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HMRC internal manual

VAT Refunds

Unjust enrichment: Reimbursement: The reimbursement scheme and set-off

Where a person makes a claim under Section 80 of the VAT Act 1994 for an amount brought into account as output tax (whether on a return or under an assessment), his claim is for the gross amount brought into account as output tax.

What he is credited, paid or repaid under Section 80(2A) is what is left after

  • all of his unpaid established debts are set against (established debts on file) are set off under section 81(3) of the VAT Act 1994 and Section 130 of the Finance Act 2008; and
  • all of the relevant unassessed liabilities are taken into account in accordance with Section 81(3A).

Thus Ali Ltd makes a claim under Section 80 for £1,000,000 overdeclared as output tax on supplies that ought to have been treated as exempt and we agree that the claim is an accurate statement of the gross overdeclaration of output tax.

Ali Ltd agrees in principle that the burden of the VAT charge was passed on to his customers and wishes to reimburse them.

We set against that claim

  • a £100,000 corporation tax debt (Section 130 of the Finance Act 2008);
  • a £150,000 VAT debt (Section 81(3) of the VAT Act 1994); and
  • £250,000 of input tax that was deducted in relation the supplies that were wrongly treated as being taxable (Section 81(3A) of the VAT Act 1994).

The result is that, we are only liable under Section 80(2A) to pay the company £500,000.

We take the view that the newly blocked input tax constitutes a loss to the business and pay Ali Ltd that amount as appropriate compensation (Section 80(3C)) and we pay him the remaining £500,000 for distribution under the reimbursement arrangements.

However, Ali Ltd must reimburse £750,000 to its customers because that is the amount for which the company has been given credit and the amount that has been passed on to the company’s customers - the amount by which the company would be unjustly enriched.

It must also reimburse to its customers ¾ of the statutory interest that was paid on the claim - the remaining ¼ having been paid in respect of the newly blocked input tax and constituting part of the appropriate compensation.