In HMRC v Investment Trust Companies (in Liquidation)3 , the Supreme Court has held that the Investment Trust Companies (ITCs) were not eligible to further refunds on mistaken payments.
The claimants were all closed-end investment trusts who had obtained investment management services from management companies (the managers) and paid VAT on the fees which they had paid. Under VATA 1994, these services were subject to VAT at the standard rate, although from 1990 there was an exemption for investment management services supplied to authorised unit trusts.
In June 2007, the Court of Justice of the European Union (ECJ) ruled that the exemption should apply to closed-end investment funds (JP Morgan Claverhouse C-363/054 ). However, in breach of EU law, domestic law had failed to exempt such services. The VAT that the ITCs had been paying, therefore, should not have been paid.
The statutory scheme for repayment by HMRC of any undue VAT is set out in section 80, VATA 1994. As it was the managers who had, in fact, paid the money to HMRC, it was only they who could bring the claims under section 80. These claims against HMRC were successful and the managers reimbursed the ITCs.
The ITCs were, however, still out of pocket for two reasons. First, for reasons relating to the applicability of various time limits, there existed a period of time for which section 80 claims could not be made (the so-called “dead period”). Second, even for those periods for which a section 80 claim was successful, the sums refunded led to a shortfall. Under section 80, HMRC were obliged only to repay the VAT paid to them. As the managers had made deductions for attributable input tax, the amount repaid was less than the VAT suffered by the ITCs and they remained out of pocket for the difference. This sum was referred to as “the £25”.
To recover the outstanding sums from HMRC, the ITCs brought claims for restitution at common law and for repayment under directly effective EU law rights.
At the High Court, Mr Justice Henderson found that HMRC had been unjustly enriched for the full amount (£100). However, he held that claims in the dead period were time-barred by section 80, VATA 1994 and therefore those claims failed. The outcome was that claims for the £25 in periods outside the dead period, succeeded.
The Court of Appeal reversed elements of the High Court’s decision. It held that HMRC had not been enriched by the full amount (£100). The ITCs were only entitled to the notional £75 for the entire period, but not the £25s. Further, it held that section 80 did not extend to parties in the ITCs position, and therefore the ITCs could recover £75 paid in respect of the dead period.
Both parties appealed the judgment of the Court of Appeal to the Supreme Court. HMRC appealed in respect of the notional £75 paid in respect of the dead period and the ITC’s crossappealed in respect of the notional £25.
The Supreme Court’s judgment
HMRC’s appeal was allowed and the ITC’s cross appeal was dismissed.
On the question of enrichment, there was no dispute that HMRC was enriched to the extent of the notional £75. The issue before the Court was the notional £25. The Court held that the managers could not benefit from the exemption and exercise the right to deduct input tax. The £25 was therefore not an amount which HMRC owed to the managers, it was only deductible from output tax that was properly due. It followed that HMRC’s enrichment was only to the extent of the notional £75.
With regard to whether HMRC’s enrichment had been “at the expense of” the ITCs, there had been uncertainty around the approach to adopt. There was no doubt that in economic terms, HMRC was enriched “at the expense of” the ITCs, however, the Court was of the view that that did not in itself entitle the ITCs to restitution. The Court commented that, as a general rule, there has to be a direct transfer of value from the claimants to the defendants or in situations equivalent to direct transfers, for example, where an agent is interposed. In the present case there was none. The ITCs payment to the managers became part of the managers’ general assets and was not impressed with a special purpose trust, while the managers VAT liability to HMRC arose independently of whether the ITCs actually paid VAT. The two transactions were separate and could not be collapsed into a single transfer of value. Accordingly, the ITCs did not have any right to restitution against HMRC.
Assuming, contrary to this conclusion, that a claim in unjust enrichment might otherwise be brought, the Court concluded that such a claim would have been excluded by section 80 in any event. It confirmed that the statute creates an exhaustive code of remedies not just for suppliers who have accounted to HMRC, but for ultimate consumers as well.
The Court concluded that the application of section 80 in this way was compatible with EU law. The ECJ has accepted that a system under which only the supplier is entitled to seek reimbursement of VAT from the tax authorities and the consumer can seek restitution from the supplier, meets the requirements of EU law. In cases where the reimbursement of the consumer by the supplier would be impossible or excessively difficult, the principle of effectiveness would require that the consumer be able to bring a claim directly against the tax authorities. This was not the case here (the managers retained the £25 and were not insolvent), and the Court did not think it was appropriate for it to consider what the position would be in a hypothetical case where a supplier was insolvent.
This judgment will have wide-ranging implications, limiting the circumstances for recovery of indirect taxes charged in breach of EU law. It is also significant in that the Court has confirmed that section 80(7), VATA 1994, limits the rights of persons other than those accounting to HMRC for VAT.
The comments of the Court concerning the question of whether enrichment is “at the expense of” the claimant are welcome. Until now there has been limited guidance on this point, which has led to uncertainty as to the approach to be adopted. Unfortunately, the Court declined to provide a definitive statement on the circumstances in which the “at the expense of” requirement will be satisfied.
A copy of the judgment is available to view here.