In HMRC v Investment Trust Companies [2017] UKSC 29 (11 April 2017), the Supreme Court found that investment trusts that had paid VAT to their managers, which had turned out not to be due, did not have a common law claim in restitution against HMRC.
Between 1992 and 2002, the claimants, closed-ended investment funds, had received supplies of investment management services from their investment managers. At the time, the supplies had been treated as taxable by the UK’s VAT legislation, which had incorrectly transposed the Sixth VAT Directive Art 13B(d)(6), as later established by the CJEU in JP Morgan Fleming Claverhouse Investment Trust (Case C-363/05). Output VAT had therefore been accounted for on those supplies and input tax deducted. The supplies were, however, exempt under the directive. Following the CJEU’s decision and the House of Lords’ decision in Fleming [2008] UKHL 2, the managers were refunded the VAT they had paid to HMRC subject to two exceptions. They could not make claims in relation to accounting periods ending on or after December 1996, as these were time barred under VATA 1994 s 80(4); and the amounts repaid to the managers were calculated on the basis that, under s 80(2A), the input tax they had deducted should be set off against the output tax repayment. The managers passed on the amounts refunded to the claimants.
There were three issues:
1. Did the claimants have a common law claim against HMRC based on unjust enrichment (subject to any statutory exclusion)?
2. If so, did VATA 1994 s 80 bar such a claim?
3. If the claimants had no claim against HMRC, either because no such claim was recognised at common law or because a common law claim was barred by s 80, was that compatible with EU law?
The Supreme Court first had to decide whether HMRC had been enriched in the full amount of output tax due by the managers or only to the extent of the amounts actually paid by the managers, after deduction of input tax. The Supreme Court found that the managers could not both claim reimbursement of the output tax which they had paid to HMRC under VATA 1994 s 80 on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable. The court concluded that HMRC’s enrichment was only to the extent of the net amount they had received.
The court then had to decide whether HMRC’s enrichment had been at the claimants’ expense. The court observed that ‘a claim based on unjust enrichment does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis’; that it should not make ‘tabula rasa’ of all judicial principles; and that the words ‘at the expense of’ did not express a statutory legal test. Finally, the court noted that the doctrine of unjust enrichment aims to restore a balance, which has been disrupted. The court held that HMRC’s unjust enrichment had not been at the expense of the claimants. There had been no connection between the claimants and HMRC and it was impossible to trace their payments to the managers into the VAT payments made by managers to HMRC. The fact that the claimants bore the cost of the undue tax paid by the managers to HMRC did not entitle them to restitution from HMRC.
In relation to the second issue, the court found that the scheme created by s 80 was inconsistent with the existence of a concurrent non-statutory liability on the part of HMRC to make restitution to consumers. It followed that s 80 barred claims by consumers.
Finally, the court noted that the CJEU had accepted that a system under which only the supplier was entitled to seek reimbursement of VAT from the tax authorities, and the consumer could seek restitution from the supplier, met the requirements of EU law (Reemtsa (Case C-35/05)).
Why it matters: The claimants were claimants for a number of investment funds and the tests previously adopted by the courts, when deciding whether enrichment had been ‘at the expense’ of a claimant, seemed unsatisfactory. The Supreme Court therefore noted: ‘It would be unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant. Nevertheless, in view of the uncertainty which has resulted from the use of vague and generalised language, this court has a responsibility to establish more precise criteria.’ This case will be an important reference.
In HMRC v Investment Trust Companies [2017] UKSC 29 (11 April 2017), the Supreme Court found that investment trusts that had paid VAT to their managers, which had turned out not to be due, did not have a common law claim in restitution against HMRC.
Between 1992 and 2002, the claimants, closed-ended investment funds, had received supplies of investment management services from their investment managers. At the time, the supplies had been treated as taxable by the UK’s VAT legislation, which had incorrectly transposed the Sixth VAT Directive Art 13B(d)(6), as later established by the CJEU in JP Morgan Fleming Claverhouse Investment Trust (Case C-363/05). Output VAT had therefore been accounted for on those supplies and input tax deducted. The supplies were, however, exempt under the directive. Following the CJEU’s decision and the House of Lords’ decision in Fleming [2008] UKHL 2, the managers were refunded the VAT they had paid to HMRC subject to two exceptions. They could not make claims in relation to accounting periods ending on or after December 1996, as these were time barred under VATA 1994 s 80(4); and the amounts repaid to the managers were calculated on the basis that, under s 80(2A), the input tax they had deducted should be set off against the output tax repayment. The managers passed on the amounts refunded to the claimants.
There were three issues:
1. Did the claimants have a common law claim against HMRC based on unjust enrichment (subject to any statutory exclusion)?
2. If so, did VATA 1994 s 80 bar such a claim?
3. If the claimants had no claim against HMRC, either because no such claim was recognised at common law or because a common law claim was barred by s 80, was that compatible with EU law?
The Supreme Court first had to decide whether HMRC had been enriched in the full amount of output tax due by the managers or only to the extent of the amounts actually paid by the managers, after deduction of input tax. The Supreme Court found that the managers could not both claim reimbursement of the output tax which they had paid to HMRC under VATA 1994 s 80 on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable. The court concluded that HMRC’s enrichment was only to the extent of the net amount they had received.
The court then had to decide whether HMRC’s enrichment had been at the claimants’ expense. The court observed that ‘a claim based on unjust enrichment does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis’; that it should not make ‘tabula rasa’ of all judicial principles; and that the words ‘at the expense of’ did not express a statutory legal test. Finally, the court noted that the doctrine of unjust enrichment aims to restore a balance, which has been disrupted. The court held that HMRC’s unjust enrichment had not been at the expense of the claimants. There had been no connection between the claimants and HMRC and it was impossible to trace their payments to the managers into the VAT payments made by managers to HMRC. The fact that the claimants bore the cost of the undue tax paid by the managers to HMRC did not entitle them to restitution from HMRC.
In relation to the second issue, the court found that the scheme created by s 80 was inconsistent with the existence of a concurrent non-statutory liability on the part of HMRC to make restitution to consumers. It followed that s 80 barred claims by consumers.
Finally, the court noted that the CJEU had accepted that a system under which only the supplier was entitled to seek reimbursement of VAT from the tax authorities, and the consumer could seek restitution from the supplier, met the requirements of EU law (Reemtsa (Case C-35/05)).
Why it matters: The claimants were claimants for a number of investment funds and the tests previously adopted by the courts, when deciding whether enrichment had been ‘at the expense’ of a claimant, seemed unsatisfactory. The Supreme Court therefore noted: ‘It would be unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant. Nevertheless, in view of the uncertainty which has resulted from the use of vague and generalised language, this court has a responsibility to establish more precise criteria.’ This case will be an important reference.
