VRM12100 - Introduction to the Unjust Enrichment Defence

What is Unjust Enrichment?

Unjust Enrichment is a defence HMRC can use where a claimant;

  • Has over-accounted for VAT and makes a section 80 claim to recover it 
  • Has passed on the burden of that VAT (see VRM12200)
  • Is unable or unwilling to reimburse the person who did bear the VAT burden (see VRM12500)
  • Has not suffered ‘loss or damage’ as a result of mistaken assumptions about how VAT operates (see VRM12300)  

The term ‘unjust enrichment’ is used in other contexts, but this guidance is only concerned with HMRC’s section 80(3) defence. Similar principles apply to other indirect taxes with the defence.

There is no statutory definition of unjust enrichment so we rely on caselaw for guidance. The key issue is whether the VAT burden has been passed on or not. Where there is partial pass on, we can reject part of the taxpayers claim if the other criteria are met and pay the rest (the amount not passed on).       

Who bears the VAT Burden?

This is a question of fact about who really pays the VAT charged on a supply. Does the supplier reduce his profit margin and try to absorb the VAT cost himself, or does he pass on the VAT cost to his customer?

The question can’t be answered by accounting evidence such as contracts mentioning invoices being VAT inclusive or VAT exclusive, or copies of invoices showing a separate VAT amount. It will normally require some kind of economic analysis to decide.

Is an economic analysis always required?

The Court of Appeal in Baines & Ernst  [2006] EWCA Civ 1040 clarified one is not always needed. The Court said it must depend on the facts of each case, and the contentions of the claimant and HMRC. However both sides are entitled to undertake an analysis and show the results.

If a customer is VAT registered and able to reclaim the cost as input tax then the VAT burden can readily be regarded as having been passed on and an economic analysis will not normally be needed. Some degree of analysis will usually be needed in other cases unless the market is relatively simple, although the level of detail needed will vary.

HMRC is entitled to the claimant’s cooperation and access to relevant records. If they are not provided then we can draw reasonable inferences from the information we do have.

There is no set format for an economic analysis or standard list of documents required. More complex cases may require a departmental economist, but officers may be able to use their sector specific knowledge in other situations.           

Burden of Proof

The overall burden of proof is on HMRC to show the claimant would be unjustly enriched. The standard of proof is the ordinary civil standard - on the balance of probabilities.

When should the unjust enrichment defence be used?

In theory, we can look at using the defence in every case where a claim is made under section 80. However in practice there may be cases where the work required to discharge the burden of proof is not worthwhile. This will be a judgement call in each case.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)