On 12 February 2015 the Court of Appeal gave judgment in Investment Trust Companies (in liquidation) v Commissioners for HMRC. This was an appeal from Henderson J’s two previous judgments in this matter.
In brief, the Court of Appeal has held that:
- Investment Trust Companies (“ITCs”) can recover from HMRC, by way of restitution, the amount of the VAT actually paid to HMRC by their managers (the “75s”) in the “dead period”.
- ITCs cannot however recover from HMRC the amount of any input tax set against the manager’s VAT liability in any period (the “25s”). Instead, ITCs would have to bring separate claims against their managers for these amounts.
What was the Court of Appeal hearing about?
This case involved the payment of unlawful VAT by investment trusts (“ITCs”) to their managers for management services. The managers then paid a proportion of the VAT (the “75s”) to HMRC and set the remaining proportion (the “25s”) against an input tax which the managers had paid to their third party suppliers. The managers successfully recovered the “75s” for certain periods from HMRC (and passed this to the ITCs) under s. 80 VATA. However, that section prevented recovery of the “25s” and restricted recovery to a 3 year limitation period which created a statutory “dead period”. The ITCs sought restitution directly from HMRC of the full VAT paid by them to their managers in the “dead period” and the “25s” in the other periods.
Henderson J, in two separate judgments, found that ITCs:
- could not recover, from HMRC, any amounts of VAT paid to HMRC by their managers in the “dead period”; but
- could recover, from HMRC, the amounts set against input tax which the managers could not recover from HMRC under s. 80 VATA (i.e. the “25s”) for periods other than the “dead period”.
Both parties appealed Henderson J’s judgments.
We discuss below the key issues in the Court of Appeal’s judgment. For ease of reference, we have adopted the Court of Appeal’s notional claim values of:
- £100 being the full VAT liability paid by the ITCs to the managers;
- £25 being the amount of VAT paid by the managers to their third party suppliers and set against the managers’ VAT liability collected from the ITCs; and
- £75 being the amount of VAT paid by the managers to HMRC from the amount collected from the ITCs.
How much can the ITCs recover from HMRC under UK domestic law?
This involves determining the value of HMRC’s unjust enrichment (i.e. the value of VAT in principle recoverable from HMRC). Henderson J found that this was the £100 VAT liability which was incompatible with EU law. HMRC argued that its enrichment was only the £75 actually paid to HMRC (the “75s”) and not the £25 set against input tax (the “25s”).
The Court of Appeal agreed with HMRC. It found that whilst the primacy of EU law required disapplication of national legislation by national courts it did not involve the national court treating the incompatible national legislation as a nullity. As a result, the effect of the UK legislation if it were compatible with EU law was that no VAT was payable by the managers to HMRC at all, and similarly, the managers would not have had the right to deduct any input tax either. HMRC therefore would have had no obligation, even in the dead periods, to allow the deduction of input tax. This was because the HMRC was entitled to £25 from the managers’ suppliers and overcharged tax could never be more than £75. Therefore, neither the managers nor the ITCs could recover more than £75 from HMRC. However, the managers were enriched by the £25 and the ITCs have a claim against them instead.
The Dead Periods
Henderson J found that claims in respect of the dead periods by the ITCs were prevented. His reasoning was that any claim by the ITCs should be analogous to that provided to the managers under s. 80 VATA. Since the managers were not entitled to recover for the dead period because of the exclusive nature of s. 80 imposed by s. 80(7), so the ITCs should be subject to the same limitation.
The Court of Appeal disagreed. It agreed that the effect of s. 80(7) was that s .80 was the only remedy available to the taxpayer (i.e. the managers). However, s. 80(7) did not apply to other parties seeking recovery. It therefore could not prevent the ITCs from bringing a UK domestic law mistake claim against HMRC for the dead periods.
Can the ITCs recover the 25s from HMRC under EU law?
Henderson J found that the ITCs were permitted to recover the 25s from HMRC under EU law because the managers could rely on change of position to defend a claim against them for the 25s. HMRC argued that change of position was not available to the managers and therefore, they were the proper defendants to a claim for the 25s not HMRC.
The Court of Appeal agreed with HMRC. It found that EU law principles allowed (i) a two-stage recovery (i.e. against the State and the taxpayer); and (ii) recovery by the ultimate consumer against the State only where it was “impossible or excessively difficult” for the consumer to recover from the taxpayer. The Court found that it was not “impossible or excessively difficult” for the ITCs to recover the 25s from the managers because the evidence showed that the managers could not take advantage of the change of position defence in respect of the 25s.