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HMRC internal manual

VAT Refunds

Unjust enrichment: Reimbursement: The reimbursement scheme and determining the extent that they would be unjustly enriched

Where a business accepts that they will be unjustly enriched and chooses to enter into the reimbursement arrangements, the extent to which they will be unjustly enriched must be determined. 

This is important because this is the amount that will be subject to the undertaking for the reimbursement arrangements. It is also the amount that will be repaid to the customers who bore the economic burden, and the amount that we are liable to repay to the claimant under the regulatory scheme - up to the net amount of their claim under section 80 of the VAT Act 1994, see VR8000.

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 some cases the extent of the claimant’s unjust enrichment, and the amount that he must reimburse, may be greater than the amount physically paid to him under Section 80. In others, the amount that the claimant is required to reimburse under the scheme may be less than the net amount that he is paid.

For example:

If input tax has now become irrecoverable - as a consequence of supplies having been treated as taxable when they ought to have been treated as exempt - that irrecoverable input tax may well have become a cost to the claimant that wasn’t taken into account as such when setting his prices. Under such circumstances we might well accept that giving credit for an amount equal to the blocked input tax would not unjustly enrich the claimant - it might be said to constitute compensation for loss or damage arising as a result of the mistaken VAT treatment of his supplies. Of course, that irrecoverable input tax may form only part of any quantified amount.

In this example the extent of the claimant’s unjust enrichment, and therefore the most that they would be required to reimburse to customers, would be the gross amount of output tax overcharged (together with appropriate proportion of any interest paid under Section 78 of the VAT Act 1994) less the cost of associated irrecoverable input tax.

In the reimbursement arrangements the “relevant amount” (referred to in regulation 43A of the VAT Regulations 1995) is defined as meaning “that part (which may be the whole) of the amount of a claim which the claimant has reimbursed or intends to reimburse his customers”. This is reflected in regulation 43G (undertakings) where the recipient has to apply the whole of the relevant amount credited to him without any deduction to the reimbursement of his customers.

In short, strictly speaking, where a claimant chooses to enter into reimbursement arrangements, we could require 100% of the tax overdeclared to be reimbursed to customers (if they bore 100% of the burden) with the claimant bearing the burden of newly blocked input tax.

However, as a matter of good administrative practice, we have agreed that, in certain circumstances, the law can be interpreted as requiring only that the net amount be reimbursed (100% of the tax overdeclared minus any associated and wrongly deducted input tax).

This agreement was made on the basis that where a person has deducted input tax on the assumption that his supplies are taxable and then discovers that his supplies are exempt and he was never entitled to deduct that input tax, then that input tax becomes an unforeseen cost to the business. In other words, generally speaking, a claimant can reasonably be said to be unjustly enriched in relation only to repayment of the difference between wrongly deducted input tax input tax and the wrongly charged output tax.