HM Revenue & Customs (HMRC): Set-off across taxes

The Policy

1.1 For many years HMRC has set-off repayments against outstanding debts within tax systems and between Income Tax and National Insurance Contributions (NICs). The judgment of Walker LJ in the case of Mellham v Burton [2006UKHL 6] confirmed set-off as a normal business principle.

1.2 Set-off reduces costs for taxpayers and HMRC alike and reduces the number of payment transactions and non-productive contacts with HMRC. New legislation in the Finance Bill 2008 now extends the principle of set-off across a wider range of debts administered by HMRC.

1.3 The new proposals also remove the need to seek authority from taxpayers before the set-off takes place. However, HMRC must still advise the taxpayer in writing what has been done.

Current procedures

1.4 A great many set-offs already take place every day, within both direct taxes and indirect taxes. The vast majority of these reallocations take place automatically, supported by established procedures for reallocating payments clerically. Guidance is available to staff making set-offs from indirect to direct taxes and vice versa.

From now on

1.5 HMRC may make a set-off at any time where an amount is due from and payable to HMRC for the same legal person or entity at the same time.

1.6 Where HMRC is obliged to set-off under specific legislation, these continue to take priority. Examples of such set-offs are for NICs, VAT, Landfill Tax, Aggregates Levy and Excise Drawback, and existing HMRC systems support these mandatory set-offs.

1.7 Going forward, set-off will be at HMRC’s discretion 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.
  • Payments are allocated using the framework of existing rules; where the aim is always to allocate to taxpayer’s best advantage as outlined in DMBM240010.
  • Self Assessment (SA) repayments will still be set automatically against SA Payments on Account within the same parameters as they are now.
  • Repayments assigned to charity under the SA Donate Scheme will continue to be made to that charity. Other assignments will be secondary to set-off.

1.8 There will be no monetary limit to the amount set-off, but HMRC may choose not to exercise set-off for small amounts if it is clearly uneconomical or unproductive to do so.

1.9 Ministers gave assurances about tax credits and child benefit in the Parliamentary debate on the Bill. HMRC will not use ongoing Tax Credit or Child Benefit awards to pay other tax debts. Where it comes to recovering overpayments arising from a Tax Credit or Child Benefit award, we will not disturb arrangements in place to recover the debt. And finally HMRC will only set other tax repayments against Tax Credit or Child Benefit overpayments when requested to do so by the customer.

1.10 Following Royal Assent, the process will operate largely as it does now with cases for set-off being identified as part of the normal day-to-day work. Set-off across taxes remains a manual process.

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

Impact on the taxpayer

1.12 Greater use of set-off will reduce costs for customers by reducing the number of payment transactions and the number of non-productive contacts. HMRC will no longer seek the authority of the taxpayer to set-off payments due and debts accrued. There is no formal appeal against set-off, but HMRC may consider a taxpayer’s specific concerns where a set-off has been made. HMRC will always notify the taxpayer in writing that set-off has taken place.

Impact on HMRC

1.13 The new legislation is expected to have little impact within HMRC generally as Debt Management and Banking will be operating largely within current business rules, and set-off will be managed from within current resources.

1.14 The main impact will be felt in setting-off some indirect tax repayments against direct tax debts.