Short answer
Yes. HMRC has a general statutory power to set any sum it owes you — including an R&D tax credit — against a debt you owe it, whether that debt is corporation tax, PAYE, VAT, or an agreed contract settlement, and it doesn’t need your permission first. Under the merged scheme, this happens automatically when working out what’s actually payable, before a figure is even arrived at; under the SME scheme and ERIS, the full credit is calculated first, and the set-off is applied afterwards, under a separate, more general power. Either way, HMRC does have to tell you in writing once it’s happened — a credit reduced or wiped out by an unannounced set-off, rather than a rejected claim, is one of the more common sources of confused client calls.
Applies to
- Schemes
- Merged scheme · ERIS · Legacy SME · Legacy RDEC
- Periods
- 1 April 2000 onwards
Two different mechanisms, easily confused
Two genuinely separate things are going on here, and conflating them is where most of the confusion comes from.
The first is built into the merged scheme’s own redemption process. As explained in What does it mean for an R&D tax credit to be “above the line” or “below the line”?, the gross credit works through a fixed seven-step sequence before anything is paid, and step six is: “any amount remaining after step 5 is to be applied in discharging any other liability of the company to pay a sum to the Commissioners… under or by virtue of an enactment, or under an agreement made in connection with any person’s liability to make a payment to the Commissioners.” Only what’s left after that — step seven — gets paid out. This isn’t really “offsetting” in the sense of a separate HMRC decision; it’s simply how the amount payable is calculated in the first place.
The second is a general power that applies across the whole tax system, not something specific to R&D relief. Finance Act 2008, section 130 lets HMRC set any “credit” — broadly, any sum it’s due to pay or repay someone under an enactment — against any “debit” that person owes it “under or by virtue of an enactment or under a contract settlement.” HMRC’s own manual is explicit that this is the power it actually relies on for R&D credits: “S130 FA2008 gives HMRC the power to set off amounts that are due to be repaid to a company against debts owed by that company, including contract settlements,” and that this “includes CT, PAYE and VAT debt.” For the SME scheme and ERIS — where, unlike the merged scheme, there’s no multi-step redemption process building the set-off into the calculation itself — this general power is the entire mechanism. It can also apply on top of the merged scheme’s own step six, since section 130(8) says it operates “without prejudice to any other power of the Commissioners to set off amounts”: the merged scheme’s built-in step doesn’t use up or replace HMRC’s separate, general power.
What HMRC doesn’t need to do — and what it does
The set-off power under section 130 is genuinely broad, and it’s worth being precise about what does and doesn’t constrain it.
HMRC doesn’t need your agreement, and doesn’t need to ask first. The set-off simply happens; there’s no consent step, and no separate decision the company can pre-empt by objecting in advance.
But HMRC must tell you afterwards. Its own manual is direct about this: “you do not need to seek authority from companies before set-off takes place, but you do need to tell the company of the set-off in writing.” A client who receives less than the credit they were expecting, with no explanation, should get a written notification of the set-off — if none has arrived, that’s worth chasing, not assuming.
The debts it can be set against are broad. CT, PAYE and VAT debts are all confirmed in HMRC’s own guidance, and the statutory power itself extends to any sum “payable by the person to the Commissioners under or by virtue of an enactment or under a contract settlement” — which covers essentially any liability across HMRC’s tax and duty remit, not a limited list specific to corporation tax.
One statutory carve-out exists, for insolvency. Where a formal insolvency procedure — a bankruptcy order, winding up, administrative receivership, a voluntary arrangement, or a deed of arrangement — has been applied to a company, HMRC cannot use this power to set a credit arising after that point against a debt that arose before it. This matters directly alongside the going concern condition on payment described in What are the going concern and other eligibility conditions for an R&D claim?: a company already in a formal insolvency process may find both restrictions engaging on the same claim from different angles — one blocking payment outright, the other limiting how a post-insolvency credit can be used even where payment isn’t otherwise blocked.
This is not the same as HMRC simply not paying yet
It’s worth keeping this distinct from the separate circumstances where HMRC withholds payment without any set-off being involved at all — an open enquiry into the return, or outstanding PAYE/NIC for the claim period specifically, both of which are conditions on whether HMRC has to pay anything yet, not a use of the credit to settle something else. A set-off, by contrast, actually applies the credit against a specific debt: the company’s liability is reduced or extinguished, and the underlying tax debt is treated as paid to that extent. One delays payment; the other uses the money.
Worked example
Illustrative figures only.
| Item | Amount |
|---|---|
| R&D tax credit calculated as due (SME scheme, before set-off) | £42,000 |
| Outstanding PAYE liability, same company, unrelated payment periods | £11,500 |
| Amount set off against the PAYE debt (FA 2008 s130) | £11,500 |
| Balance paid to the company | £30,500 |
| Written notice of the set-off | Sent separately, referencing the specific debt cleared |
Where claims go wrong
- Assuming a reduced payment means the claim was partly rejected. A set-off changes what’s paid, not what’s been allowed. The claim itself may be entirely correct; the shortfall is a separate tax debt being cleared, not a reduction in the R&D relief.
- Not checking for other outstanding HMRC debts before setting client expectations on cash. If PAYE, VAT, or CT arrears exist anywhere in the company, raise that risk with the client before quoting a claim value as an expected cash receipt.
- Missing the written notice. HMRC’s own guidance confirms notice is required. If a client’s payment is short and nothing has arrived explaining why, chase it directly rather than assume the claim was simply reduced.
- Overlooking the insolvency timing point. On a claim connected to a company in or approaching formal insolvency, whether the credit arises before or after the insolvency procedure was applied can determine whether a set-off against an older debt is even lawful — this is a genuinely fact-specific question worth getting right rather than assumed either way.
John Mapother
Founder & Director
Last reviewed 9 September 2026