Can HMRC use a tax refund to pay another debt

Yes. Section 130 of Finance Act 2008 lets HMRC set a repayment it owes you against any established debt you owe it, across different taxes and duties, without asking first, although it must tell you in writing afterwards. It cannot use the power where the debt is still open to appeal or under appeal, where the refund and the debt belong to different people or capacities, against tax credits or Child Benefit, or across the start of an insolvency.

What power does HMRC have to set off a refund?

Section 130 applies where there is both a “credit” and a “debit” in relation to a person. A credit is a sum HMRC must pay or may repay to the person, such as an overpayment of tax. A debit is a sum the person owes HMRC under any enactment or under a contract settlement. HMRC may set one against the other, and both obligations are discharged to the extent of the set off. The power has applied since 21 July 2008 in England, Wales and Northern Ireland, and was extended to Scotland from 15 September 2016 by section 178 of Finance Act 2016.

HMRC’s Debt Management and Banking Manual (DMBM700010 and DMBM700040) makes three practical points: HMRC does not need your consent, it must always write to tell you what it has done and what it proposes for any balance, and a set off made at HMRC’s discretion will not be reversed without its consent. The power sits alongside older duties to set off in particular regimes, such as section 81(3) of the VAT Act 1994, which continue to take priority.

Is set off automatic within the same tax?

Often, yes. HMRC’s manual at DMBM802040 explains that its computer systems will usually set off a repayment automatically when the debt is for the same tax, for example a Self Assessment repayment against a Self Assessment debt. HMRC’s public guidance also warns that you may not get a Self Assessment refund if tax is due in the next 45 days, such as a payment on account; the money is used against that liability instead.

Set off across different taxes, such as a VAT repayment against a Corporation Tax or PAYE debt, is generally a manual step taken by debt management staff. HMRC’s instruction is that officers should not hold up a repayment waiting for a debt to arise, and should not go looking for repayments before pursuing a debt unless one is imminent or enforcement is about to be reviewed. Where a repayment and an outstanding debt are both known, they should make every effort to set one against the other.

What conditions must be met before HMRC can set off?

DMBM700050 sets out the conditions:

Same person, same capacity. The credit and debit must be due to and from the same person acting in the same right.
The debt must be established. The amount must be agreed, or the time for appeal must have passed, or the appeal must have been decided. For in year PAYE, a debt becomes established 7 days after a P101 notice or similar process (DMBM700085).
The credit must be cleared. It must have passed HMRC’s credibility and verification checks.
No other impediment. There must be no statutory or contractual bar, and particular care is needed where litigation affects the credit or the debt.

Where the refund is not enough to clear every debt, HMRC appropriates it under its payment allocation rules and should allocate it to least disadvantage the taxpayer.

When can HMRC not use a refund against a debt?

DMBM700060 lists the main exceptions:

Tax credits for individuals and families, Child Benefit and Guardian’s Allowance cannot be used to reduce a tax debt, and a tax repayment cannot be set against an overpayment of those benefits unless you ask.
In insolvency, section 131 prevents a post insolvency credit being set against a pre insolvency debit, or the other way round.
Where a Self Assessment repayment is being withheld during an enquiry under section 59B(4A) of the Taxes Management Act 1970.
Where the parties act in different capacities, for example as a trustee for the credit and personally for the debt.
Where the legal entity is different, even if linked. In a VAT group the representative member is the person, so its repayment cannot be used against a separate group company’s Corporation Tax debt. An individual’s credit cannot be used against a partnership liability without the individual’s written authority.
Where the debit or credit cannot be properly quantified, the credit is compensation recommended by the Adjudicator for official error, a sum ordered by a court so the taxpayer can seek justice, or a cash security held for a specific tax.

Does set off affect interest?

DMBM405080 says set off is normally done so that the result is the same as if HMRC had repaid you and you had paid the debt on the effective date of the set off. Repayment interest runs on the credit up to that date and late payment interest runs on the debt up to the same date. For Self Assessment and Corporation Tax, “common period” rules stop interest running both ways on the same amount. If HMRC knew of a debt but repaid you instead of setting off, and you then paid the debt late, it should consider giving up the interest that set off would have avoided.

What about Time to Pay and refunds you have nominated?

HMRC’s principle is not to make repayments while a Time to Pay arrangement is running. Staff are told to ask whether a repayment is expected during the arrangement and to explain that any future repayment will, whenever possible, be set against the debt. Exceptions need a manager’s agreement.

Assigning a refund to someone else does not protect it. Under section 133 of Finance Act 2008, assignments made on or after 25 June 2008 do not stop HMRC setting the repayment against your own debts first. The exception is a repayment donated to charity through the Self Assessment donate scheme. See our guide to nominating repayments to an agent.

What can you do if you dispute the debt?

There is no formal right of appeal against a set off itself. HMRC has undertaken to consider concerns raised after a set off, case by case (DMBM700100). Where HMRC made an error, it must reverse the set off; otherwise reversals are rare. Practical steps are:

Check whether the debt was established. If you were still within the appeal period, or an appeal is open, the debt should not have been used. Point this out in writing and ask for the set off to be reversed.
Challenge the underlying decision. Appeal the assessment or penalty in time, and use statutory review or the tribunal if needed. A successful appeal reduces the debit and any excess set off becomes repayable.
Check identity and capacity. A refund due to a company, a trust or a partner should not be used against another entity’s debt.
Check the interest. Ask HMRC to confirm the effective date used.
Complain if handling was wrong. HMRC’s complaints process and the Adjudicator are available for delay or error.

How does this work in practice?

Illustration only. A company is due a £12,000 VAT repayment. It also has a £9,000 Corporation Tax liability that was assessed in a closure notice eight weeks ago and not appealed, plus a £4,000 penalty under appeal. The appeal time on the Corporation Tax has passed, so that debt is established, and HMRC sets off £9,000 against it, repaying £3,000. It should not use the balance against the penalty while the appeal is open. HMRC writes to explain the set off, and repayment interest and late payment interest are both calculated to the effective date of the set off.

What mistakes do people make?

Expecting a refund in full when a payment on account is due within 45 days.
Agreeing Time to Pay and assuming an expected VAT repayment will still be paid out.
Assigning a refund to a third party, believing that puts it out of HMRC’s reach.
Letting appeal deadlines pass, which turns a disputed assessment into an established debt that can absorb future refunds. HMRC can also collect established debts by direct recovery from bank accounts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.