Investment Trust Companies v Revenue And Customs

In a claim for repayment of unlawfully charged VAT, the amount of the State’s enrichment is assessed after the statutory recovery process has reversed the tax treatment. A supplier’s recovery of output tax does not include input tax which becomes irrecoverable when the supply is treated as exempt. An end consumer may sue the revenue in restitution despite not being the accountable taxpayer where the economic connection is sufficiently close. The statutory bar on claims by the accounting taxpayer does not extend to the consumer. EU effectiveness is satisfied where the consumer can recover through the supplier, unless that route is impossible or excessively difficult.

The claimants were closed-end investment trusts which had paid VAT charged by their investment managers. Following the decision in [2007] ECR I-5517, the managers recovered some VAT under section 80 of the Value Added Tax Act 1994 and refunded it to the trusts. The trusts claimed the unrecovered amounts from HMRC in restitution and under EU law, including VAT falling within a statutory limitation gap and input tax retained by the managers.

Henderson J held that the trusts had a restitutionary claim for the full amount but that section 80(7) barred the domestic claims. He allowed a limited EU-law claim. The appeals concerned the extent of HMRC’s enrichment, the scope of section 80(7), and the availability of a direct remedy under the San Giorgio principle.

Both appeals were allowed. The claimants could recover the net output tax retained by HMRC, amounting in principle to £75 of each nominal £100 charge, but not the £25 input-tax element.

1. The court applied the ordinary restitutionary questions: enrichment, enrichment at the claimant’s expense, unjustness and defences. The amount of enrichment had to be assessed after the VAT recovery process, rather than only at the date of the original payment. The managers’ section 80 claims operated as an election to treat their supplies as exempt and waived any right to deduct related input tax. The statutory position therefore had to be reversed globally, including for the limitation-gap periods. The £25 claim lay against the managers, not HMRC.
2. Indirect enrichment can satisfy the requirement that enrichment be at the claimant’s expense. There is no inflexible direct-transfer rule. Relevant considerations include causal connection, avoidance of double recovery, respect for contractual arrangements and confinement of restitution to disgorgement of undue enrichment. In the VAT context, the final consumer has a sufficient economic connection with HMRC, although the supplier is the accountable person. The court declined to formulate a comprehensive general rule.
3. Section 80(7) of the Value Added Tax Act 1994 prevents the accounting taxpayer from bypassing the statutory scheme and its time limit. Its language and legislative history do not extend that bar to an end consumer who neither accounted for nor paid the VAT to HMRC. The claimants could therefore recover £75 under domestic restitutionary principles.
4. EU effectiveness was satisfied by the available two-stage remedy: recovery by the managers from HMRC and civil recovery by the trusts from the managers. A direct claim against HMRC was required only if recovery from the managers was impossible or excessively difficult. That condition was not met in relation to the £25. No reference to the ECJ was necessary.

Kleinwort Trust’s recovery was subject to its ability to reclaim 58.4 per cent of the VAT charged. The final result was recovery of £75 for all relevant periods and recovery of none of the £25.

1. Court of Appeal (Civil Division). On 12 February 2015, the court allowed both appeals and held that the claimants could recover £75 but not £25.
2. High Court, Chancery Division. Henderson J’s decisions, reported at [2012] EWHC 458 (Ch) and [2013] EWHC 665 (Ch), held that the trusts had a restitutionary claim for the full amount, but that section 80(7) barred the domestic claims; a limited EU-law remedy was allowed.