Deluxe Property Holdings Ltd v SCL Construction Ltd & Anor

A VAT refund obtained by a trader under a statutory reimbursement scheme, supported by an undertaking to repay the customer who bore the VAT, may be held on a Quistclose trust. The method by which HMRC allows the refund, whether by accounting credit or payment, does not alter its restricted purpose.

Communication of the trust arrangements to the intended payee may perfect an assignment of the original beneficiary’s equitable interest, enabling the intended payee to enforce the trust. Independently, equity may impose a constructive trust where property is acquired solely for remittance to another and retention would be unconscionable. A disputed debt cannot be set off against a proprietary claim.

The claimant had engaged the first defendant to carry out building works. VAT was wrongly charged at 20 per cent although the works were zero-rated. The first defendant recovered the overpaid VAT from HMRC through an adjustment to its VAT return, after giving an undertaking to reimburse the claimant.

The claimant sought declarations that the accounting credit and repayment were held on trust for it. The first defendant did not attend the hearing and asserted that any repayment had been set off against alleged liabilities owed by the claimant. No relief was sought against HMRC. The issues were whether a trust arose, whether the claimant could enforce it, and whether the alleged debt could be set off against the proprietary claim.

1. Trust arising from restricted purpose. The accounting credit and resulting VAT repayment were obtained in circumstances where the first defendant had undertaken to reimburse the customer in cash or by cheque, without deduction, and not to use the credit for any other purpose. The fact that HMRC permitted recovery through a VAT-return adjustment rather than the original claim procedure did not alter the character of the refund. A Quistclose trust therefore arose, initially for HMRC, subject to the stated purpose of reimbursing the claimant.
2. Enforcement by intended payee. Under the principle identified in Re Margaretta Ltd [2005] EWHC 582 (Ch), communication of the trust arrangements to the intended payee may perfect an assignment of the original beneficiary’s equitable interest. The undertaking was communicated to the claimant’s agent, so the claimant obtained the beneficial interest and could enforce the trust. The resulting trust covered the sums within the undertaking, but not the £1,701.64 relating to the earlier accounting quarter.
3. Independent constructive trust. Independently of the undertaking, the refund was acquired solely to reimburse the customer who had borne the wrongly charged VAT. It would therefore be unconscionable for the first defendant to retain it. A constructive trust arose over the whole accounting credit and repayment, including the amount relating to the omitted quarter.
4. Set-off. The proceedings were unsuitable for determining the disputed contractual and trading claims. In any event, a claim in debt could not be set off against the claimant’s proprietary claim: Zemco Ltd v Jerrom-Pugh [1993] B.C.C. 275, approved on appeal, and Guinness plc v Saunders [1988] 1 W.L.R. 863 (CA).
5. Declaratory relief was granted. The trust was to be wound up and the balance transferred to the claimant. Because the refund had been used for the company’s general business activities, the first defendant had acted in breach of trust and was liable as trustee to restore the trust fund.

First-instance decision. No earlier appellate decision is stated in the judgment.