The Court of Appeal upheld a decision of the High Court ([2005] BTC 5,785) that the taxpayer company was entitled to repayment of VAT where Customs had failed to establish that the taxpayer would be unjustly enriched by repayment of the disputed claim. It was not open to the VAT tribunal to find that the whole or part of the burden of the tax had been passed on, since on the evidence it would have been unable to draw any proper inference as to how much that part would have been.

Facts

The taxpayer company carried on a business consisting of the provision of debt management services. It was registered for VAT and accounted for VAT on the price charged for its services to its customers. During 2002 the VAT and Duties tribunal held, in Debt Management Associates ([2003] BVC 4,055; No. 17,880), that services indistinguishable from those provided by the taxpayer were exempt for VAT purposes. Thereafter the taxpayer was treated as exempt. It could not recover the input tax on its purchases, but it did not have to account for output tax on its sales. It then sought to recover from the Customs the net amount of VAT for which it had accounted to them in the calendar years 2000 to 2002. Customs relied on a defence of unjust enrichment, under s. 80(3) of the Value Added Tax Act 1994 (‘VATA 1994’). The tribunal he ld that that defence was made out, and that no sum was repayable ([2005] BVC 4022; Decision No. 18,769).

The taxpayer appealed. Warren J held that the tribunal had gone wrong. He allowed the appeal, but dealt with the three years differently. He held that for the year 2002 the net amount of VAT was repayable, but that for 2000 and 2001 there might be a proper basis on the evidence for holding that the defence was in fact correct. He therefore remitted the claim in respect of those years to the tribunal to be reconsidered ([2005] BTC 5,785).

Customs appealed against both aspects of that order, with permission. The taxpayer resisted the appeal and served a respondent's notice asking for appeal against the tribunal's order as regards 2000 and 2001 to be allowed instead of remitted.

It was common ground that the burden of proving unjust enrichment was on Customs to prove that the taxpayer passed on either the whole, or at least part (and if so what part), of the burden of the tax to its customers. The taxpayer based its case in answer to the unjust enrichment defence on the proposition that it would have charged the same rates for its services even if it had been treated as exempt, so that the burden of the tax for which it had to account was pure loss. On the other hand, the commissioners argued that the taxpayer would have charged 15 per cent, or 15 per cent plus just enough to cover its irrecoverable input tax, and therefore had lost nothing.

Issue

Whether the tribunal erred in concluding that repayment of VAT overpaid would amount to unjust enrichment.

Decision

Lloyd LJ (May and Gage L JJ agreeing) (dismissing the Revenue's appeal and allowing the taxpayer's cross-appeal) said that there was a fundamental defect in Customs’ case and the tribunal's conclusion that the whole of the tax was passed on could not stand. If the charges wrongly levied had been incorporated in the price of the goods and thus passed on to the purchasers, then it could unjustly enrich the undertaking which paid the charges to be reimbursed for their amount, on the assumption that the benefit of the repayment would not be passed on to the customers who bore their burden in the price paid. That was the basis for the defence. VAT was a tax whose burden was designed to be passed on, so as to be borne by the end user of the goods or services. It could readily be regarded as passed on to users who were registered for VAT and entitled to recover input tax on purchases, usually by way of set off against the output tax for which they were accountable on their sales. The application of the concept of passing on in other cases required careful consideration in relation to such a tax.

It was for the national courts to determine, in the light of the facts in each case, whether the burden of the charge had been transferred in whole or in part by the trader to other persons and, if so, whether reimbursement to the trader would amount to unjust enrichment.

A taxpayer who had paid tax which was not due had a primary right to be repaid the amount of that tax.

Community law permitted a member state, by way of exception, to limit the right of repayment if the whole burden of the tax had been borne by someone other than the taxpayer, and the repayment would constitute unjust enrichment of the latter. If part of the burden had been borne by the taxpayer, that part was repayable. There was no presumption that because the tax had been included in the price, it had been borne by the customer (Marks & Spencer plc v C & E Commrs [1999] BTC 5,073 and Weber's Wine World Handels GmbH v Abgabenberufungskommission Wien (Case C-147/01) [2004] BTC 8,019; [2003] ECR I-11365 considered).

In the present case, it might have been possible to infer that the taxpayer would have charged less than 17.625 per cent but more than 15 per cent, in order to endeavour to cover its input tax, but the tribunal would then have needed to come to a conclusion as to what that level of charge would have been. It had no material on which to come to a conclusion on that because no evidence had been adduced relevant to that issue. Therefore, the court disagreed with the judge in his conclusion that it was or could remain open to the tribunal to find that the whole or part of the burden of the tax had been passed on, since it would have been unable to draw any proper inference as to how much it would have been.

The defence of unjust enrichment to the repayment claim could not be made out in full or in part and Customs should not be allowed another opportunity to seek to persuade the tribunal that the defence was made out. It could not do so without additional evidence being adduced and there was no reason to allow that.

Court of Appeal (Civil Division). Judgment delivered
25 July 2006.