Baines & Ernst Ltd v Customs & Excise

Repayment of VAT wrongly paid may be refused under Value Added Tax Act 1994, section 80(3), only where repayment would unjustly enrich the taxpayer. There is no permissible presumption that tax has been passed on or that repayment would cause unjust enrichment. The court may, however, draw reasonable inferences from proved facts. Once passing on is established, the taxpayer must identify material supporting economic loss or explain why relevant evidence is unavailable. The Commissioners retain the legal burden throughout. In assessing unjust enrichment, the comparison must be made between what actually happened during the relevant accounting period and what would have happened if the tax had not been wrongly charged for that period. The approach must also reflect the special features of VAT, including input-tax recovery.

Baines & Ernst Limited appealed from the decision of the VAT and Duties Tribunal, which had dismissed its appeal against the Commissioners’ refusal to repay £5,851,579 of VAT paid on debt-management services during January 2000 to December 2002.

The services were later accepted to be exempt. The Commissioners accepted liability for VAT on the initial fee but maintained that repayment of VAT on the continuing management fees would unjustly enrich B&E. The central issues were whether the VAT had been passed on, whether B&E had suffered economic loss, the correct evidential approach, and whether the Tribunal had applied the correct hypothetical comparison.

1. Appeal allowed. The Tribunal’s conclusion that the whole VAT burden had been passed on and that B&E had suffered no concomitant loss could not stand.
2. Section 80(3) had to be interpreted consistently with ECJ jurisprudence. The Commissioners retained the legal burden of establishing unjust enrichment. Community law prohibited a statutory presumption or evidential rule requiring the taxpayer to disprove passing on or unjust enrichment. It did not prohibit reasonable inferences from established facts.
3. Passing on and unjust enrichment were analytical stages directed to one question: whether repayment would unjustly enrich the taxpayer. Passing on did not necessarily establish unjust enrichment. The court had to consider economic loss, including reduced sales, lost profits and the effect of VAT on input-tax recovery. A full economic analysis was not required in every case, but it might become necessary once the taxpayer identified an evidential basis for economic loss.
4. The Tribunal had treated contractual references to VAT and the continued accounting for VAT as effectively determinative. Those matters could support an inference of passing on, but did not establish the economic burden as a matter of law. The Tribunal also adopted the wrong hypothetical by asking what B&E would have charged if its supplies had always been exempt. The proper comparison was with what B&E would have charged in the relevant period if the tax had not been wrongly imposed for that period.
5. The fact that B&E charged 17.625 per cent after exemption was established was powerful evidence, particularly for the later part of the disclosure period. The Tribunal had failed to give it proper weight and had not adequately addressed the possible loss associated with the minimum entry level and minimum fee. The case required further consideration by the Tribunal. The judge reserved the precise relief and remittal orders for further argument.

• High Court (Chancery Division): The appeal from the VAT and Duties Tribunal was allowed. The precise consequential relief and whether the matter should be remitted were reserved for further argument.