If a business has overdeclared output tax on past returns then
it seems reasonable that this should be corrected, either by adjusting a current
return or submitting a form VAT652
if the “error” is over £10,000 net.
If it is a genuine adjustment, surely HMRC must recognise
the correction and either make a repayment or offset the overdeclaration
against a current amount of VAT due.
The answer is yes, but… “unjust enrichment”…
Unjust enrichment
HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)
“It shall be a defence, in relation to a claim under this section by
virtue of subsection (1) or (1A) above, that the crediting of an amount
would unjustly enrich the claimant.”
This means that HMRC can refuse to repay a claim if they can
show that it would unjustly enrich the taxpayer.
It should always be borne in mind that if a claimant absorbed
the burden of the wrongly charged VAT himself then unjust enrichment cannot be
used as a defence against refusal to repay the claim. Loss or damage to a
business due to overpaid VAT is considered in detail here.
Meaning
A refusal to repay a VAT claim using the unjust enrichment contention
is to prevent a business becoming enriched at the expense
of other entities who actually bore the cost of the incorrectly charged VAT. The
authorities consider that a taxpayer should not be put into a better position
by recovering the VAT than if VAT had not been charged at all. HMRC regard it
as appropriate for unjust enrichment to be considered every time a claim is
made.
The recipients of the corrected supply may be final
consumers but can also be businesses, charities, etc, who were unable to deduct
the overcharged VAT as input tax.
The salient point being whether the VAT was added to the
price charged by the claimant or whether the claimant would have charged less
had he known that his supplies were not liable to VAT.
HMRC consider that the process of establishing whether a
claimant will be unjustly enriched by payment of his claim is two-stage
procedure.
First stage
Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).
If the customer deducted the wrongly invoiced output tax as
input tax, HMRC is entitled to assume that the supplier passed the economic
burden of the tax charge on to its customers. In this case, the VAT wrongly
accounted for is a cost neither to the supplier nor to the customer.
Second stage
This 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, ie; has the taxpayer been
economically damaged by having to bear the VAT cost?
The burden of proof of establishing that there is unjust
enrichment falls upon HMRC. The standard of proof is the civil standard of
proof; on a balance of probabilities.
HMRC will require the claimant to provide all
of the relevant information on; pricing, policy and any other relevant
documentation that establishes the pricing strategy**. It is to the taxpayer’s
advantage to demonstrate that their margins have been depressed, as they have
been required to charge VAT incorrectly.
Factors that HMRC consider:
- who are the claimant’s competitors?
- what is its market? (comparisons
made with other competitors’ products)
- how does the business set its prices?
- what are the business’ overheads?
- any other factors that may affect the prices
The reimbursement scheme
This is an undertaking to comply with certain reimbursement
arrangements. The full text of the required undertaking is set out here.
This scheme applies where a business accepts, or HMRC prove,
that by receiving a refund of sums incorrectly accounted for as output tax the business
would be unjustly enriched at its customers’ expense and it wishes to refund
the money they overpaid. If a customer was able to deduct all of the mistaken
VAT charge as input tax HMRC will not regard them as having borne the burden of
the charge.
In such cases HMRC will only make a refund of overpaid VAT
if the taxpayer agrees to reimburse those customers in accordance with the
terms of the scheme. More details Notice
700/45.
If HMRC repay a claim and the claimant is unable or unwilling to reimburse its
customers (who bore the cost) with any amounts paid to him by HMRC then unjust
enrichment will always apply. See The
Deluxe High Court case.
Prices after a
claim
It is worth bearing
in mind that where a claimant has kept prices the same after he has found out
that no VAT was due on the supplies in question, courts are likely to assume
that that is because the business was charging the market rate. That assumption
is made on the basis that, if the market rate were less, he would be compelled
to reduce his prices. HMRC often check any post-claim price changes (or lack
thereof).
Case law
(summary)
The salient points
from European Court of Justice case law may be summarised as:
- 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 HMRC can invoke the unjust enrichment defence it 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
* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.
** A pricing strategy is a business’s approach to
determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they
give them the flexibility to price separate products differently.
Pricing policies refer to the processes and
methodologies a businesses uses to set prices for their supplies. There are various
pricing strategies that may be used, but some of the more common
ones include:
- value-based pricing
- competitive pricing
- price skimming
- cost-plus pricing
- penetration pricing
- economy pricing
- dynamic pricing
Further
reading
