In the June 2008 issue of Bank notes we noted the Court of Appeal decision in Midlands Co-operative Society Ltd v. Revenue and Customs Commissioners [2008] All ER 121, which held that a taxpayer’s right to a VAT refund from HM Revenue and Customs (HMRC) was, under the general law, a “chose in action”, the benefit of which the taxpayer could assign to a third party. As such, it is a “receivable” capable of being assigned by sale or as security.

Andy Collins discusses part of the Finance Act 2008, which places new obstacles in the way of third parties intending to purchase or lend against tax refunds generally.


The United Kingdom has a plethora of taxes. Most were conceived and enacted on a stand-alone basis and, following the merger of the Inland Revenue and Customs & Excise, are administered by HMRC.

Some tax codes (for example VAT) contain express provisions requiring set-off between amounts owed by the taxpayer to HMRC and refunds owed by HMRC to the taxpayer. But only in limited cases did set-off apply between different types of taxes.

The new set-off rules

The Finance Act 2008 introduces new powers of set-off for HMRC across all taxes that it administers. Where under the legislation for a particular tax set-off is in any event mandatory, HMRC must apply set-off. Where no mandatory rule applies, HMRC is now entitled to do so. So if a taxpayer has an unpaid corporation tax bill, but is due a VAT refund, HMRC can set one against the other.

And further, in response to the Midlands Co-operative decision, the Finance Act 2008 provides that the set-off rules apply even if the taxpayer has assigned the benefit of a refund to a third party. This means that the third party’s right to receive the refund (which the decision confirmed could be validly transferred to him) is vulnerable to reduction or extinction by unpaid taxes due from the transferor that become payable at any time up to the actual payment of the refund by HMRC.