Case Preview: Commissioners for Her Majesty’s Revenue and Customs v Investment Trust Companies (In Liquidation) and others
25 Monday Jul 2016
In May, the Supreme Court heard submissions in a case concerning the payment of VAT that was, in fact, not due. Despite the existence of a statutory mechanism by which such money could be reclaimed from HMRC, the claimants were still left out of pocket. Could a claim in unjust enrichment come to their rescue?
The case arose out of the provision of investment management services to the claimants, all of which were closed-end investment trusts. These services were provided, as stipulated under the relevant contracts, for a fee plus VAT “if applicable”. Until mid-2007, there was no question as to the applicability of VAT: these were services that were subject to VAT at the standard rate. The claimants accordingly paid the managers VAT for the duration of their relationship and, having deducted input tax, the managers passed this money to HMRC.
This all changed in June 2007 with the ECJ’s decision in Claverhouse. Claverhouse established that the provision of these services ought to have been exempt from VAT under the Sixth Directive art 13B(d)(6). The VAT that the claimants had been paying, therefore, never ought to have been paid.
The natural place to turn to recover their money was VATA 1994, s80 , which provides a statutory scheme for repayment by HMRC of any undue VAT. As it was the managers who had, in fact, paid any money to HMRC, it was only they who could bring s 80 claims. These claims against HMRC were successful and the managers, in turn, returned the refunded money to the claimants. However, the claimants were 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 a s 80 claim could not be made (the so-called “dead period”). Second, even for those periods of time for which a section 80 claim was successfully made, the sums refunded still led to a shortfall. As was explained to the court, of a notional £100 VAT payment that the claimants paid to the managers, £25 was deducted by the managers by way of input tax and £75 was paid to HMRC. It was this £75 that was refunded in a s 80 claim and subsequently found its way back to the claimants. The claimants, therefore, were still out of pocket for the remaining £25.
To recover the outstanding money from HMRC, the claimants resorted to the law of restitution. Under normal restitutionary principles, the claimants argued that (i) HMRC had been enriched at the claimants’ expense, (ii) that enrichment was unjust, and (iii) no defence was available (Banque Financière De La Cité v. Parc (Battersea) Limited). The claimants also sought repayment under EU law, which provides a mechanism to recover undue tax directly from tax authorities.
At first instance, Henderson J found that HMRC had, indeed, been unjustly enriched, and for the full £100. According to Henderson J, the other £25 “was retained by the Managers in satisfaction of the liability of HMRC to credit the with that sum under s.25(2) and s.26 VATA. It had therefore been used to mean an obligation of HMRC”.
Interestingly, Henderson J accepted that the enrichment had come at the claimants’ expense. This is a notoriously difficult ingredient in the unjust enrichment recipe. It appears to require a causal connection between claimant and defendant before an unjust enrichment claim can be successful. Of course, in this case any relationship HMRC had was with the managers, not the claimants. However, there has been a growing willingness in case law and academic commentary to recognise the idea of “indirect” unjust enrichment. Henderson J was prepared to lend it further support.
The effect of this was that the claimants were, at least in principle, entitled to full payment of the £100 both within and without the dead period under English law. However, Henderson J limited any entitlement to those claims falling outside the dead period on the grounds that VATA, s 80 was intended to be a comprehensive and exhaustive regime for the recovery of undue tax. Its time limits, therefore, should stand.
EU law could not provide any further assistance either. Notwithstanding the fact that Henderson J was prepared to accept that the claimants had, again at least in principle, rights under EU law to reclaim the £100 paid during the dead period through a direct right to reimbursement known as a San Giorgio claim, he nonetheless considered that the time limits for any such claim ought to be in line with those of the s 80 claims brought by the managers. To hold otherwise, Henderson J reasoned, would be to place the claimants in a more favourable position than that of the managers.
Putting this all together, the claimants could recover the extra £25 from HMRC for accounting periods that fell outside the dead period. However, whilst in principle entitled to the full £100 for the dead period both in English and EU law, any such claims were time barred by VATA, s 80.
Court of Appeal
HMRC appealed the finding that it was liable to account for the extra £25 while the claimants cross-appealed on the dead period point.
The Court of Appeal allowed HMRC’s appeal. In the opinion of the court, Henderson J had erred in his view that HMRC had been enriched by the notional £25. Placing the parties in the position they would have been had the legislation been properly implemented, the managers would not have been entitled to withhold the £25 as input tax. In effect, then, it was the managers who were enriched by the £25 and against whom any claim ought to be brought.
The court also held that Henderson J was wrong to exclude those restitutionary claims falling within the dead period on the basis that the statutory regime, and its corresponding time limits, acted as an exhaustive remedy. Whilst s.80 precludes any claim by the managers (as the party who has “accounted to the Commissioners for VAT”), it does not extend to any claim brought by parties in the claimants’ position. Their claim falls outside s 80’s scope and to extend its scope further would be, in the Court of Appeal’s view, to act contrary to the intention of Parliament.
In short, the claimants were entitled to the notional £75 for the entire period, but not the £25 for any. That should be sought from the managers by way of a restitution claim, to which they would have no defence. The court appeared to agree with the lower court on the position in EU law, namely that the claimants should not find themselves in a better position than that of the managers. In any event, there was, as the court explained, no need to resort to EU law: the combined effect of bringing a claim against HMRC for £75 over the entire period as well as a claim against the managers for £25 was that the claimants could recover the £100 in its entirety.
The Supreme Court
Both parties appealed the judgment of the Court of Appeal. The Supreme Court comprising Lords Neuberger, Mance, Reed, Carnwath, and Hodge heard submissions between the 17th and 19th May. They will have to consider whether, and if so to what extent, the claimants have an action in unjust enrichment and, further, whether any such action is excluded by VATA, s 80. The judgment will clearly be of interest to those who may have found themselves in a position similar to that of the claimants, keen to recover their money. Restitutionary lawyers will watch with interest too, not only for the Supreme Court’s view on the interplay between unjust enrichment and the operation of VATA, but also in the hope that it will contribute to the growing jurisprudence on indirect unjust enrichment and the question of what exactly is meant when the enrichment must be “at the claimant’s expense”.