Weekly VAT Update – 18 April 2017
Supreme Court Rules against Investment Companies Restitution Claims
The Supreme Court has decided in favour of HMRC in a case involving Investment Trust Companies (ITC) and supplies which had been received from investment fund managers. The managers, in accordance with practice at the time, had charged VAT on their management services.
However, in the previous case of J P Morgan Fleming Claverhouse Investment Trust, it was decided that this was incorrect and that the charges should have been exempt from VAT. In early 2004, claims to HMRC were made under section 80 VATA 1994 for refunds of VAT from 2001 to 2004. Claims for earlier periods were not made under section 80 due to time limits imposed by section 80. Further claims were made directly to HMRC, firstly, in respect of a period when one trust went into liquidations and, secondly, on the input tax that is deducted from a section 80 claim. For example, if a manager made taxable supplies to an ITC, and the VAT chargeable on those supplies was £100, then the manager had to account to HMRC for £100. If the manager had purchased taxable supplies where the VAT was £25, the manager was entitled to credit for that £25, and was required to pay HMRC only the balance of £75. The second part of the claim was in respect of the £25 that HMRC had not repaid. The appeal was by HMRC against an earlier decision of the Court of Appeal in respect of the notional £75 paid on the liquidated trust, and a cross-appeal by the Lead Claimants in respect of the notional £25.
In its judgement, the Supreme Court stated that, based on the laws of unjust enrichment, HMRC had not received a benefit directly from the ITC Companies and the claim must fail on the basis that they did not have a relationship with HMRC. The Court also stated that the inability of the lead claimants to recover those sums is not incompatible with EU law.
This case helps to clarify the law of unjust enrichment and, although it does not exclude the possibility that claims can be made on HMRC, it appears that they will be very rare in practice.