VRM4700 - Who is entitled to claim: assignment of right to claim

Output tax

Where a person has over-declared his output tax liability he is entitled to make a claim to recover that overstated VAT under section 80 of the VAT Act 1994.

That right to make a claim was held by the Court of Appeal in CRC -v- Midlands Co-operative Society Ltd [2008] EWCA Civ 305; [2008] STC 1803; [2008] BVC 414 to be property (a chose in action) within the meaning of section 136(1) of the Law of Property Act 1925.

Because the right to make a claim is property it can be transferred, assigned or sold and if it can be transferred assigned or sold, it can be enforced by somebody other than the person who actually made the over-declaration of output tax.

The person who made the over-declaration of output tax is known in the legislation (section 133 of the Finance Act 2008) as the original creditor and the person to whom the right to make the claim is assigned is referred to as the current creditor.

You are most likely to see assigned rights to claim where a person has transferred his entire business as a going concern.

Where that happens and the transferor (or original creditor) retains nothing of the business, it will be reasonable to conclude (if there is no evidence to the contrary) that any over-declaration of output tax made by the transferor (or original creditor), and not claimed at the time of the transfer of the business, will be enforceable by the transferee (or current creditor).

If it is clear from the contract or deed of transfer that it was intended that all of the transferor’s property was to pass to the transferee, we can probably reasonably assume that rights to claim have also passed to the transferee.

If, on the other hand, the sale agreement explicitly transfers certain aspects of VAT liabilities or entitlements but the right to claim over-declared VAT is not mentioned, you should proceed on the assumption that the transferor has retained any such rights that may exist.

Where a person transfers only part of his business, you will need to establish, by reference to the deeds of transfer, the contracts and sale and purchase agreements exactly what was transferred to the transferee.

Whilst it is perfectly possible for the right to make a section 80 claim to be transferred, assigned or sold on its own as property in its own right, it will probably be quite rare.

Where a claim is made by an assignee (or current creditor), the provisions of section 133 of the Finance Act 2008 apply so that all of the set-offs that would be made against the claim made were it made by the original creditor, are made against the claim made against the current creditor.

So, for example, Jack has a business manufacturing pails and he has been accounting for VAT on his supplies of pails. In January 2017, he transfers his business as a going concern to Jill. In February, it emerges that there is no VAT due on the supply of pails which is exempt. The right to make the claim under section 80 is now Jill’s, not Jack’s.

Jill makes the claim in March 2017 and can claim going back to the quarter beginning 1 January 2013. That claim has to take into account all of the input tax that Jack deducted on the assumption that the supply of pails was taxable. It also has to take into account the substantial input tax deduction that Jack made on the capital refurbishments made to the factory in 2011.

Section 133 simply ensures that the claim that Jill has is no better than the claim that Jack would have had.

If you get a claim from a person other than the person who made the over-declaration of output tax, you must check that that person does, in fact, have the right to make the claim. If he can produce no evidence to show that the right to claim has been assigned to him, you should simply refuse to entertain the claim.

Input tax

Normally speaking, a deduction of input tax may only be made by the taxpayer who made the taxable supplies to which the input tax was attributable.

There is specific provision made, however, in regulation 6(3) of the VAT Regulations 1995 that where a business is transferred as a going concern and the transferee adopts the VAT registration number of the transferor, the right to claim deduction of any input tax is one of the things that is transferred to the transferee.

However, the judgment of the Court of Appeal in CRC -v- Midlands Co-operative Society Ltd [2008] EWCA Civ 305; [2008] STC 1803; [2008] BVC 414 applies to input tax claims as it does to output tax claims and such claims are property ( choses in action) within the meaning of section 136(1) of the Law of Property Act 1925.

Because the right to make a claim is property it can be transferred, assigned or sold and if it can be transferred assigned or sold, it can be enforced by somebody other than the person who actually made the under-claim of input tax.

The person who made the under-claim of input tax is known in the legislation (section 133 of the Finance Act 2008) as the original creditor and the person to whom the right to make the claim is assigned is referred to as the current creditor.

You are most likely to see assigned rights to claim where a person has transferred his entire business as a going concern.

Where that happens and the transferor (or original creditor) retains nothing of the business, it will be reasonable to conclude (if there is no evidence to the contrary) that any under-claim of input tax made by the transferor (or original creditor), and not claimed at the time of the transfer of the business, will be enforceable by the transferee (or current creditor).

If it is clear from the contract or deed of transfer that it was intended that all of the transferor’s property was to pass to the transferee, we can probably reasonably assume that rights to claim have also passed to the transferee.

If, on the other hand, the sale agreement explicitly transfers certain aspects of VAT liabilities or entitlements but the right to claim under-claimed input VAT is not mentioned, you should proceed on the assumption that the transferor has retained any such rights that may exist.

Where a person transfers only part of his business, you will need to establish, by reference to the deeds of transfer, the contracts and sale and purchase agreements exactly what was transferred to the transferee.

Whilst it is perfectly possible for the right to make a regulation 29 claim to be transferred, assigned or sold on its own as property in its own right, it will probably be quite rare.

Where a claim is made by an assignee (or current creditor), the provisions of section 133 of the Finance Act 2008 apply so that all of the set-offs that would be made against the claim made were it made by the original creditor, are made against the claim made against the current creditor.

So, for example, Jack has a business manufacturing pails and he has been treating his supplies as exempt. In January 2017, he transfers his business as a going concern to Jill. In February, it emerges that the supply of pails is liable to VAT at a reduced rate so that Jack ought to have deducted the input tax he incurred in the course of his manufacture of pails and accounted for output tax at a reduced rate. The right to make the claim is now Jill’s, not Jack’s.

Jill makes the claim in April 2017 and can claim going back to the quarter beginning 1 January 2013. That claim has to take into account all of the output tax that Jack didn’t account for.

Section 133 simply ensures that the claim that Jill has is no better than the claim that Jack would have had.

If you get a claim from a person other than the person who made the over-declaration of output tax, you must check that that person does, in fact, have the right to make the claim. If he can produce no evidence to show that the right to claim has been assigned to him, you should simply refuse to entertain the claim.

General

The right to claim can also be transferred in the course of the transfer of business activities from one person to another which is governed by statute. Such transfers might be made, for example, under:

• The Industrial and provident Societies Act 1965.
• The National Health Service and Community Care Act 1990.
• The Local Government Act 1992.

The extent to which rights to make claims and the liabilities are transferred will be set out in the legislation or in Orders of the relevant Secretary of State made under the appropriate Act of Parliament.

Where a claim is made by an entity other than the one which incurred the input tax being claimed, you should ask the claimant for the details of the legal provisions under which they took over their activities with a view to establishing that they are, in fact, entitled to make the claim.

Under these circumstances, it will probably be the case that the ‘importing’ entity inherits the liabilities as well as the assets and rights of its predecessor.