Recovery of overpaid VAT by customers direct from HMRC

The Supreme Court has held that a consumer does not generally have a right to recover VAT which it has overpaid to its supplier directly from HMRC: HMRC v The Investment Trust Companies [2017] UKSC 29. Following a lengthy review of the principles of unjust enrichment, the court considered that the principle of unjust enrichment does not provide a customer with a general restitutionary right to repayment directly from HMRC as the relationship between customer and HMRC is too indirect. Furthermore, the court considered that, even if there were such a right, the statutory scheme of recovery in VATA 1994 s.80 was intended by Parliament to be exhaustive and, as such, would exclude any such right.

The decision substantially restricts taxpayers’ ability to recover overpaid VAT directly from HMRC where they are not the supplier in question. The decision makes clear that the customer’s right to recover overpaid VAT by way of restitutionary claim is directed against the supplier, subject only to the supplier’s right to recover such overpaid VAT from HMRC. The one exception is that EU law requires the repayment of taxes levied in breach of EU law, including repayment of VAT to the customer in some exceptional circumstances, such as insolvency. However, those circumstances were not applicable in this case and did not benefit the taxpayers.

The decision means that the claims by the ITCs failed. More generally, however, suppliers should ensure that their contractual arrangements protect them, as far as possible, from the adverse consequences of overcharging for VAT. Whilst the judgment of the court appears to recognise the existence of the defence of “change of position” where amounts paid onto HMRC are irrecoverable, it seems certain that such a defence comes with an obligation to make all necessary efforts to recover overpaid VAT, acting diligently in the pursuit of such repayments.

Background

In 2008, the ECJ held that UK rules which exempted from VAT management services provided to unit trusts and Open-ended investment companies (OEICs) but not investment trusts were contrary to EU law. The Government amended UK VAT law in 2008 to provide for exemption and accepted that charging output VAT on such services historically was incorrect. As such, managers were invited to make claims for repayment of output VAT from HMRC, subject to the usual time limits.

Repayment claims made by managers were restricted by two factors, in particular. Firstly, such repayment claims were limited by the three year cap on VAT repayments. Secondly, managers were only able to recover the net amount of VAT accounted for to HMRC, after allowing for any input VAT recovery the manager was entitled to on its own outgoings. VAT recovered by managers in this way was passed onto the investment trust customer under arrangements entered into with HMRC to reassure HMRC that such managers would not be "unjustly enriched" by any VAT repayment.

Ultimately, however, the investment trusts party to these proceedings were left out of pocket. On an illustrative example, involving the payment of £100 output VAT on management services, where the manager set off £25 input tax and paid £75 output tax to HMRC, the investment trust only recovered £75 of the output VAT it had paid. In addition, the repayments only covered the three year period allowed for claims by the managers and, in particular, did not cover the so-called “dead period” between 04 December 1996 and the date in 2001 that was three years before the section 80 claims were made.

Against this background, a number of investment trusts (ITs) claimed recovery, based on the principle of unjust enrichment, from HMRC of the additional output VAT suffered by them. This gave rise to an number of issues:

• firstly, to what extent had HMRC been “unjustly enriched” by the overpayments
• secondly, were the ITs entitled to recover the extra output VAT from HMRC on the basis of the domestic restitutionary remedy based on unjust enrichment, and
• thirdly, did the ITs have rights under EU law to claim the unrecovered VAT from HMRC.

Decision of the Supreme Court

On the first point, the Supreme Court agreed with the Court of Appeal that HMRC had only been unjustly enriched (on the illustrative example) to the extent of £75. In the High Court, Henderson J had considered that the enrichment of HMRC was £100, since the additional £25 absorbed input VAT that HMRC would otherwise have had to repay to the managers. The Court of Appeal reversed this decision on the basis that, although HMRC was obliged to give £25 credit to the managers for their own input VAT, this would not have been the case had the supplies been exempt. Accordingly, the actual enrichment of HMRC was only £75. The Supreme Court agreed with the analysis of the Court of Appeal on this point.

HMRC, however, argued that, even if they were unjustly enriched, the ITs had no right to obtain repayment directly from HMRC under the principle of unjust enrichment. Either the restitutionary remedy based on unjust enrichment did not apply where the relationship between the payer and the person enriched was indirect (as in this case) or because the right was excluded by an exhaustive statutory scheme for repayments of VAT in section 80. The Supreme Court has agreed with HMRC on both of these points.

The Supreme Court focussed on the question whether HMRC had been unjustly enriched “at the expense” of the ITs and whether the fact that the payment flowed via the managers to HMRC prevented the application of the principle. In effect, the Supreme Court held that it was not the payment from the ITs that unjustly enriched HMRC, but the payment from the managers. The payments of VAT from the ITs to the managers were not treated differently to any other payments received by the managers. They simply became part of the general assets of the managers. There was no trust over those monies and it was not possible to collapse the payment from the ITs to the managers and the payments of VAT by the managers to HMRC into a single transfer of monies. The ITs restitutionary right to repayment based on unjust enrichment lay only against the managers in these circumstances, not against HMRC.

However, even if this had not been the case, the Supreme Court considered that the scheme for repayments of overpaid VAT set out in section 80 should be regarded as exhaustive. The Court of Appeal had held that section 80 was limited to repayments of VAT to persons who have accounted for VAT to HMRC. Accordingly, section 80(7) (which provided for exclusivity) did not affect the claimants right to recover overpaid VAT under a restitutionary remedy directly from HMRC. The Supreme Court has overturned this part of the decision. Viewed as a whole, it was clear that Parliament intended section 80 to lay down an exhaustive scheme for repayments. It provided for a remedy for consumers (albeit indirect) as well as suppliers. It was clear that the rationale for the section 80 scheme was to protect the public finances and Parliament cannot sensibly be taken to have intended to have set up a scheme with strict time limits for suppliers whilst leaving open a separate wider, non-statutory right for customers.

However, the Supreme Court did recognise that EU law requires that a Member State must, in principle, provide for repayment of taxes levied in breach of law. The court noted that, in Reemsta, the ECJ recognised that a system under which only the supplier is entitled to seek reimbursement of overpaid VAT from the tax authorities, and the consumer can recover from the supplier only, meets the requirements of the EU law, subject to the caveat that a consumer should be able to seek recovery from the tax authority if it otherwise becomes impossible or excessively difficult. In the later Danfoss case, the ECJ gave an example of such a situation being where the supplier became insolvent.

In the present case, however, there was no such difficulty. The ITs were in a position to recover overpaid VAT from the managers. Such recovery could have included the £25 recovered as input VAT by the managers. To the extent that the managers’ claims were time barred (for the dead periods), then the managers would have had a defence of change of position in relation to the remaining £75 at least. However, the inability of the ITs to recover those sums was not incompatible with EU law, since the time limit on claims is itself compatible with EU law.

Comment

The decision means that the ITCs’ claims for both the so-called dead periods and input tax "top ups" both fail. The decision makes clear that the customer’s right to recover overpaid VAT is directed at the supplier, subject only to the supplier’s right to recover such overpaid VAT from HMRC.

Whilst the judgment of the court appears to recognises the existence of the defence of “change of position” where amounts paid onto HMRC are irrecoverable, it seems certain that such a defence comes with an obligation to make all necessary efforts to recover overpaid VAT, acting diligently in the pursuit of such repayments. Suppliers that file repayment claims promptly in such circumstances should be in a robust position.

The decision of the Supreme Court will be of much wider significance than just the ITCs claims. In particular, it will be of relevance to similar claims by pension funds against HMRC which, presumably, will equally be defeated. In particular, this will have an impact on United Biscuits as a lead case on the insurance exemption arguments, wherein the claimant may no longer have standing to bring the action. It does not undermine asset managers’ existing "Wheels" claims, however.