VAT claims made by final consumers against HMRC for VAT that has been wrongly charged to them by their suppliers

HMRC has issued Revenue and Customs Brief 4 (2017) to set out its view of the judgment of the Supreme Court in Investment Trust Companies (ITC) (in liquidation) v HMRC, regarding claims made by final consumers against HMRC for VAT that had been wrongly charged to them by their suppliers.

If a business has accounted for output tax and later discovers that it should not have done so, it can make a claim under s80, VAT Act 1994 to recover the wrongly declared output tax. This is subject to the four year cap and reduced by any input tax that was wrongly deducted.

The only person entitled to make a claim under section 80 is the person who accounted for the VAT or a person to whom the right to make the claim has been transferred. HMRC will refuse to pay a claim if it can show that payment of the claim would ‘unjustly enrich’ the claimant.

Investment Trust Companies

In June 2007, the European Court of Justice released its judgment in Claverhouse (2008) STC 1180, ruling that certain supplies of investment management services, which HMRC had believed were liable to VAT at the standard rate, were exempt.

As a result of that judgment, HMRC received, and paid, section 80 claims made by fund managers (the suppliers) for output tax over-declared on supplies of investment management services made to investment trust companies (the customers).

The suppliers accepted that they had passed the economic burden of the wrongly charged VAT on to their customers. They also accepted that they had suffered no loss or damage to their business as a result of having done so and would therefore be ‘unjustly enriched’ by payment of their claims. Consequently, the suppliers agreed to reimburse anything received from HMRC to their customers.

However, because the supplier, when they prepare the VAT return, is entitled to deduct the input tax (for example, £25) from the output tax (for example, £100), the amount which has been charged to the customers as output tax (the £100) is greater than the amount that’s paid to HMRC (for example, £75). Under the terms of section 80, HMRC is only liable to pay the supplier the £75.

Nine trust companies made non-statutory common law claims for the difference in the High Court against HMRC.

The Supreme Court’s judgment in ITC

On 11 April 2017, the Supreme Court handed down its judgment and dismissed the trust companies’ claims in full, agreeing with HMRC that the only person entitled to make a claim against them is the supplier who had accounted for the VAT to them. The court held that the customers did have a claim, but that it was against the suppliers and not against HMRC.

Consequently, where a customer believes that a supplier has wrongly charged them VAT, the remedy is to make a claim against the supplier. This is a commercial matter and the right to claim against the supplier will depend on the terms of the contract under which the goods or services were supplied.

The effect of the judgment

Anyone who believes that they have a claim that is not precluded by the Supreme Court’s judgment must bring their claim in the ordinary courts and not directly to HMRC. The circumstances under which a claim can be made directly against HMRC are extremely limited and outside the scope of HMRC’s legislation and guidance manuals.

In England and Wales claims have to be made in the County Court if the claim is for less than £100,000 or in the High Court if it’s for more. In Scotland, claims should be made in the Sheriff Court if the claim is for less than £100,000 or in the Sheriff Court or Court of Session if it’s for more. In Northern Ireland, claims need to be made in the County Court if the claim is for less than £30,000 or in the High Court if it’s for more.

This brief replaces Revenue and Customs Brief 15 (2013) published on 10 July 2013.

HMRC will be writing to those traders who have already put in High Court or County Court claims.