The High Court has held in Investment Trust Companies (in liquidation) v HMRC 6, that final consumers, with directly effective rights to recover incorrectly charged VAT from HMRC, are entitled to pursue a mistake-based remedy (in preference to a Woolwich remedy with an attendant time limitation 7) on a disapplication of section 80(7) of the Value Added Tax 1994 (to provide an effective and equivalent remedy enforcing EU law) rights.
The case was concerned with whether the basis upon which the recipients of supplies of investment management services (the claimants) could obtain recompense directly from HMRC for VAT incorrectly charged on those supplies. In its first judgment, the High Court held that the claimants had a common law mistake-based remedy against HMRC, but that it was statutorily excluded by section 80(7) and, following the CJEU’s decision in Danfoss A/S, Sauer-Danfoss ApS v Skattemnisteriet 8, EU law gave claimants the right to directly claim against HMRC for payment of incorrectly charged VAT.
However, pending the decision of the Supreme Court in Test Claimants in the Franked Investment Income (FII) Group Litigation v Inland Revenue 9 and the decision of the Court of Justice of the European Union (CJEU) in Littlewoods Retail Ltd & Others v HMRC 10, the High Court adjourned determination of whether it was required to disapply the statutory exclusion contained in section 80(7) so as to allow a mistake-based restitution claim (without any time limitation) or whether a Woolwich claim, which would time-bar recovery for most periods, was all that was required.
Investment Trust Companies: first judgment
In the first judgment the High Court held that:
- The claimants had a common law mistake-based remedy against HMRC because HMRC had been unjustly enriched at the expense of the claimants.
- That remedy was statutorily excluded by section 80(7), which provides that HMRC is not liable to repay amounts in respect of VAT other than as provided by section 80 (rejecting the notion that the exclusion applies only to section 80 claims).
- Pending the decision of the Supreme Court in the FII case and the decision of the CJEU in Littlewoods, the High Court adjourned determination of whether it was required to disapply the statutory exclusion in section 80(7) (in relation to the uncapped periods) so as to allow a mistake-based restitution claim (without any time limitation) or whether a Woolwich claim, which would time-bar recovery for most periods, was all that was required.
Investment Trust Companies: further judgment
In the second judgment, on 26 March 2013, the High Court considered:
- Although FII restated the Woolwich principle so as to cover all sums paid to a public authority in response to an apparent statutory requirement to pay tax (without the need for a formal demand), can a person other than the taxpayer pursue such a claim? (The managers were the taxpayers and the claimants, who were contractually obliged to pay sums equal to the VAT chargeable on the investment management services, suffered the economic burden of the tax).
- Whether section 80(7) had to be disapplied and, if so, whether the appropriate means of recompensing the claimants was by providing the same choice of remedies that would be available to a claimant seeking to recover incorrectly charged tax (assuming section 80 had never existed).
The High Court ruled that the effect of disapplying section 80(7) was to put the claimants in the same position as if the common law remedies had always co-existed with section 80. Therefore, following the majority decision in FII, a claimant was free to choose whichever common law remedies were available to him. The Court rejected HMRC’s efforts to distinguish FII on the grounds that section 80 expressly excluded all other remedies (so that the claimants, unlike the taxpayers in FII, never previously had the option of any common law remedies for recovering overpaid tax) and that this justified the selection of the most appropriate remedy (namely, a Woolwich claim). The Court found support for its view in DMG and FII (in relation to section 33 of Taxes Management Act 1970), where it seemed implicit in the judgments that disapplication would not impinge on the freedom of choice of remedies, and Littlewoods which gave no indication that it was for the national court to identify an appropriate minimum remedy.
In light of the Supreme Court’s referral of FII to the CJEU, it seems unlikely that this decision will necessarily be determinative of the disapplication issue. Perhaps of more general interest is the Court’s decision on the scope of the reformulated Woolwich principle. It is difficult to isolate the Supreme Court’s reformulation of Woolwich to persons who are directly liable to pay the tax. However, that is not surprising given that the Supreme Court was not concerned with that issue. While a further reformulation of Woolwich would not be out of the question (and maybe the Supreme Court will be given the opportunity), extending Woolwich to persons who bear the economic burden of the tax may result in uncertainty as to the scope of the principle.
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