#6742 - Investment Trust Companies V. Hmrc - Commercial Remedies BCL

Investment Trust Companies v. HMRC

Facts

An end customer of goods or services has for many years been charged VAT at the standard rate by the supplier of those goods or services. The customer has paid the VAT, and the supplier has duly accounted for it as output tax to HMRC (a term which I will use to include their statutory predecessors, the Commissioners for HM Customs and Excise). It then transpires, as a result of a ruling by the Court of Justice of the European Union ("the ECJ"), that the supplies in question have at all material times been exempt, with the consequence that the VAT was unlawfully charged. To the maximum extent permitted by UK domestic law, the supplier then recovers from HMRC the VAT which it has overpaid, and passes on the benefit of that recovery to the customer. There are two reasons, however, why the supplier may be unable to recover from HMRC the full amount of the unlawful VAT paid by the customer. The first reason is the statutory three year limitation period applicable at the material time to claims by a taxable person to recover overpaid VAT from HMRC. The second reason is that the supplier will have paid to HMRC in the first place only a net amount representing the difference between the output tax on the supply to the customer and any associated input tax incurred by the supplier. The amount of the overpaid tax which the supplier can recover from HMRC, and thus pass on to the customer, is therefore confined to the net amount of tax which the supplier has actually paid to HMRC, as well as being subject to the three year limitation period.

Particular Facts: Before going into liquidation, each of the investment trusts carried on the business of investing funds subscribed by the public in various asset portfolios, with a view to obtaining capital and/or income returns. As I have already said, the Managers supplied investment management services to the claimants, in return for fees on which VAT was charged and paid at the standard rate. The Manager was often, but not always, a company associated with the investment trust.

Question

In these circumstances, the question arises whether the end customer, who has borne the full economic burden of the unlawful VAT, can bring a direct claim against HMRC to recover the balance of the tax which it paid to the supplier.

Holding

Difference between statutory obligation of supplier and contractual obligation of consumer

In my judgment this passage makes good the contention, at a fairly high level of generality, that for the purposes of VAT the final consumer is properly to be regarded as the taxpayer, and that the role of the intermediate taxable persons in the chain of supply is to collect the tax and account for it to the tax authorities. On the other hand, I am satisfied that there are dangers in pressing this point too far, because the final consumer is not in any ordinary sense a taxpayer vis-à-vis HMRC. It is the supply of goods or services to the final consumer which triggers the liability to pay and account for VAT on the supply, and the supplier is liable accordingly, whether or not he passes on the tax charge to his customer. Conversely, the customer is under no liability to HMRC for the VAT, even if the supplier fails to pay it, and the customer's obligation to pay the VAT to the supplier rests only in contract. If, for whatever reason, the supplier fails to charge VAT to the customer, he will have no remedy against the customer unless the customer is contractually bound to pay it. Essentially for these reasons, I am not happy with the claimants' conduit metaphor, which suggests that the tax flows from the final consumer to HMRC, and that the supplier is in some sense acting as the customer's agent in paying it to HMRC.

General rule barring indirect recipients - exceptions recognised in certain cases

I must now draw the threads together, and state my conclusions on this difficult question. In the first place, I agree with Mr Rabinowitz that there can be no room for a bright line requirement which would automatically rule out all restitutionary claims against indirect recipients. Indeed, Mr Swift accepted as much in his closing submissions. In my judgment the infinite variety of possible factual circumstances is such that an absolute rule of this nature would be unsustainable. Secondly, however, the limited guidance to be found in the English authorities, and above all the clear statements by all three members of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council, suggest to me that it is preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions, rather than to adopt Professor Birks' view that the rule and the exceptions should in effect swap places (see "At the expense of the claimant": direct and indirect enrichment in English law, loc.cit., at page 494). In my judgment the obiter dicta of May LJ in Filby, and the line of subrogation cases relied on by Professor Birks, provide too flimsy a foundation for such a reformulation, whatever its theoretical attractions may be, quite apart from the difficulty in framing the general rule in acceptable terms if it is not confined to direct recipients.

Indicative factors for recognizing exceptions to the general rule

The real question, therefore, is whether claims of the present type should be treated as exceptions to the general rule. So far as I am aware, no exhaustive list of criteria for the recognition of exceptions has yet been put forward by proponents of the general rule, and I think it is safe to assume that the usual preference of English law for development in a pragmatic and step by step fashion will prevail. Nevertheless, in the search for principle a number of relevant considerations have been identified, including (in no particular order):

a) the need for a close causal connection between the payment by the claimant and the enrichment of the indirect recipient;

b) the need to avoid any risk of double recovery, often coupled with a suggested...