VRM12300 - What to do with claims resulting in unjust enrichment: loss or damage

Where the VAT burden is passed on, a claimant may still be able to show he suffered other ‘loss or damage’ such as reduced sales. He will not be unjustly enriched to the extent of that loss, although the value of a claim can never be increased. On this page we use the terms loss and damage interchangeably.   

HMRC’s view is that a claimant will not have suffered ‘loss or damage’ unless;

  • There is a direct causal link between the pass-on and the loss suffered
  • The loss resulted from mistaken assumptions about the operation of VAT
  • The VAT burden has been passed on from the claimant
  • He can show a quantified amount that represents adequate compensation

It is a question of fact whether a claimant has suffered loss or damage. Like pass-on, the relevant business unit will be best placed to assess this. You should bear in mind;

  • Loss or damage is not restricted to loss of sales and profits
  • We must take account of loss or damage caused to any business of the claimant (including non-taxable ones)
  • This includes future losses (if quantifiable)
  • The fact damage arose from the claimant’s own actions does not mean we can exclude it, including where further losses arose from his attempts to mitigate the original loss   
  • For VAT Groups, although the claim is made by the representative member, damage to any group member can be considered  

What is a direct causal link?

It must be reasonably clear that the loss or damage to the claimant was caused by the passing on of the VAT charge and not some other reason. The type of loss or damage incurred must also have been reasonably foreseeable as occurring due to the pass on. If there is a long chain of events before the damage was caused, or if any one event in the chain was highly unlikely to happen (even though it did) then the damage may be too remote to be considered.

Mistaken Assumptions

There is no requirement a claimant’s assumptions have to be reasonable. However if a person knows their VAT treatment is incorrect but delays correction, there will be no loss for the intervening period. 

The VAT burden has been passed on

HMRC needs to show pass on first to prove unjust enrichment, otherwise there is no need to look any further towards loss or damage. 

A quantified amount representing adequate compensation

The claimant may need to use some form of estimation, but this should involve a credible method that provides a figure with reasonable certainty. It is not sufficient to show ‘some’ damage resulted nor does HMRC have to accept a figure simply because it is a best guess with the material available.

While the overall burden of proof in showing unjust enrichment lies with HMRC, the claimant must make a case for and provide some evidence rather than simply challenging HMRC to show he has not suffered loss. We are not obligated to consider any possible loss unless the taxpayer raises the issue.