Summary: The Supreme Court has held in Investment Trust Companies (in Liquidation) v Revenue and Customs Commissioners ( UKSC 29), that final consumers have no right to make a claim in restitution directly against HMRC for overpaid VAT. Instead their remedy is limited to a claim against the supplier unless such a claim would be “impossible or excessively difficult”.
The court further found that the inability of a final consumer to make a direct claim against HMRC is not incompatible with EU law.
The claimants, a number of Investment Trust Companies (ITCs), had paid VAT on supplies of investment management services, which was later established to be contrary to EU law. The appeal concerned a claim in restitution brought by the ITCs against HMRC for repayment of the VAT. There were three questions before the Supreme Court:
- Did the claimants (as final consumer) have a common law claim in restitution (on the basis of unjust enrichment) directly against HMRC, in principle, subject to any statutory exclusions?
- If the claimants did have a claim, in principle, against HMRC, did section 80 Value Added Tax Act 1994 (VATA 1994) bar such a claim?
- If the claimants had no claim against HMRC (either because no such claim is recognised at common law or because a common law claim is barred by section 80), is that compatible with EU law?
Did the claimants have a common law claim in restitution against HMRC, in principle, subject to any statutory exclusions?
The court unanimously held that the claimants were not entitled to claim in restitution against HMRC. The final consumer’s right to restitution lies only against the supplier – in this case the providers of the investment management services (the Managers).
Considering the common law requirements for unjust enrichment, the court found that although HMRC had been enriched from the overpaid VAT, the enrichment was not at the ITCs’ expense. The payment of VAT from the ITCs to the Managers was a contractual obligation separate to the payment of VAT from the Managers to HMRC. The two transfers could not be collapsed into a single transfer of value from the claimants to HMRC.
If the claimants did have a claim against HMRC, did section 80 VATA 1994 bar such a claim?
The court considered whether, regardless of their conclusion in relation to the first question, any common law claim against HMRC by the final consumer is barred by section 80 VATA 1994. It was common ground that section 80 provides an exhaustive remedy for repayment of VAT to the supplier that has accounted to HMRC for that VAT. However, the question was whether it also excluded common law claims by the final consumer. The Supreme Court found that it did.
Sections 80 and 80A created a scheme which enabled consumers who have been wrongly charged VAT to obtain reimbursement via the supplier’s claim. The court determined that Parliament cannot have intended that a statutory liability subject to strict time limits would run concurrently with a non-statutory liability which was wider in scope and had a longer limitation period.
If the claimants have no claim against HMRC, is that compatible with EU law?
The inability of the claimants to pursue a direct claim in restitution against HMRC was not incompatible with EU law. It is accepted law that, in principle, a system under which only the supplier is entitled to seek reimbursement of VAT from the tax authorities, whilst the consumer must seek restitution from the supplier, meets the requirements of EU law. One caveat to this is where restitution from the supplier is impossible or excessively difficult (for example if the supplier is insolvent). In such a case the final consumer may have a claim directly against the tax authority.
In this case the ITCs’ right of enforcement against the Managers was not impossible or excessively difficult. The only amounts which the claimants could not recover were amounts of VAT paid during the so-called “dead periods” where recovery by the Managers from HMRC was time-barred and, therefore, recovery by the ITCs from the Managers was prevented by the defence of change of position. The court found that the inability to recover these sums was not incompatible with EU law as it is established law that reasonable limitation periods for recovery are compatible with the EU principle of effectiveness and, specifically, the limitation period under section 80(4) VATA 1994 has been held to be reasonable.
This is a disappointing result for taxpayers who have claims stayed behind the ITC decision. However, there may be a glimmer of light as the ITC judgment leaves open the question of whether a fund can seek recovery of the notional £25 from the Managers (£25 being the notional amount of input tax deducted by the Managers from the total £100 paid by the ITCs to the Managers). The Court found that HMRC was not unjustly enriched by the £25 and therefore the Manager’s claim under section 80 was limited to the net £75 paid over by the Managers to HMRC.
However, this does not clarify the fund’s situation in relation to a claim for restitution of the £25 from the Managers. Such a claim would only extend to the period covered by the statutory regime (as the “dead periods” are covered by the defence of change of position), and limitation issues would need to be considered in each case.