VRM12100 - What to do with claims resulting in unjust enrichment: overview
What is unjust enrichment?
The ‘unjust enrichment’ defence is available to HMRC where they can show that a person who makes a claim to recover over-declared VAT has passed the economic burden of that VAT on to his customers – in simple terms HMRC must show that the person charged the ‘market rate’ for his supplies of goods or services plus VAT, as opposed to the ‘market rate’ including VAT.
IMPORTANT: The unjust enrichment defence cannot be invoked on the basis, purely and simply, that the claimant is not willing or able to pass back to his customers any amounts paid to him by HMRC on his claim.
What is the unjust enrichment defence and what is its aim?
This is the defence that HMRC uses to prevent unjust enrichment when a claimant makes a claim. We check the position to make sure that criteria set down in European Court of Justice case law are satisfied and, where appropriate, refuse the claim.
The aim is to prevent businesses from being enriched at the expense of their customers who, for all practical purposes, bore the burden of the wrongly charged VAT.
The customers will often be final consumers but can also be businesses, charities, etc., who were unable to deduct the overcharged VAT.
It is not a question of whether the enrichment was unjust in subjective or moral terms but whether the VAT was added to the price charged by the claimant; whether the claimant would have charged less had he known that his supplies were not liable to VAT.
What are the important points from European Court of Justice case law?
- A person who has wrongly accounted for VAT is entitled to recover it.
- HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers.
- The invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally.
- The unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice.
- Before we can invoke the defence we must carry out an economic analysis of the market in which the claimant is operating.
- The case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax.
When should you consider unjust enrichment?
In theory, we are entitled to invoke the unjust enrichment defence in every case where a claim is made under section 80 of the VAT Act 1994.
In practice, we apply the defence of unjust enrichment in accordance with ECJ and UK judgments.
There will be cases in which the work required to discharge the burden of proof for an unjust enrichment defence will be worthwhile but it will be a judgment call in each case.
What should you do?
Where appropriate, you will need to make appropriate enquiries. If the facts of the case justify it, the claimant should be asked to provide all information and documentation on their pricing structure and policy in relation to the goods or services that are the subject of the claim.
What should you check?
The process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.
The first thing that you must check is whether the burden of the over-declared VAT being claimed was passed on to the claimant’s customers – whether the claimant charged the market rate plus VAT. This must be done on the basis of an economic analysis of the market in which the claimant is operating – see, for example, the recent decision of the First-tier Tribunal in Berkshire Golf Club [2015] UKFTT 627 (TC).
If the customer deducted the wrongly invoiced output tax as input tax, we are entitled to assume that the supplier passed the economic burden of the tax charge on to his customers – In this scenario, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.
The second stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits.
Where does the onus of proof lie?
The burden of proof is on HMRC to show that payment or crediting of the claim would lead to the unjust enrichment of the claimant.
The standard of proof is the civil standard of proof – on a balance of probabilities.
At what stage should you invoke the defence of unjust enrichment?
We should not invoke the defence of unjust enrichment until we have adequate evidence to discharge our burden of proof.
If you give the claimant an appealable decision that we are invoking the defence of unjust enrichment before we have the necessary evidence to show that we are right to do so, this will cause difficulty further into the appeals procedure.
Detailed guidance
For more detailed guidance on:
- Passing on, see VRM12200.
- Things to consider with passing on, see VRM12220.
- Passing on and points for and against unjust enrichment, see VRM12240.
- Loss or damage, see VRM12300.
- Disclosure request, see VRM12400.
- Reimbursement arrangements, see VRM12500.
- How much is to be reimbursed, see VRM12600.
- Who can use the reimbursement arrangements, see VRM12700.
- Reimbursement procedures, see VRM12800.
- Unjust enrichment examples, see VRM12900.