HMRC v Investment Trust Companies: Suppliers beware overpaid VAT

The ruling in HMRC v Investment Trust Companies [2017] UKSC 29 published last month has established that final customers have no right to claim overpaid VAT directly from HMRC, and instead their remedy is limited to a common law claim in restitution against the supplier, unless such claim would be “impossible or excessively difficult”. The extent of the customer’s common law remedies against the supplier may come as a surprise to some suppliers.

Background

Between 1992 and 2002, the claimants, closed-ended listed investment trusts, received supplies of investment management services from their investment managers (the “Managers”). The contracts for such services provided for the Managers to be paid fees plus VAT “if applicable”. The UK VAT legislation then in force incorrectly transposed the Sixth VAT Directive Art 13B(d)(6), and treated such supplies as taxable. The Managers therefore charged the claimants VAT, recovered from this amount input VAT, and accounted for the tax to HMRC.

It was established in JP Morgan Fleming Claverhouse Investment Trust (Case C-363/05) that investment management services such as those in the current case were VAT-exempt supplies. In accordance with s80 VATA 1994, the Managers applied to HMRC for a refund of the overpaid VAT, which was received by the Managers and passed to the claimants. This refund was subject to two exceptions: (a) it did not cover the overpaid VAT in relation to accounting periods excluded by the (then) three year statutory limitation period (the “dead periods”); and (b) the input tax the Managers had deducted was set off against the output tax repayment.

In the current case, the court contemplated whether the claimants had a common law claim under UK law against HMRC based on unjust enrichment and, if not, whether that position was compatible with EU law. The court also commented on the customer’s rights against the supplier.

Supreme Court judgement

The court ruled that the Managers could not both claim the refund of output tax on the basis that the supply was VAT exempt, and retain the amounts they had recovered as input tax on the basis that the supplies were taxable. Therefore HMRC was only liable to refund, to the Managers, the net amount of VAT it had actually received (ie the amount by which HMRC would otherwise have been unjustly enriched).

Additionally, HMRC’s unjust enrichment had not been at the expense of the claimants; the fact that the claimants bore the cost of the undue tax paid by the Managers to HMRC did not entitle them to restitution by HMRC.

However, the claimants did have a right to restitution from the Managers for the full amount of the output tax charged for accounting periods within the s80 limitation period (the “live periods”).

In respect of the dead periods, the Managers would have a change of position defence in relation to the net VAT amount (ie output tax less input tax) passed on to HMRC, as it is statue-barred from reclaiming this. However, the claimants can claim the balance (ie the over-recovered input tax) from the Managers.

Finally, the court established that this was compatible with EU law (in particular, in respect of tax periods when the claimant’s own claim for repayment against HMRC was statute-barred under s80).

Implications for investment trusts

Investment trusts should look initially to their contracts for investment management services to determine whether the contract provides for any overpaid VAT to be repaid in full by the supplier.

If the contract is silent, or the wording is limited to VAT being due “as applicable”, it follows from the ruling in HMRC v Investment Trust Companies that the investment trusts will not be able to claim overpaid VAT from HMRC directly, and instead must engage with the manager to request that they apply using s80 to have the tax refunded. Only the supplier who incurred the liability to pay the wrongly charged tax to HMRC will have a right under the legislation to a refund. Once the supplier has received the refund, it is legally obliged to pass the refunded amount to the investment trust.

However, a civil action may have to be brought by investment trusts against managers in order to reclaim any amounts representing the over-recovered input tax, for both live and dead periods, should they wish to do so and should the terms of the relevant contract not exclude it.

The case is a useful reminder of the remedies that other customers may have against their suppliers in the event of overcharged VAT, and notes that their rights may turn on the terms of any contracts between them and those suppliers.