Investment trust companies paid VAT on investment management services that were in fact exempt under EU law. They sought restitution from HMRC of sums not recovered through their managers under the statutory scheme. The Supreme Court held that they had no claim in unjust enrichment against HMRC, and that the statutory bar on such a claim was compatible with EU law.
Between 1992 and 2002 the lead claimants, closed-ended investment trust companies, received investment management services under contracts providing for fees plus VAT if applicable. UK legislation treated the supplies as taxable, although article 13B(d)(6) of the Sixth VAT Directive exempted them and had direct effect. The managers charged and invoiced VAT, which the claimants paid. The managers accounted to HMRC for output tax after deducting input tax on supplies received for their business, paying only the surplus. Using the court’s notional figures, a £100 VAT charge might result in £25 being retained against input tax and £75 being paid to HMRC. One claimant, which made supplies outside the EU, had already recovered part of the VAT as its own input tax, and its claim was reduced accordingly.
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After the Court of Justice held in Claverhouse that the supplies were exempt, the managers obtained refunds under section 80 of the Value Added Tax Act 1994 for periods not caught by the three-year limit, and passed those refunds to the claimants under approved reimbursement arrangements. Claims could not be made for certain “dead periods” after 4 December 1996, a limitation which the parties accepted was compatible with EU law. Refunds were also confined, correctly under section 80(2A), to the tax actually paid to HMRC, not the amount retained against input tax. Henderson J later found that, had the true position been known, the managers would have absorbed that input tax rather than increased their prices. Some managers later refunded the retained element; the M&G Trust’s manager did not.
The proceedings below
The claimants sued HMRC for the unrecovered amounts: the time-barred element and, where not refunded by the manager, the retained input-tax element. They relied on unjust enrichment and, alternatively, EU law. Henderson J held that HMRC was enriched by the full notional £100 and at the claimants’ expense, but that section 80(7) excluded a domestic claim. He held that EU law required a remedy for the full amount, though not for the dead periods, and later held that section 80(7) must be disapplied so as to permit a mistake-based claim. He gave judgment for the M&G Trust on the retained element outside the dead period and dismissed the dead-period claims.
The Court of Appeal held that there was a direct unjust-enrichment claim which section 80(7) did not exclude, but that HMRC was enriched only by the notional £75. Any claim for the retained £25 lay against the managers, and EU law did not require a direct claim against HMRC for that sum. It therefore allowed the claimants’ appeal only as to the £75 paid in the dead periods, and allowed HMRC’s appeal on the £25.
Enrichment and “at the expense of”
Lord Reed, with whom the other Justices agreed, held that HMRC was enriched only to the extent of the notional £75. The managers could not both reclaim output tax on the basis that the supplies were exempt and retain sums deducted as input tax on the basis that they were taxable. Retention of the £25 therefore conferred no benefit on HMRC. The claimants’ restitutionary claim against the managers for that sum was, in principle, unanswerable.
The more difficult question was whether HMRC’s enrichment was at the claimants’ expense. The court emphasised that unjust enrichment is governed by legal principle, not a broad discretion to do what seems fair, and that the expression “at the expense of” is not itself a legal test. Restitution corrects a normatively defective transfer of value. Ordinarily the defendant must have received a benefit from the claimant and the claimant must have incurred a loss through providing it. Indirect provision may suffice where the law treats the position as equivalent to a direct transfer, for example through agency, a sham, coordinated transactions that are in reality a single scheme, or tracing. An incidental benefit, or a merely economic or commercial connection, is not enough.
Here there were two defective transfers: the notional £100 paid by the claimants to the managers under a contract mistakenly believed to require it, and the notional £75 paid by the managers to HMRC under inapplicable legislation. Those transfers could not be collapsed into one. The managers were not agents or trustees. The VAT element became part of their general assets, so it could not be traced into the payment to HMRC. The first payment did not even cause the second. Economic reality, in the sense that the claimants bore the cost, did not itself found restitution against HMRC. The claimants therefore had no common-law claim against HMRC. Their claim lay against the managers for the whole notional £100. The managers had no change-of-position defence to the £75, because that payment was reversible under section 80, or to the £25 they retained.
Section 80 and EU law
Even if a common-law claim against HMRC might otherwise have existed, section 80 would have barred it. Subsections (3) and (4), read with section 80A and the reimbursement regulations, create a scheme under which the supplier recovers undue VAT from HMRC, subject to a passing-on defence and a three-year limit, and reimburses consumers who bore the burden. A concurrent, potentially wider and longer-lived claim by consumers against HMRC would be inconsistent with that scheme. Section 80(7) therefore excludes it.
That result is compatible with EU law. A member state must repay tax levied in breach of EU law, but may require the consumer to claim from the supplier, provided reimbursement is not impossible or excessively difficult. Insolvency of the supplier is the usual example of such difficulty, though not necessarily the only one. Reasonable limitation periods are permissible, and the section 80(4) period had already been held reasonable. The claimants could sue the managers, who were not insolvent and could recover the £75 from HMRC and pass it on, while retaining the £25. The only irrecoverable sums were those paid to HMRC in the dead periods. Although a claim against the managers for those periods would not have been time-barred, the managers would have had a change-of-position defence because their own claims were statute-barred. The court found no need to refer the case to the Court of Justice, and declined to consider how the arrangements would operate if a supplier were insolvent.
Verdict: The Court unanimously allowed HMRC’s appeal and dismissed the investment trusts’ cross-appeal. Their claims to recover the VAT directly from HMRC failed. The Court left the position of an insolvent supplier open.
