Investment Trust Companies v HM Revenue and Customs

Where unlawful VAT is paid by a final consumer through a supplier, the tax authority may be enriched by the full tax even though the supplier remits only its net liability. English restitution generally requires direct enrichment, but exceptional indirect-recipient claims may arise where commercial reality supplies a close causal link and there is no double recovery, contractual leapfrogging or claim for damages. A payment made under the mistaken belief that VAT was lawfully due can ground restitution. The statutory recovery code in the Value Added Tax Act 1994, including section 80(7), bars the domestic claim. EU effectiveness nevertheless requires a direct San Giorgio remedy for the final consumer where recovery from the supplier is impossible or excessively difficult, subject to an analogous limitation period. The court left unresolved whether that remedy should be implemented through an extended Woolwich action or the mistake-based claim.

Nine closed-end investment trusts in liquidation sought from HMRC the VAT charged by their investment managers on services that should have been exempt under EU law. The managers had recovered and passed on only the amounts permitted by the statutory scheme. The trusts claimed the unrecovered balance under English unjust enrichment principles and, alternatively, EU law, particularly for a limitation dead period and for input tax retained through the managers’ VAT accounting.

At this liability trial, the court considered whether HMRC were enriched at the trusts’ expense, whether Value Added Tax Act 1994 section 80(7) excluded the domestic claim, and whether EU law required a direct remedy. It also considered whether that remedy should be based on a modified Woolwich cause of action.

1. HMRC were enriched by the full amount of the VAT paid by the investment trusts. This included the element reflected in the managers’ input-tax credit, although only the net amount was remitted in cash.
2. English law generally requires enrichment directly at the claimant’s expense, but there is no absolute rule excluding claims against indirect recipients. A limited exception may apply where there is a close causal connection, no risk of double recovery, no contractual leapfrogging, and the claim is confined to disgorgement of undue enrichment. The economic reality of the VAT system supported the conclusion that HMRC’s enrichment was at the trusts’ expense.
3. The trusts paid the VAT under a mistake. Their contracts did not require payment of VAT which was not lawfully due. There was a sufficient but-for causal link between the mistake, the payments to the managers and HMRC’s enrichment. The basic ingredients of a common-law restitutionary claim were therefore established.
4. Section 80(7) of the Value Added Tax Act 1994 was construed purposively as extending to claims by end customers. The statutory scheme was intended to be exhaustive for recovery of undue VAT, and Parliament could not have intended end customers to have a more generous remedy than the taxable suppliers. The domestic claims were therefore barred.
5. Applying Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze (Case C-35/05) and Danfoss A/S, Sauer Danfoss ApS v Skatteministeriet (Case C-94/10), EU law could require a direct remedy against the State where recovery from the taxable supplier was impossible or excessively difficult. The claims were San Giorgio reimbursement claims, not merely Francovich damages claims.
6. The remedy was subject to a limitation period analogous to that applicable to the managers’ own claims. The dead-period claims were barred, but the otherwise irrecoverable input-tax element outside that period could in principle be recovered by disapplying section 80(7) to the necessary extent.
7. The court did not finally decide whether the remedy had to be implemented through an extended Woolwich cause of action rather than the mistake-based claim. Further consideration was adjourned pending the ECJ’s decision in the Littlewoods reference and the Supreme Court’s decision in the FII appeal.