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HMRC internal manual

VAT Refunds Manual

What to do with claims resulting in unjust enrichment: unjust enrichment examples

Subject to time limits, a business will receive credit for the over-declared output tax. However, if there are other errors, including tax wrongly deducted as input tax, these will be netted off to arrive at the amount of tax adjustment to be made. These examples show different situations.

Example 1 - Claim where unjust enrichment does not apply

   
Output tax over-declared -£10,000
Associated wrongly deducted input tax +£2,000
Net over-declaration -£8,000
Total credit (£10,000)

In the above example, where unjust enrichment does not apply, the business will be credited with £10,000 which will result in a net amount of £8,000 being repaid if there are no other debts.

If there are other outstanding debts then the £8,000 will be offset against these and the net amount remaining if any will be repaid.

Example 2 - Claim if unjust enrichment does apply and the business declines to enter into the reimbursement arrangements

   
Output tax £10,000
Input tax credit wrongly claimed +£2,000
Net over-declaration -£8,000
Total credit (£10,000)

A credit of £10,000 is denied on the grounds of unjust enrichment and an assessment for £2,000 may be made and notified to the business under the provisions of Section 73 of the VAT Act 1994 (subject, of course, to the time limits) for the wrongly deducted input tax.

If the input tax is attributable to the supplies on which the output tax over-declared, we shall set it against the claim under the terms of section 81(3A) of the VAT Act 1994 and there will be no need to make any assessment.

Example 3 - Claim where unjust enrichment does apply and the business enters into the reimbursement arrangements

   
Output tax over-declared £10,000
Input tax credit wrongly claimed +£2,000
Net over-declaration -£8,000
Total credit (£10,000)

In the above example, where unjust enrichment does apply and the business chooses to enter into the reimbursement arrangements, the business will be credited with the full amount to be reimbursed, and may only receive payment from HMRC of a sum up to the net amount of their claim (£8,000).

If the £2,000 input tax was attributable to the supplies on which the output tax was over-declared, it will be set off under the terms of section 81(3A) of the VAT Act 1994. If it is not related to the supplies in respect of which the claim was made, you will need to make an assessment under section 73(2) of the VAT Act 1994 to recover it.

This amount is credited or repaid on condition that it is reimbursed to their customers in full.

Therefore in some instances the business will be required to reimburse to their customers an amount greater than that which they receive as payment from HMRC. This is because they will have been given full credit to begin with, but because of other errors they will only receive the net amount remaining, if any.

Remember, the extent to which a claimant will be unjustly enriched may be any amount up to the gross amount of output tax that they have wrongly charged and accounted for.

In those circumstances, a business cannot argue that because he has not received a refund from us in the way of a cheque through the post, that he has not been credited with the over charged and over-declared VAT he has promised to return to his customers.

Example 4 - Claim where unjust enrichment does apply and the business enters into the reimbursement arrangements. Business has an outstanding VAT debt on file equal to the amount credited

   
Output tax over-declared £10,000
Associated input tax credit wrongly claimed £0,000
Debt-on-file £10,000
Net over-declaration -£0,000
Total credit (£10,000)
Amount to be reimbursed to customers £10,000

In the above example, where unjust enrichment does apply and the business chooses to enter into the reimbursement arrangements they will be credited with £10,000 which will be set off against the outstanding debt-on-file of £10,000. The extent of their unjust enrichment is the gross amount of the over-declared output tax (£10,000).

The claimant is required to reimburse the entire £10,000 notwithstanding the fact that he has not actually received any money from us.

If he fails to reimburse the money, either in whole or in part, we should make an assessment under section 80B of the VAT Act 1994 to recover however much has not been reimbursed, up to the full £10,000.

Example 5 - Claim where unjust enrichment does apply and the business enters into the reimbursement arrangements. Business has an outstanding VAT debt on file less than the amount credited

   
Output tax over-declared £10,000
Associated input tax credit wrongly claimed £2,000
Debt-on-file £5,000
Net over-declaration -£8,000
Total credit (£10,000)
Amount to be reimbursed to customer £10,000

In the above example, where unjust enrichment does apply and the business chooses to enter into the reimbursement arrangements then they will be credited with £10,000, but receive a physical payment of £3,000. The extent of their unjust enrichment is the gross amount of the over-declared output tax (£10,000).

The claimant is required to reimburse the entire £10,000 notwithstanding the fact that he has only been paid £3,000.

If he fails to reimburse the money, either in whole or in part, we should make an assessment under section 80B to recover however much has not been reimbursed, up to the full £10,000.