The Commissioners for Her Majesty’s Revenue and Customs v The Investment Trust Companies

A personal claim in unjust enrichment requires a transfer of value from the claimant to the defendant. The familiar four questions concerning enrichment are headings for structured analysis, rather than legal tests. A causal link, economic burden or incidental benefit does not by itself establish that an enrichment occurred at the claimant’s expense.

Where a consumer pays mistaken VAT to a supplier and the supplier separately accounts for tax to the revenue authority, the two transfers cannot ordinarily be collapsed. The consumer’s restitutionary claim lies against the supplier. The statutory scheme under section 80 of the Value Added Tax Act 1994 also excludes concurrent common law claims against the revenue authority. That arrangement complies with EU law where recovery from the supplier is neither impossible nor excessively difficult and any obstacle results from a reasonable limitation period.

Investment trust companies paid their investment managers amounts invoiced as VAT on management services. The services were later established to be exempt under EU law. The managers recovered from HMRC the net output tax which they had paid, subject to the limitation period in section 80 of the Value Added Tax Act 1994, but some amounts remained unrecovered. The companies claimed those amounts directly from HMRC in unjust enrichment or under EU law.

The High Court held in [2012] EWHC 458 (Ch) and [2013] EWHC 665 (Ch) that a domestic restitutionary claim was statutorily excluded but that EU law supplied a remedy in part. The Court of Appeal, [2015] EWCA Civ 82, held that the companies had a direct common law claim for the net amounts received by HMRC during the time-barred periods, but not for input tax retained by the managers.

The issues were whether the companies had any common law claim against HMRC, whether section 80 excluded it, and whether the absence of a direct remedy was compatible with EU law.

1. Appeal allowed and cross-appeal dismissed. Lord Reed, with whom Lord Neuberger, Lord Mance, Lord Carnwath and Lord Hodge agreed, held that the investment trust companies had no direct restitutionary claim against HMRC. The Court of Appeal’s contrary conclusion concerning the net VAT received during the time-barred periods was reversed.

2. HMRC was enriched only by the net amount paid to it by the managers, represented by the notional £75. It was not enriched by the notional £25 which the managers retained after deducting input tax. A supplier relying on the VAT exemption could not simultaneously assert a right to deduct input tax on the basis that its supplies were taxable. The managers were therefore, in principle, liable to restore the retained amount to their customers.

3. A personal claim in unjust enrichment must be governed by ascertainable legal rules, not a broad judicial assessment of fairness. Lord Steyn’s four questions provide headings for structured analysis but are not themselves legal tests. The claimant must have suffered a loss through providing the benefit received by the defendant. A sufficient nexus, a “but for” causal connection or the allocation of an economic burden does not alone establish a transfer of value. The majority’s contrary approach in TFL Management Services Ltd v Lloyds TSB Bank plc [2013] EWCA Civ 1415 was wrong.

4. The payment of the notional £100 by the companies to their managers and the managers’ later payment of the notional £75 to HMRC were separate transfers. There was no agency, trust, tracing claim, sham or coordinated single transaction which could make them legally equivalent to a direct transfer. Commercial or economic reality could not collapse them. The companies’ restitutionary claim lay against the managers for the entire amount mistakenly paid. The managers could recover the net payment from HMRC under section 80, except where that claim was lawfully time-barred.

5. Even if a common law claim against HMRC could otherwise have existed, section 80 of the Value Added Tax Act 1994 excluded it. Sections 80 and 80A and the Value Added Tax Regulations 1995 created an exhaustive scheme under which suppliers recovered undue VAT and reimbursed consumers. Concurrent non-statutory claims with longer limitation periods would conflict with the scheme’s protection of public finances. Section 80(7) therefore barred consumer claims as well as supplier claims.

6. The statutory arrangement complied with EU law. Recovery through a civil claim against the supplier ordinarily satisfies the principle of effectiveness. A direct claim against the tax authority is required only where recovery from the supplier is impossible or excessively difficult. The managers were solvent and the companies’ claims against them were practicable. The remaining inability to recover arose from the reasonable limitation period in section 80(4), whose compatibility with EU law was conceded. No reference to the Court of Justice was required.

• United Kingdom Supreme Court: In [2017] UKSC 29, unanimously allowed HMRC’s appeal and dismissed the investment trust companies’ cross-appeal. It reversed the Court of Appeal’s conclusion that the companies could recover directly from HMRC the net VAT received during the time-barred periods.
• Court of Appeal: In [2015] EWCA Civ 82, allowed both sides’ appeals. It held that the companies had a direct unjust-enrichment claim against HMRC for the net amounts received during the time-barred periods, but no domestic or EU claim against HMRC for amounts retained by the managers as input tax.
• High Court: In [2012] EWHC 458 (Ch), held that HMRC had been enriched by the full amount charged but that section 80(7) excluded the domestic claim; it recognised an EU remedy outside the time-barred periods. In [2013] EWHC 665 (Ch), rejected the Woolwich claim and held that EU law required section 80(7) to be disapplied.