Revenue & Customs Brief 15/13

Judgments of the High Court in Investment Trust Companies (in liquidation) -v- CRC [2012] EWHC 458 (Ch); [2012] STC 1150; [2012] All ER (D) 84 (Mar) & [2013] EWHC 665 (Ch); [2013] WLR (D) 125 (ITC)

Claims under section 80 of the VAT Act 1994 (section 80) (the VAT Act) – Claims by persons to whom VAT has been wrongly charged – Common law claims against HM Revenue & Customs (HMRC) by third parties – Whether HMRC is liable – Who can claim

Purpose of this brief

This Revenue & Customs Brief sets out, in the wake of the judgments of the High Court in ITC, HMRC’s view of the situation where:

  • a person (the Supplier) has charged an amount as VAT to their customers (the Customers) which ought not to have been charged
  • they have passed the ultimate economic burden of that VAT charge on to those Customers so that the VAT has not been a cost to them and has not suffered any loss or damage to their business as a result, and
  • owing to exceptional circumstances, the Customers are unable to get the amounts wrongly charged to them back from the Supplier

Readership

This Revenue & Customs Brief is aimed primarily at professional tax advisors and lawyers although it may be of interest to others.

Action required

This Revenue & Customs Brief is for information only.

HMRC does not require any action to be taken.

Background – section 80 claims

A person who makes taxable supplies (a Supplier) is required to register for VAT and to charge VAT (their output tax) on the supplies of goods and services that they make to their customers. Because they are making taxable supplies, they are entitled to deduct from the output tax for which they are liable the VAT that is charged to them (their input tax) by their suppliers.

If a person has accounted for output tax on goods or services they have supplied on the assumption that those supplies are properly taxable and later discover they are, in fact, exempt, they can make a clam under section 80 to recover the wrongly declared output tax. That claim is subject to statutory time limits (four years) and must be reduced by any input tax that was wrongly deducted.

Section 80 provides that only the person who accounted for the output tax is entitled to make a claim – Please note that it is possible to legally assign the right to make it to someone else under, for example, section 136(1) of the Law of Property Act 1925 (England & Wales), section 87(1) of the Judicature (Northern Ireland) Act 1978 or by an assignation in Scotland.

HMRC will reject a section 80 claim if they believe that the claimant would be unjustly enriched by the payment. Payment will unjustly enrich a claimant if:

  • they passed the economic burden of the VAT charge on to their customers in the price charged to them, and
  • they suffered no loss or damage to their business (for example, by loss of customers or of profits) as a result of having done so.

Background – Claims by Customers

Where a Customer believes that a Supplier has wrongly charged them VAT, their remedy is to bring a claim against their Supplier. This is a commercial matter and the right to claim against the Supplier will depend upon the terms of the contract under which the goods or services were supplied. In simple terms, the Customer has simply been overcharged by the Supplier.

Such claims are not statutory claims. They are not provided for in any of the tax legislation and will normally be subject to the time limits provided for in the relevant statute of limitations – see below.

There is no statutory provision which would enable the Customer to make a claim against HMRC.

Background – ITC

In June 2007, the Court of Justice of the European Communities (ECJ) delivered its judgment in JP Morgan Fleming Claverhouse Investment Trust Plc & Anor –v– CRC [2008] STC 1180 ruling that supplies of fund management services were not liable to VAT at the standard rate but were exempt.

In the wake of that judgment, HMRC received, and paid, claims made under section 80 by fund managers (the Suppliers) for output tax overdeclared on supplies of fund management services made to investment trust companies (the Customers).

The Suppliers accepted, when they made their claims, that they had passed the economic burden of the wrongly charged VAT on to their Customers, that they had suffered no loss or damage to their business as a result and that, consequently, they would be unjustly enriched if they were allowed to keep any payments made to them by HMRC.

They undertook to reimburse to their Customers anything paid to them by HMRC.

However, as explained above, the Suppliers were not repaid by HMRC the total amount wrongly charged as VAT to their Customers. By way of example, assuming the output tax wrongly charged by the Supplier was £100 and the input tax wrongly deducted by them was £25, the latter was set against the former and the Supplier was repaid the net amount of £75 which they passed on to their Customers.

As a result, the amount wrongly charged to the Customers as VAT by their Suppliers exceeded the amount reimbursed to them.

Nine investment trust companies made common law claims in restitution against HMRC for the difference.

The High Court’s judgment in ITC

On 2 March 2012 and 26 March 2013, the High Court handed down its judgments.

Mr Justice Henderson held that:

  • section 80 prevents any claim being made against HMRC by anyone other than the Supplier (in this case the fund managers)
  • HMRC have been enriched at the expense of the investment trust companies to the extent of the full amount charged by the fund managers to the investment trust companies (that is, the £100 in the example given above)
  • that enrichment had been unjust
  • the investment trust companies could be said to have a common law claim in restitution against HMRC notwithstanding the fact that they had made no direct payment to HMRC.

He went on to hold that:

  • the investment trust companies’ primary remedy was to make a claim against the fund managers
  • any such claim that they might make would, on the facts in this case, be excessively difficult or impossible in practice to enforce
  • the investment trust companies have a directly effective EU law right to recover the balance of wrongly charged VAT from HMRC, and
  • to that end they were entitled to make a mistake-based claim in restitution against HMRC.

It was accepted by all parties that the fund managers had passed the ultimate economic burden of the wrongly charged VAT on to the investment trust companies and had not suffered any loss or damage to their business as a result.

The effects of the judgment

Both parties have been given leave to appeal to the Court of Appeal against the judgment of the High Court.

Customers who believe that they are entitled to bring claims on the basis of the judgment may do so. However, Mr Justice Henderson held that claims such as those made by the investment trust companies were claims of last resort. In any event, a Customer may only be entitled to make a claim direct against HMRC where they can show that:

  • the tax was wrongly levied in breach of EU law
  • the Supplier passed the wrongly charged tax on to them so that they ultimately bore the economic burden of it, and
  • it is, for reasons unrelated to the merits of the claim, excessively difficult or impossible in practice for them to make a claim against their Supplier.

Claims must be brought in the relevant courts and must be particularised.

These judgments have no application in relation to duties, taxes and levies which have been collected by HMRC in breach of UK legislation but not in breach of EU law.

Making claims

These are not statutory claims for recovery of tax wrongly accounted for. They are not claims made under section 80 and are outside the jurisdiction of the First-Tier Tribunal.

In England and Wales and in Northern Ireland, these claims are mistake-based claims in restitution and must be brought in the High Court. Claims for less than £30,000 should be brought in the County Court.

In Scotland they are actions of repetition to recover an overpaid sum of money and can be brought in the Court of Session or the Sheriff Court. Claims for £5,000 or less must be brought in the Sheriff Court.

HMRC will normally agree to have claims founded on directly effective EU law rights, and falling within the scope of this Revenue & Customs Brief, stayed or sisted behind the litigation in ITC, but all claims must be particularised.

'Claims' submitted by writing to HMRC will be neither effective nor valid. HRMC is unable to do anything with them to validate them and they will not stop the clock for the purposes of the relevant time limits.

Time limits

Because these claims are not statutory claims and are not made under any provision of the VAT legislation, they are not subject to the time limits prescribed in the VAT Act but are subject to the time limits provided for in the various statutes of limitation in the three jurisdictions of the United Kingdom.

Those time limits are as follows:

  • England & Wales – six years from the date on which the cause of action accrued or six years from the date on which the mistake giving rise to the cause of action was discovered or could have been discovered with reasonable diligence – sections 2 and 32(1)(c) of the Limitation Act 1980
  • Northern Ireland – six years from the date on which the cause of action accrued or six years from the date on which the mistake giving rise to the cause of action was discovered our could have been discovered with reasonable diligence – Articles 6 and 71 of the Limitation (Northern Ireland) Order 1989, and
  • Scotland – five years from the date on which the obligation arose (the date on which the payment was made by the Supplier to HMRC) unless the claimant can show that he was induced to refrain from making a claim by the words or actions of HMRC – section 6 of the Limitation and Prescription (Scotland) Act 1973.

In the circumstances with which this Revenue & Customs Brief is concerned, a cause of action normally accrues when a person pays an amount to another person which they ought not to have been required to pay.

Important

It is important to note that the High Court held that the investment trust companies (the Customers) were only entitled to repayment of the VAT wrongly charged to them in the prescribed accounting periods for which the fund managers (their Suppliers) had themselves made claims which were in time under the statutory section 80 time limits.

They were not entitled to claim for amounts wrongly charged to them in prescribed accounting periods which were out-of-time when the fund managers made their claims.

In cases where a Supplier has accounted for VAT in breach of EU law but has not made a valid section 80 claim, it will not be possible for a Customer to make a claim against HMRC in respect of any period which is, at that point, outside the time limits for a section 80 claim.

The High Court said that the Customer can have no better claim, and no more advantageous time limits, than the Supplier had or would have had.

Further information

Claims of the type discussed in this Revenue & Customs Brief are outside the scope of HMRC’s legislation and guidance manuals so that the National Advice Service and the Written Enquiries Teams are unable to advise potential claimants.

If you believe you may be entitled to make a claim, you should seek professional advice.

Guidance on reclaiming overpaid tax for taxpayers who have paid VAT to HMRC - including on time limits and unjust enrichment – can be found in 'Notice 700/45 How to correct VAT errors and make adjustments or claims' and the 'VAT Refunds Manual'.

Issued 10 July 2013