(B) VALUE ADDED TAX ACT 1994, SECTION 80

Section 80 of the Value Added Tax Act 1994 makes provision for the recovery of overpaid VAT.¹²⁹ The effect of this statute is that where VAT has been paid in circumstances in which the money was not due to the Commissioners, they are liable to repay that amount to the payer, as long as the amount was not paid more than three years before the claim was made.^[1] Consequently, there is a general right to repayment, regardless of the circumstances of payment, so that recovery is not confined to cases of mistaken payment. Overpaid VAT can only be recovered under this section by the party who was directly accountable for the tax to the Commissioners, so, as regards such claims, the common law restitutionary regime is excluded.^[2] Where, however, the unlawful VAT was paid by a third party but the burden was borne by the claimants, it has been held that, although the claimants could not recover the payment under the statute because they were not accountable for the tax as end consumers of services provided by the third party, the statutory scheme was inapplicable and a claim at common law grounded on Woolwich was held to be available.^[3]

There are two issues of particular significance relating to the operation of the statutory regime. The first concerns the award of interest on any VAT which is overpaid,^[4] particularly whether simple or compound interest should be awarded.^[5] The matter was referred to the CJEU in respect of a claim to repay overpaid VAT which had been charged in contravention of EU law.^[6] It was held that there was an obligation to pay interest, but it was for each Member State to determine the rate and method of assessment, but with regard to the principles of equivalence and effectiveness. When the matter was then reconsidered in the English court, the Court of Appeal held that compound interest could be awarded.^[7]

The second issue relates to a particular defence recognized by the Value Added Tax Act 1994. By section 80(3) recovery of overpaid VAT is denied if repayment would unjustly enrich the payer. The proper interpretation of this defence is a matter of some controversy. The defence was considered by the Inner House of the Court of Session in Customs and Excise Commissioners v McMaster Stores (Scotland) Ltd.^[8] Lord President Hope identified a number of principles to assist in the determination of what constituted unjust enrichment for these purposes, particularly that, since the defence is statutory, the common law principle of unjust enrichment is not relevant to its interpretation.¹³⁸ To establish the defence it must be shown both that the claimant would be enriched by the recovery of the overpaid VAT and that this recovery would be unjust. The receipt would be unjust if the taxpayer was placed in a better position than it would have been in had the tax not been paid, as will occur where the taxpayer has passed on the burden of the tax to its customers. So, for example, if the taxpayer overpaid ?5,000 VAT and then recouped this amount from customers by increasing the price of goods, the burden of paying the extra VAT will be borne by the customers rather than the taxpayer, so the effect of making restitution to the taxpayer would be that it would be in a better financial position than it occupied before the VAT had been paid. It will, however, be difficult to prove that the taxpayer will have passed on its loss by increasing prices, since the volume of sales might have fallen as a result.

The application of the defence was also considered in Baines and Ernst Ltd v Commissioners of Customs and Excise.^[9] The claimant had been founded as a debt collection agency and was liable to pay VAT at the standard rate. It then changed to providing debt management services and was informed that it was liable to pay VAT at the same rate, when in fact it was exempt from paying the tax. The claimant had invoiced clients for services at a rate of 15% plus VAT, amounting to 17.625%. When the claimant was informed that its services were VAT exempt it increased its charge to 17.625%. The claimant said that, if its claim for restitution was successful, it would not repay any money to its clients. The key issue was whether allowing recovery of the overpaid VAT would unjustly enrich the claimant within section 80(3). A number of principles were identified as regards the application of the defence: the burden of proving unjust enrichment is on the Commissioners; there is no presumption of passing on simply because the price is stated to be inclusive of VAT; even where there has been passing on of the burden of VAT it does not necessarily follow that restitution to the claimant will involve unjust enrichment,^[10] because, for example, the effect of an increase in prices may be to reduce the claimant’s profits as a result of a fall in sales; crucially, therefore, whether the claimant was unjustly enriched requires an ‘economic analysis in which all the relevant circumstances are taken into account’.^[11] The trial judge concluded that, in the light of these principles, the claimant had in fact passed on the burden of the VAT to its clients and so it would be unjustly enriched if restitution was awarded.

Although the unjust enrichment defence has been criticized, its legitimacy has been affirmed by the ECJ,^[12] where it was recognized that the application of the defence requires full economic analysis of the facts of the case, which is a matter for the national court.

• [1] Value Added Tax Act 1994, s 80(4).
• [2] Ibid, s 80(7). See Investment Trust Companies v HMRC [2015] EWCA Civ 82.
• [3] Investment Trust Companies v HMRC [2015] EWCA Civ 82. See also Littlewoods Retail Ltd v HMRC[2014] EWHC 868 (Ch), [450] (Henderson J).
• [4] Value Added Tax Act 1994, s 78. 134 See p 29, above.
• [5] 135 Case C-591/10 Littlewoods Retail Ltd v HMRC [2012] STC 1714.
• [6] 136 Littlewoods Retail Ltd v HMRC [2015] EWCA Civ 515. 137 [1995] STC 846.
• [7] 138 See also Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (Law Com
• [8] No 227, 1994), 121.
• [9] [2004] UKVAT V18769. 2 Ibid, [98]. 3 Ibid, [100].
• [10] 142 Case 309/06 Marks and Spencer plc v Commissioners of Customs and Excise; Case C- 398/09 Lady andKid v Skatteministeriet [2012] STC 854.
• [11] 143 As recognized in Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19, [2012] AC 337.
• [12] 144 Where the unlawfulness of the tax has been determined by the CJEU it has been held that time will begin