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HMRC internal manual

VAT Refunds

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HM Revenue & Customs
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Unjust enrichment: Some items to consider: What to consider before invoking the defence of unjust enrichment

Once it has been established that a trader’s claim falls within the scope of Section 80 of the VAT Act 1994, we need to establish whether the claimant passed the economic burden of the wrongly charged output tax on to his customers (consumers). 

There are two things about unjust enrichment that are universally applicable.

The first is that it is for us to prove that the claimant has passed on to his customers (consumers), in full or in part, the economic burden of the wrongly charged output tax.

The second is that, you cannot assume, because VAT is meant to be a tax borne by the final consumer or because it is shown on an invoice, that it has been passed on to customers (consumers).

In Amministrazione delle Finanze dello Stato -v- SpA San Giorgio, Case 199/82 [1983] ECR 3595 the ECJ stated:

“In a market economy based on freedom of competition the question whether, and if so to what extent, a fiscal charge imposed on an importer has actually been passed on in subsequent transactions involves a degree of uncertainty for which the person obliged to pay a charge contrary to community law cannot be systematically held responsible.”

This means that in some cases only a percentage of the economic burden of the VAT may have been passed on to customers. If this is the case, we can block a percentage of the refund on grounds of unjust enrichment and pay the claimant the balance. For example, we may pay 50% of the amount claimed and withhold the balance on the grounds that half of the economic burden of the wrongly charged VAT was passed on to the claimant’s customers.

On the matter of claimants’ counter assertions in relation to loss or damage, the terms of the judgment in Société Comateb -v- Directeur Générale des douanes e droits indirects [1997] STC 1006 mean that the Tribunal has to give serious consideration to this point and not accept taxpayers’ arguments which are not supported by evidence. This is especially so following remarks of Moses J (as he then was) in Marks & Spencer -v- C&E Commrs, [1999] STC 205; [1999] BTC 1573:

“…it seems to me obvious that in cases where the Commissioners have established that a wrongly charged tax was passed on and that is all the evidence in the case then the Commissioners will succeed. But if the taxpayer asserts that it has suffered damage in passing on the excessive charge and produces material on which that assertion is based, then the Tribunal will have to consider that material and decide whether, in the light of that material, the Commissioners have made good the defence of unjust enrichment.”

Therefore the defence of unjust enrichment can be considered to have two strands; pass on and loss or damage. We ought not to invoke the defence until we have sufficient evidence to prove, on a balance of probabilities, not only that the output tax being reclaimed has been passed on (in whole or in part) to customers (consumers) but also that the claimant has not suffered economic loss or damage - or if he has that it is limited to only part of the amount claimed.