In Investment Trust Companies v Revenue and Customs  EWHC 665 where the High Court continued its early judgment (see Investment Trust Companies v HM Revenue and Customs  EWHC 458) on the question of whether utlimate consumers entitled to recover overpaid VAT from the revenue on they basis that they bore the economic burden of the overpaid VAT.
In this judgment, the High Court finalised its decision to take into account the decision of the Supreme Court in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners  UKSC 19. That case dealt with a claim for refund of overpaid corporation tax and the restitutionary principles underlying such a claim and whether Parliament could lawfully curtail claims for repayment. My discussion below is limited to the observations of the Court on the Woolwich principle, being the restitutionary principles for the recovery of tax which was not lawfully retained by the Revenue.
The facts and the earlier decision
Before looking at the decision of the Supreme Court, it is appropriate to re-visit the facts of this case and the earlier decision made by the Court.
The facts can be simply stated:
- the claimant had for many years been charged VAT by the supplier of goods and services – the claimant paid the GST and the supplier accounted for the VAT to the Revenue
- as a result of a court decision, the supplies were at all material times exempt from VAT, with the consequence that the VAT was unlawfully charged
- the supplier recovered the overpaid VAT to the maximum extent possible under the VAT legislation and passed the benefit onto the customer
- the supplier was unable to recover all of the overpaid VAT because of the statutory 3 year limitation period on refunds and also that refunds were limited to the “net amount” actually paid by the supplier (i.e., the VAT less input tax credits claimed).
The question for the Court was whether the claimant, who had borne the full economic burden of the unlawful VAT, could bring a direct claim against the Revenue to recover the balance of the tax it paid to the supplier. The Court considered this question from an English law and an European law perspective.
The essential question was whether the English law recognised a right to restitution in favour of the claimants. This involved the consideration of the following questions:
- Was the Revenue benefited, in the sense of being enriched?
- Was the enrichment at the claimant’s expense?
- Was the enrichment unjust?
- Are there any defences?
Was the Revenue enriched?
The Court found that the Revenue was enriched by the payments of VAT. Also, the enrichment was the full amount of the VAT, notwithstanding that the supplier only paid a lower amount (after claiming input tax credits).
Was the enrichment at the expense of the claimants?
The Court noted that common sense might be thought to suggest that the answer to the question was obvious – the full economic burden of the unlawful tax was borne by the claimants. As noted at :
This entirely accords with the fundamental nature of VAT as a tax on the supply of goods or services, the burden of which is borne by the final consumer. Equally clearly, it is HMRC who ultimately benefited from the imposition of the tax: that is the very purpose of taxation, to transfer money from the taxpayer to the Crown. How, then, can it seriously be disputed that the enrichment of HMRC was at the expense of the claimants, who actually paid the tax, and were unable to pass it on to anybody else?
The Court then accepted “at a fairly high level of generality”, that for the purposes of VAT the final consumer is properly to be regarded as the taxpayer, and that the role of the intermediate taxable persons in the chain of supply is to collect the tax and account for it to the tax authorities. However, the Court considered that there were dangers in pressing this point too far, because the claimant was not the taxpayer and was not liable, vis-a-vis, the Revenue, for the VAT. The Court rejected any argument that the supplier was a “conduit” for the VAT or that there was any relationship of agency, or anything resembling agency.
Nevertheless, the Court found that the absence of a “direct” relationship or liability did not prevent there being a sufficient relationship. In doing so, the Court recognised that one should look at whether “in reality” it was the claimant’s money and that this was not confined to strict legal reality, but could in appropriate circumstances include a broader underlying commercial or economic reality (at ).
In conclusion, the Court found that the enrichment was at the expense of the claimants, and stated as follows (at ):
In other woods, VAT is a tax on the consumer, collected by the supplier, and paid or accounted for to HMRC. Viewed in this way, the nexus between the consumer and HMRC could hardly be closer or stronger, and in economic terms the person at whose expense unlawful VAT is paid to HMRC is indubitably the consumer. I remind myself at this point that “at the expense of” is not a statutory requirement, and (as the subrogation cases show) it can be satisfied by reference to the underlying commercial reality of a transaction. To recognise that the test is satisfied in the present case would not, as Mr Swift submitted, be to dismiss the structure of the VAT legislation as mere formalism, but rather to give due weight to the economic reality which explains and underpins that structure.
In the end, I come back to where I started. In my judgment there is no convincing answer to the common sense proposition that the enrichment of HMRC was indeed at the expense of the claimants, and I would therefore so hold.
Was the enrichment unjust?
On the basis that the payments were made by mistake, and that if the true legal position had been appreciated, the payments would not have been made. The enrichment was therefore unjust.
Conclusion on restitution claim
The Court concluded as follows (at ) “all the basic ingredients of a restitutionary cause of action by the claimants against HMRC are made out, and that subject to any available defences the claims should succeed as a matter of English domestic law“.
Were there any defences to the claim?
The only defence relied on by the Revenue was the statutory provision relating to refunds of VAT. It was common ground that this provision provided a code for the recovery of VAT and that the code was exhaustive and excludes other remedies (such as common law claims for restitution). Under the terms of the section, only the supplier could seek to recover under those provisions, and the critical question for the Court was whether the exclusion of other remedies applied only to the suppliers (being the only parties entitled to claim under that section) or it had a wider application which extended to the restitutionary rights of the claimants.
The issue was one of literal vs purposive construction of the section. The literal construction favoured a limited exclusion which did not extend to the claimants. The purposive construction favoured a broad exclusion which covered all potential claims for a refund of VAT, regardless of who the claimant was. The Court favoured the purpose view at stated as follows (at ):
At this point, purposive considerations appear to me to be decisive. The evident purpose of section 80, so far as taxable persons are concerned, is to provide exhaustive and exclusive machines for the recover of undue VAT, subject to a relatively strict time limit for the making of claims. It is thus common ground that the [supplier] could not make restitutionary claims against HMRC in respect of VAT overpaid by them…although in the absence of section 80 there would be nothing to prevent them from advancing such claims, with the benefit of the usual six year limitation period and mistake-based extensions to it pursuant to section 32(1)(c) of the Limitation Act 1980. Given that Parliament has decided to enact this limited regime in relation to the taxable persons by whom the undue VAT was paid or accounted for to HMRC, it seems to be inconceivable that Parliament could have intended a more generous regime to be available to end customers buy whom the economic burden of the unlawful tax was actually borne. It would make no sense to limit recovery by the tax collector, but to expose the Exchequer at the same time to far more extensive claims by the “real” taxpayer. Furthermore, it could not plausibly be suggested that the position of end customers was somehow overlooked, because the section contains a defence of passing on, and…regulations make elaborate provision for the benefit of repayments to suppliers to be passed on to their customers. It would be wholly inconsistent with this limited and carefully regulated scheme if claims by the end customers fell outside its scope.
The further decision
The Court noted that the most relevant part of the FII judgment was the broad question whether EU law had any, and if so what, impact on the remedies available to the test claimants under English domestic law to vindicate their claims to restitution of unlawfully levied tax. Allied to this question was whether the Woolwich cause of action, correctly understood, would be sufficient to provide an effective domestic remedy for the claim.
The Supreme Court found that the Woolwich principle did not require an unlawful demand for the tax to have been made, the principle was formulated as follows:
…where tax is purportedly charged without lawful Parliamentary authority, a claim for repayment arises regardless of any official demand (unless the payment was, on the facts, made in order to close the transaction). The same effect would be produced by saying that the statutory text is itself a sufficient demand, but the simpler and more direct course is to put the matter in terms of a perceived obligation to pay, rather than an implicit demand…We should restate the Woolwich principle so as to cover all sums paid to a public authority in response to (and sufficiently causally connected with) an apparent statutory requirement to pay tax which (in fact and in law) is lawfully not due.
Before the High Court, the Revenue accepted that it was now not open to argue that the claimants could not bring a restitutionary claim because no demand had been made. However, the Revenue contended that there was nothing in the reformulated principle which suggests that a claim can be brought by anyone other than a taxpayer (being the person liable to pay the tax) – in this context, the Revenue contended that it was irrelevant that the claimants were persons who had borne the economic burden of the tax.
The Court agreed with the Revenue and found that the Woolwich cause of action would not be available to the claimants and considered that the Woolwich remedy should be confined to those who have themselves paid the sums which it is sought to recover to a public authority in response to an apparent statutory requirement to do so.
However, the Supreme Court also found that the legislation introduced to remove claimants rights to recover the overpayments was invalid because it breached the principles of EU law.