Revenue and Customs Brief 4 (2017): judgment of the Supreme Court in Investment Trust Companies
Published 19 December 2017
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The purpose of this brief
This brief sets out the HM Revenue and Customs’ (HMRC) view of the judgment of the Supreme Court in Investment Trust Companies (ITC) (in liquidation) v HMRC.
ITC was about claims made by final consumers against HMRC for VAT that had been wrongly charged to them by their suppliers.
This brief replaces Revenue and Customs Brief 15 (2013) published on 10 July 2013.
Readership
This brief is aimed primarily at professional tax advisors and lawyers, although it may be of interest to others.
Action
HMRC doesn’t require any action to be taken.
HMRC will be writing to those traders who have already put in High Court or County Court claims.
Section 80 claims
A person who makes ‘taxable supplies’ (a ‘taxable person’) must register for VAT and charge VAT on the supplies of goods and services that they make to their customers.
In the course of making their taxable supplies, the taxable person will buy in supplies of goods or services from other traders who will have charged VAT on their supplies.
When the taxable person prepares a VAT return at the end of the prescribed accounting period, they need to show the total amount of VAT due on supplies that they’ve made to customers (the output tax). They also need to show the total amount of VAT paid to the suppliers on supplies that they’ve bought in (the input tax). They then need to deduct the input tax from the output tax to arrive at the amount of VAT due to HMRC for the accounting period.
If a taxable person has accounted for output tax and later discovers that they didn’t need to, they can make a claim under section 80 of the VAT Act 1994 to recover the wrongly declared output tax.
That claim is subject to a statutory 4 year time limit and must be reduced by any input tax that was wrongly deducted.
The only person entitled to make a claim under section 80 is the person who accounted for the VAT or a person to whom the right to make the claim has been transferred. For example, under section 136(1) of the Law of Property Act 1925 (England and Wales), section 87(1) of the Judicature (Northern Ireland) Act 1978 or by an assignation in Scotland.
HMRC will refuse to pay a claim if they can show that payment of the claim would ‘unjustly enrich’ the claimant. That is to say, because they passed the burden of the VAT charge on to their customers, paying the claim would amount to them receiving the value of the over-declared output tax twice (once from the customer and once from HMRC).
Investment Trust Companies
In June 2007, the European Court of Justice released its judgment in Claverhouse (2008) STC 1180 ruling that certain supplies of investment management services, which HMRC had believed were liable to VAT at the standard rate, were exempt.
As a result of that judgment, HMRC received, and paid, section 80 claims made by fund managers (the suppliers) for output tax over-declared on supplies of investment management services made to investment trust companies (the customers).
The suppliers accepted that they had passed the economic burden of the wrongly charged VAT on to their customers. They also accepted that they had suffered no loss or damage to their business as a result of having done so.
In short, they accepted that they would be ‘unjustly enriched’ by payment of their claims.
The suppliers therefore agreed to reimburse to their customers anything paid to them by HMRC.
However, because the supplier, when they prepare the VAT return, is entitled to deduct the input tax (for example, £25) from the output tax (for example, £100), the amount which has been charged to the customers as output tax (the £100) is greater than the amount that’s paid to HMRC (for example, £75).
Under the terms of section 80, HMRC is only liable to pay the supplier the £75.
Nine trust companies made common law claims against HMRC in the High Court for the difference.
The claims made by the trust companies were not statutory claims. They were common law claims in restitution.
The Supreme Court’s judgment in ITC
On 11 April 2017, the Supreme Court handed down its judgment and dismissed the trust companies’ claims in full.
The Supreme Court agreed with HMRC that the only person entitled to make a claim against them is the supplier who had accounted for the VAT to them.
Importantly, the court held that the customers did have a claim but that it was against the suppliers and not against HMRC.
Where a customer believes that a supplier has wrongly charged them VAT, the remedy is to make a claim against the supplier.
This is a commercial matter and the right to claim against the supplier will depend on 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.
The effect of the judgment
Anyone who believes that they have a claim that isn’t precluded by the Supreme Court’s judgment must bring their claim in the ordinary courts.
In England and Wales claims have to be made in the County Court if the claim is for less than £100,000 or in the High Court if it’s for more.
In Scotland, claims should be made in the Sheriff Court if the claim is for less than £100,000 or in the Sheriff Court or Court of Session if it’s for more.
In Northern Ireland, claims need to be made in the County Court if the claim is for less than £30,000 or in the High Court if it’s for more.
Claims must be made in the courts and can’t be made directly to HMRC. Claimants should check procedures on the relevant courts’ websites.
The circumstances under which a customer is able to make a claim direct against HMRC are extremely limited.
More information
Claims of the type discussed in this brief are outside the scope of HMRC’s legislation and guidance manuals. 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 VAT Notice 700/45: how to correct VAT errors and make adjustments or claims and the VAT Refunds Manual.