VRM12500 - What to do with claims resulting in unjust enrichment: reimbursement arrangements

The overall purpose of the unjust enrichment defence is to prevent a claimant from benefiting from a refund when the VAT was not a cost to him. But if the person who did bear the VAT burden can be identified and the claimant agrees to reimburse them and meets certain conditions, we will not use the defence.

The relevant legal provisions are Section 80A and Regulations 43A-G.  

A supplier is entitled to refuse to use the arrangements and appeal any claim rejection HMRC issues, or simply not make a claim at all. In those circumstances his customer may or may not have a claim against him – but this is a matter between both of those parties and not HMRC.

A supplier is not required under s.80A to reimburse more to their customer than HMRC pays to him.

Bearing the VAT Burden

Section 80A(2) defines ‘reimbursement arrangements’ as being made to reimburse the persons who for practical purposes bore the VAT burden.

This means a customer who has had the VAT cost passed on to him, who has not passed that cost on any further and who has not deducted input tax to relieve that burden.  

‘Pass on’ and ‘Bearing the VAT burden’ are different although related concepts. If a claimant passes on the VAT cost, it won’t necessarily mean his immediate customer bore that VAT cost. It could have been passed on further down the supply chain, or conceivably where a final supply is zero-rated it’s possible no one bore the VAT burden. 

The burden bearer may also change over time. A VAT registered person who deducted input tax will initially not bear the VAT cost, but if he corrects his VAT account or HMRC assesses to recover that incorrectly claimed input tax he will normally do so when the correction or assessment occurs.

It’s not necessary to investigate supply chains in detail – if a claimant wants to use reimbursement arrangements, you only need to look at the evidence supporting the recipient having borne the VAT cost.         

Regulation 43A-G Requirements

The claimant’s reimbursement arrangements must contain the following provisions and undertakings;  

  • Payment to be made to the customer in full within 90 days of HMRC crediting the claimant (or the sum repaid to HMRC within 14 days if this is not done)
  • Any Interest paid by HMRC on the principal amount will be treated in the same way
  • No deductions for administration fees or similar (however described)
  • Payment by cash or cheque (we consider electronic payments to be equivalent to cash, but the full use of the monies must be given. This does not include credit notes or partial payment where the claimant setoffs some of the claim amount against debts owed to him)       
  • The claimant must keep records identifying the name and address of reimbursed customers and the amounts including interest paid and produce them on request
  • The claimant must undertake to notify HMRC if he does not pay the customer within 90 days

Domestic Reverse Charge          

Where a domestic reverse charge applies, the customer should account for both the output and input tax relating to the supply. If the supplier mistakenly accounts for this output tax instead then he is entitled to make a section 80 claim for this sum. However we will normally refuse the claim on unjust enrichment grounds because of pass-on. The reimbursement arrangements cannot be used because the customer will not have borne the VAT burden due to their input tax recovery.

In this situation the customer is entitled to retain their input tax, but if HMRC assess or the customer corrects the missing output tax then the customer will normally have borne the VAT burden. At that point we can pay the suppliers claim if they agree to use the reimbursement arrangements and there is no other reason to refuse the claim.     

Deregistered Claimants

A deregistered claimant can still use the reimbursement arrangements where;

- the business was registered for VAT for the whole of the period covered by the claim, and

- it can meet the requirements in regulations listed above

Arrangements that don’t meet requirements in Section 80A and/or Regulations

Normally we will disregard any arrangements that do not meet these requirements. The purpose of a refund under section 80 is to neutralize the VAT burden from the person who suffered it. A payment by the claimant to some other party does not achieve that aim. 

The provisions and undertakings in regulations ensure that the person who bore the VAT burden receives the full amount the claimant has been paid by HMRC and provides a framework to police this scheme. 

Assessments under Section 80B

We may need to recover sums when a claimant fails to reimburse the person agreed within 90 days using a Section 80B assessment. See VAEC 5110.