A claim for restitution of overpaid tax based on the principle of unjust enrichment had necessarily to recognise and respect the methodology adopted for the recovery of the charge and to assess the claim that the revenue had been unjustly enriched in the light of that process. That required the court to decide whether there had been unjust enrichment at the end of that process and not merely at the time of the original mistaken payment.

The Court of Appeal so stated when allowing the appeal of HM Revenue and Customs against a ruling by Henderson J [2013] EWHC 665 (Ch)[ [2013] WLR(D) 125 that it pay £25 in restitution and also allowing the appeal of the claimants against the judge’s construction of section 80(7) of the Value Added Tax Act 1994.

The claimants, Investment Trust Companies (in liquidation) (comprising the third, seventh and eighth claimants, Kleinwort Overseas Investment Trust plc, F & C Income Growth Investment Trust plc and M & G Recovery Investment Trust plc, as the three lead claimants) sought the full amount of the VAT (£100) they were charged on management services supplied to them, less recoveries to date. The judge decided that they should be confined to a modified version of the cause of action in order to satisfy their directly effective European Union rights to recover from the defendant, HM Revenue and Customs, that part of the consideration (£75) paid by them to the managers of the trusts for investment services which represented VAT mistakenly thought to be due outside the so-called “dead period” prior to the three years before the date of claims made under section 80 of the Value Added Tax Act 1994, and which the managers themselves had been unable to recover from the revenue and pass on to the claimants. The judge held that the domestic law claims were barred by section 80(7). The revenue appealed and the claimants appealed on the section 80(7) point.

PATTEN LJ, giving the judgment of the court, said that under domestic law the two principal issues were (1) whether the claimants had any claims in restitution for the overpaid tax given that the managers and not they were accountable for and paid the tax in question; and (2) if so, whether HM Revenue and Customs (“the revenue”) had been enriched to the extent of the full £100 charged to the claimants as VAT by the managers under the management agreements or only to the extent of the £75 actually paid to the revenue after deduction by the managers of input tax. If the correct sum was the £75 then M & G Trust had no claim for the uncapped periods and the claims for the dead period were reduced accordingly. But if the revenue had been unjustly enriched at the claimants' expense in respect of the dead period at least in respect of the £75 then the only defence to the claim for that period was section 80(7). The judge held that the claimants did have a restitutionary claim as pleaded for the full £100 even though they were not accountable to the revenue for the VAT on the grounds that as the ultimate consumers of the managers' output services, they had (contractually) funded the tax paid which was sufficient to give them a cause of action for its recovery. He rejected the argument that the revenue could not have been enriched by more than the amount of tax (£75) which they actually received. The £25 of the output tax was, he held, retained by the managers in satisfaction of the liability of the revenue to credit them with that sum under section 25(2) and section 26 of the Value Added Tax Act 1994. It had therefore been used to meet an obligation of the revenue. But he held that the domestic law claims were barred by section 80(7) which, on its proper construction, was not limited to restitutionary claims made by the person accountable for the tax but was intended to be a comprehensive restriction which extended to similar claims by end consumers who had borne the economic burden of the unlawful tax. The focus of a claim for restitution of overpaid tax based on the principle of unjust enrichment had necessarily to recognise and respect the methodology adopted for the recovery of the charge and to assess the claim that the revenue had been unjustly enriched in the light of that process. That required the court to decide whether there had been unjust enrichment at the end of that process and not merely at the time of the original mistaken payment. Since the managers had, by common consent, a directly effective right to treat the services supplied to the claimants as exempt and were entitled to enforce that right retrospectively through the medium of section 80, it must follow that the making of those claims operated as an election to treat those supplies as exempt and the waiver of the right to deduct input tax. Although section 80(4) prevented recovery of the tax beyond the three-year time limit, the claims for the dead period did not on that account justify any different treatment. The managers were to be placed into the position which they would have been in had the domestic legislation properly implemented the provisions of the Sixth Directive. That would have been that no output tax was payable in any of the accounting periods in question but that no recovery could be made in respect of the £25 input tax. The reversal of the tax position created by the Value Added Tax Act 1994 had to be carried out on a global basis. Once the legality of the domestic tax treatment was challenged it had to be treated as disapplied in respect of each of the accounting periods in which it was operated. That meant that even in respect of the dead period for which no direct recovery could be made using the machinery of section 80, the amount of the overcharged tax levied on the managers was never more than £75. Consistently with that, the revenue had no obligation to allow deduction of input tax for the dead period and the claimants had no better right than the managers to the recovery of the £25. Although the claim in restitution was not a section 80 claim, it proceeded on the premise that the tax paid was never due and that the revenue were enriched to the extent of the full amount paid. The judge was wrong to regard the £25 retained by the managers as representing the discharge of any still subsisting obligation to refund that amount on the part of the revenue and, except upon that premise, they could not have been enriched by more than the £75 for any of the accounting periods in question. Any domestic claim in restitution for the £25 therefore lay against the managers alone. It was common ground that section 80(7) was effective to prevent any claim by the managers outside section 80. That therefore secured the imposition of the three-year limitation period under section 80(4) and would exclude any common law claim by the managers in restitution. But the judge ultimately held that section 80(7) was not, despite its express language, limited to a claim by the person who had accounted for and paid the VAT to the revenue It should, he held, be given a purposive construction in order to recognise and ensure that section 80 (with the then three-year limit on claims) provided an exhaustive and exclusive mechanism for the recovery of undue VAT. That was a surprising conclusion and, in the court’s view, it was wrong. In summary, the judge was wrong to treat the revenue as enriched by the entire £100 on the basis that the £25 retained by the managers satisfied an outstanding and relevant obligation to give credit for input tax. Nor was he entitled to treat the managers as having a realistic change of position defence. Their section 80 claim for the £75 reversed the tax treatment of the £25 and made their retention of that sum as against the investment trusts impermissible. Since the recent evidence before the judge removed the alternative way in which a change of position defence could have been asserted, the repayment by the revenue to the investment trusts of the full £100 would in a real sense unjustly enrich the managers who would be relieved of their liability to account for the £25 to the claimants but would have no liability to account for the sum to the revenue. In those circumstances, it was not necessary to decide whether the principle in Amministrazione delle Finanze dello Stato v SpA San Giorgio(Case 199/82) [1983] ECR 359 in its application to indirect taxes such as VAT imposed on the relevant authorities a liability to account for the full amount of the tax paid by the ultimate consumer regardless of how much of that sum was properly to be regarded as due to the revenue on the correct tax treatment of the relevant transaction. There was much to be said for the view that the same principles should govern the position under EU law as determined the extent of the unjust enrichment under domestic law. In both cases the court should have regard to the position not only at the time when the tax was paid but also having regard to the consequences of reversing the tax position. In the end, however, one reached the same conclusion even if the wider principle of recovery was the correct one to be applied. The San Giorgio claims of the investment trusts for the recovery of the full £100 were capable in this case of being satisfied by a combination of their successful claims against the revenue for the £75 and a domestic law claim against the managers for the £25 to which they would have had no change of position defence on either of the grounds relied on before the judge. The claim to recover the £25 for any of the relevant accounting periods therefore failed The appeal could therefore be resolved by the application of established EU law principles. The court therefore allowed the appeal of the revenue against the judge’s order for the payment of the £25 but also allowed the appeal of the claimants against the judge’s construction of section 80(7).