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HMRC internal manual

VAT Refunds Manual

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

The first thing to remember is that the fact that VAT is shown on an invoice is not proof of anything.  The legislation requires a taxable person making supplies to show VAT separately on invoices in respect of his taxable supplies so that the person to whom the invoice is issued can use it as evidence for the deduction of that amount as input tax.

It is not proof that the issuer of the invoice added the VAT charge to his ‘going rate’ for the supplies in question.

The case law of the European Court of Justice and of the courts in the UK start from the assumption that in a free market economy, and probably even in a managed economy, a trader will charge the market rate and account for any VAT out of his profit margin.

If we are going to invoke the unjust enrichment defence successfully, we have to prove otherwise.

What we have to try to establish is why the claimant’s prices are where they are. That might be easier with a new business than with a long established business. To the extent that a trader sits down and works out what his price is going to be for a given product, it is going to be easier to establish with a recently established business.

That said, there are cases (see Barbury Shooting School for example) where the trader simply looks around at his competitors, sees what they’re charging and does his best to compete, for example by undercutting them or by charging the same and adding a little more for the money.  In such cases, it’s going to be extremely difficult to show that the claimant didn’t absorb the burden of the wrongly charged VAT himself.

It is also worth bearing in mind that where the claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, the courts are very likely to assume that that is because he was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices.

As claims are limited to four years there should normally be business or VAT records for the accounting periods covered by the claim. VAT registered businesses are obliged, by paragraph 6(3) of Schedule 11 to the VAT Act 1994, to keep their records (see regulations 31 and 33 of the VAT Regulations 1995) for up to 6 years (see the guidance on traders’ records for concessions on record keeping).

As a check you should generally take the following factors into account.


In cases where a product competes in a market with products whose VAT liabilities vary, food for example, it can often be significant if the claim is for an amount declared as VAT on the supply of goods competing with similar goods, or substitutes, which are liable to VAT at the reduced or zero-rate.

Under such circumstances, it will be more difficult for us to show that the tax has been passed on because the claimant will obviously have had to price his product to compete with the zero-rate and reduced rate competitors.

Addictiveness, necessity of goods

Goods that are addictive or can be classified as necessities are far more likely to have VAT added to the price that the suppliers want for them - cigarettes and bread for example.

This is because a person’s resistance to price rises is less sensitive, because they will tend to buy such goods whatever the cost.

Market position

When considering market conditions we must be careful to compare like with like. For example, it is no good comparing the market conditions relating to luxury cars with that for economy cars. 

It may also give a false reading if you compare upmarket retail establishments with the common-or-garden ones - upmarket retail outlets may have different costs simply because of the standard of service.

In the case of monopolies, the supplier can set whatever price he wants for his goods or services simply because there is no competition. However, the products still have to be reasonably priced if they are to sell so some or all of the VAT may be absorbed if the cost of the goods or services becomes too high for demand.

Pricing and margin

You should examine the period of the claim then look back through the trader’s records to see if the price has increased at all.

If the price went up when VAT was added, we are more likely to be able to show that the VAT charge was passed on. However, if the price has remained the same this may be more difficult.

We need to know the average margin the trader hopes to achieve. It would be useful to consider overall margins achieved in that particular market sector.

If the trader is making lower margins than is generally accepted for a given product, it would probably be difficult to prove unjust enrichment. The claimant might reasonably argue that, by incorrectly accounting for VAT, he has suffered a loss of profits.

Period of over-declaration of VAT

The longer the claimant has been accounting for VAT wrongly, the better our chance of proving unjust enrichment.

It is unlikely that we could successfully invoke unjust enrichment where the claimant has only been applying VAT to his supplies for a relatively short period of time and where there has been no increase in price.

Have profits declined? If a trader’s profits have declined following the addition of VAT it is likely that he has absorbed the tax or has suffered an economic loss and unjust enrichment may be more difficult to prove.

Don’t always accept that a claimant’s declining sales are solely attributable to the incorrect imposition of VAT. There may be other underlying reasons such as

  • competitors opening nearby
  • shop ambience being poor
  • changing customer preferences
  • poor location in comparison to competitors.

Are customers registered for VAT?

If most or all of the claimant’s customers are registered for VAT it is far more likely that the economic burden of the VAT has been passed on.

Where the person to whom the VAT was invoiced is entitled to deduct it as input tax, we are entitled to start from the assumption that the supplier passed the economic burden of the VAT charge on to his customers.

On the face of it, the VAT will have been a burden to neither the supplier nor the customer – the supplier will have passed the burden of the VAT charge on to his customers and they will have deducted it as input tax.

Other factors and questions

There are other factors we need to consider

  • Who are the claimant’s competitors?
  • What is its market?
  • How does it set its prices?
  • What are its overheads?
  • Anything else that may have relevance?

These include the following

  • If comparisons have been made with other competitors’ products and promotions, they should be asked to specify the businesses whom they believe to be their competitors. If you think it might be useful, you might also carry out some limited research to try to establish whether there are any indications that all parties selling the goods in question are passing on the VAT.
  • How were the details of competitors’ prices and promotions collected?
  • During the period of the claim, were prices altered in response to price changes and promotions by competitors?
  • What were the wholesale prices and retail selling prices of the goods covered by the claim? From this we can discover margins.
  • Where the claimant is involved in interest free credit sales, or where products are strongly marketed by suppliers, it may be worth asking the following questions to establish whether the loss is as large as claimed:
  • How many suppliers did the claimant have during the period of the claim? Did all the products subject to the claim benefit from interest free credit promotions?
  • How were the cost prices for these goods or services negotiated during the period of the claim? Did these negotiations take into account interest free credit promotions or other indirect support from suppliers?
  • Were volume discounts received? Did these differ for interest free credit promotions?
  • Does the claimant have a formal policy on the allocation of selling space for products subject to interest free promotions?