The recent decision of the Court of Appeal in ITC3 represents an important step in providing ultimate taxpayers with a direct right of action to recover overpaid VAT from HMRC.


The case concerns the recovery of VAT by Investment Trust Companies (ITCs) which paid VAT on services supplied to them by management companies (the managers). The imposition of VAT on these services was found to be contrary to EU law by the CJEU in Abbey National4 and JP Morgan Claverhouse5.

The ordinary process for recovering overpaid VAT is contained in section 80 Value Added Tax Act 1994 (VATA), however, the mechanism is open only to those who accounted for the VAT to HMRC. As a result, the ITCs could not recover the overpaid VAT as they had not accounted to HMRC for it. In such circumstances there is no breach of EU law where a claim may be made by way of ordinary civil law claim against the interposed taxable person. In this case, the ITCs were able to recover much of the overpaid VAT from the managers who had made corresponding claims to HMRC under section 80, however, there remained a significant residual (referred to in the judgment as the £25) which the managers were not able to recover. The £25 in question was referable to input tax deductions the managers had made in respect of costs attributable to the wrongly charged output VAT. HMRC only paid back the wrongly charged portion less the input tax deduction. Additionally, the claims were limited in time to those permitted by section 80(4) VATA and Fleming claims. This left a period, known as the “dead period” where claims could not be made either in respect of the £25 component attributable to input tax deduction or the “£75” of the VAT actually paid by the managers to HMRC.

Before the High Court, Mr Justice Henderson found that HMRC was to make reparation for the £25 on the basis that HMRC had been enriched to the full extent of the unlawful VAT, including the input tax deduction, and that no claim lay against the managers as they had a “cast iron” change of position defence to any claim against them. Consequently, the only route open to the ITCs was a direct right of action against HMRC, following the CJEU’s decision in Danfoss6. Henderson J, however, restricted the scope of the claimants’ remedy to the same extent available under section 80 VATA. This had the effect of reducing HMRC’s exposure under the extended limitation period contained in section 32(1)(c) Limitation Act 1980, to 3 years under section 80(4)and excluded any recovery for the “dead period” in relation either to the £25 or £75 component of the claim.


The Court of Appeal, took a different approach and found that, as a matter of English law, there was nothing in section 80 which precluded a High Court claim being made directly against HMRC by an ultimate taxpayer for overpaid VAT. Interestingly the court’s analysis was based on an English law interpretation of the statute and applicable common law rights of action (without reference to EU law). This meant that the restriction on the time limit imposed by the High Court did not apply, and the claimants’ claims in relation to the £75 for the dead period were upheld.

As to the £25, the Court of Appeal also took a different approach to the High Court, finding that HMRC had not been enriched by the £25 and that the reduction in VAT attributable to  the managers’ input tax claims meant that it was the managers, and not HMRC, who had been unjustly enriched.


This case is significant in expanding and defining an ultimate taxpayer’s right to claim against HMRC both as a matter of English and EU law. Section 80 VATA can no longer be said to be the only route to recover overpaid VAT, or provide an effective bar against claims by ultimate taxpayers. The Court of Appeal’s interpretation of the relevant statutory provisions is far wider than that anticipated by the High Court, and leads to an acquiring of rights by ultimate taxpayers beyond that required by EU law.

As the Government may introduce legislation to address this issue, those with claims, or potential claims for the recovery of overpaid VAT – especially if they were not the taxable person – ought to seek advice as soon as possible in order to secure their position.

To read the decision click here.