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HMRC internal manual

VAT Refunds Manual

What to do with claims resulting in unjust enrichment: passing on


The basis of the unjust enrichment defence is simply this.

If a taxable person has accounted for VAT on supplies that he has made to his customers and has passed on the VAT in the price charged for those supplies, payment of his claim under section 80 of the VAT Act will, effectively, result in him getting that money twice – once from his customer and once from HMRC.

That is the only basis on which the defence can be invoked.

There are a couple of decisions of the VAT & Duties Tribunal in which the Tribunal Chairman held that any enrichment arising from payment of the trader’s claim would not be ‘unjust’ because the trader’s customers ‘would not mind’ the trader keeping the money. In Newcastle Theatre Royal Trust Ltd, the Tribunal said this:

‘That one trader can, and the other cannot, identify its customers is not, of itself, a ground for deciding that the former should not, while the latter should, receive a refund when, as a matter of fact, neither will make a refund, but it is, I think, pertinent to ask what would be the response of their respective customers if told that VAT which they had themselves paid was to be repaid to the trader, and retained. In Baines & Ernst, the shareholders intended to keep the money themselves. I strongly suspect that their clients would consider that manifestly unjust. Here, by contrast, the Appellant proposes to devote the money to its general purposes of promoting live theatre in Newcastle. It seems to me more likely than not that its patrons, even if they could establish an entitlement to an individual refund, would not seek one but would instead be content to see the money diverted to those purposes. In other words, it does not appear to me that the informed bystander, even one with a personal, if small, interest in the matter, would consider it in any way unjust that the Appellant should receive and retain the refund it seeks. On this ground, too, the appeal must be allowed.’

This is not a valid consideration. If HMRC has shown that it is more likely than not that the economic burden of the tax charge was passed on by the claimant to his customers, then that is an end of the matter – subject to the claimant’s loss or damage defence, see VRM12300.

At this point, it is open to the claimant, accepting in principle that the economic burden of the tax charge was borne by his customers to argue that the result of that was that he suffered loss or damage to his business.

The logic of the loss or damage argument is this. Let us say we have been able to show that the market rate for a ‘widget’ is £10. Let us say the claimant added VAT to that price and charged £12 per widget. That means that we have been able to show, on a balance of probabilities, that payment of the taxable person’s would lead to his unjust enrichment.

If the claimant can show that, as a result of having added that £2 to his price, he suffered, for example, a loss in profits or a loss in customers, he will have been able to show that payment of his claim, whilst enriching him, would not do so unjustly.

A simple example of this would be where VAT is introduced on a product that has never borne VAT. A taxable person simply adds 20% to his prices. It later turns out that he ought not to have accounted for VAT on his supplies. He makes a claim for the over-declared output tax and points to his income from the supplies in question which, from the date on which the VAT was introduced on the supplies in question, has gone down significantly and there is no other obvious explanation.

There is an evidential burden on the claimant to show loss or damage – see GIL Insurance Ltd (IPT00009), paragraphs 75 to 106. That is an Insurance Premium Tax case but the legislation operates in exactly the same way.

Section 80(3A)

This subsection sets out the scope of the subsections that follow.

In simple terms, they apply where, as a result of mistaken assumptions about the operation of VAT, a person has:

  • Accounted for VAT and brought an amount into account as output tax that wasn’t due as such (within the meaning of subsections (1) and (1A); and
  • Passed the economic burden of the tax charge on to his customers.

Section 80(3B)

This subsection provides that, in these circumstances, HMRC is entitled to ignore any loss or damage arising from the mistaken assumption except to the extent that the claimant is able to provide a quantified amount.

In simple terms, if we have made out our case on passing on and the claimant simply rebuts that by saying that he suffered loss or damage, we are entitled to ignore that argument and continue with the invocation of the defence.

If, on the other hand, he rebuts our unjust enrichment defence by arguing that, as a result of the mistaken assumption about the operation of VAT, he suffered holes in his profit of £x and loss of business of £y because of a loss of clients, we are bound to take that into account.

The ‘loss or damage’ that the claimant can ask us to take into account includes:

  • Analysis of damage resulting from the mistaken assumptions of the VAT wrongly charged;
  • Loss or damage caused to any of the business activities carried on by the claimant by having accounted for the VAT - not just the business activities on which the VAT was wrongly charged;
  • Loss or damage resulting from the actions of the claimant, especially if those actions are taken in order to try to mitigate the loss or damage;
  • Future loss or damage arising out the mistaken VAT charge so long as any such loss has crystallised, for example, before the date of the final hearing in an appeal in the Tax Tribunal and can then be shown by the Appellants to have resulted from the mistaken assumptions.

In other words, ‘Loss or damage’ is not restricted to that arising from loss of sales or loss of profit.

You should note that we are not liable to credit or pay the claimant any more than the net amount of their claim, even where the actual loss and damage suffered exceeds this amount.

Section 80(3C)

This subsection defines some of the expressions used in subsection 3(B).

It defines ‘quantified amount’ as the amount that the claimant is able to show that he has lost through having wrongly charged VAT on his supplies and ‘VAT provisions’ as

  • any provision of the VAT Act
  • any regulations made there under, and
  • any tertiary legislation contained in public notices, etc.