close off a potential avoidance opportunity that has arisen as a result of a recent judgment of the Court of Appeal.

In HMRC v Midlands Co-operative Society, the Court held that a right to make a claim for overpaid or overdeclared VAT can be transferred, assigned or sold. Prior to this 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 if the claim for the VAT overpaid or over declared is made by somebody else, where the right to make the claim is transferred. Therefore, by transferring the right to make a claim, taxpayers can avoid the set-off procedures. The avoidance opportunity that arises as a result of this judgment also gives rise to a loophole in the unjust enrichment rules as the original creditor could sidestep the unjust enrichment provisions by transferring the right to make a claim to another (current) creditor.

The new clause provides that, where the original creditor transfers the right to claim overpaid or over declared tax to another individual, the latter will not receive any more from HRMC than if the original creditor had made the claim. The new clause will also address the unjust enrichment issue by again putting the current creditor in the shoes of the original creditor for the purposes of the unjust enrichment provisions.

Full details are available at http://www.hmrc.gov.uk/briefs/vat/brief3108.htm