Revenue and Customs v The Investment Trust Companies [2017] UKSC 29

Investment trust companies paid VAT on investment management services which were later found to be exempt under EU law. They sought restitution directly from HMRC for amounts their managers could not reclaim. The Supreme Court held no direct claim lay against HMRC.

Facts

The claimants were investment trust companies (ITCs) which, between 1992 and 2002, received investment management services from their managers. Under the UK’s VAT legislation then in force, those services were treated as taxable, and the managers charged VAT on their fees, which the ITCs paid. The managers accounted to HMRC for output tax, deducting input tax paid on their own taxable supplies, and remitting only the balance.

In JP Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Comrs (Case C-363/05), the ECJ held that such supplies were exempt under article 13B(d)(6) of the Sixth VAT Directive, which had direct effect. The managers made claims under section 80 of the Value Added Tax Act 1994, and HMRC repaid the net amounts remitted (a notional £75 in the illustrative figures used), which were passed on to the ITCs via reimbursement arrangements. Two shortfalls remained: (i) amounts retained by the managers as input tax (the notional £25); and (ii) amounts in respect of “dead periods” outside the three-year limitation period in section 80(4).

Issues

The Supreme Court identified three principal questions:

• Whether the ITCs had a common law claim in unjust enrichment against HMRC, in principle, subject to statutory exclusion.
• Whether section 80 of the 1994 Act barred any such claim.
• Whether the absence of any direct claim by the ITCs against HMRC was compatible with EU law.

Arguments

The ITCs argued that HMRC had been enriched both by the £75 remitted and the £25 retained (because that £25 discharged HMRC’s purported obligation to credit input tax), and that the enrichment was at their expense as a matter of economic reality, given the VAT system’s design to tax the final consumer. They argued section 80(7) did not exclude claims by consumers, who were not within the section’s machinery, and that EU law required an effective direct remedy.

HMRC argued they were enriched only to the extent of the £75 actually received; that the ITCs’ loss was not, in law, at their expense because the managers were not agents and there was no direct transfer of value; that section 80 was an exhaustive code excluding common law claims; and that EU law was satisfied because the ITCs could recover from the managers.

Judgment

Enrichment

Lord Reed (with whom Lord Neuberger, Lord Mance, Lord Carnwath and Lord Hodge agreed) held that HMRC were enriched only to the extent of the £75 actually remitted. Relying on Becker and VDP Dental Laboratory, a taxable person could not simultaneously claim that supplies were exempt (for the purposes of recovering output tax) and that they were taxable (so as to retain input tax deductions). The managers therefore had no defence to a claim by the ITCs for the £25.

“At the expense of”

The Court took the opportunity to provide more precise criteria for the “at the expense of” requirement, noting the unsatisfactory vagueness of formulations such as “sufficient economic connection”. Lord Reed emphasised that unjust enrichment is governed by principle, not discretion, and is designed to reverse defective transfers of value. The general rule is that the defendant must have received a benefit directly from the claimant, with recognised equivalents including agency, assignment, sham transactions, traceable property, discharge of debts, and co-ordinated transactions forming a single scheme.

Incidental benefits, and connections established only by economic reality, do not satisfy the requirement. The Court disapproved aspects of the reasoning in TFL Management Services Ltd v Lloyds TSB Bank plc. Applying this framework, there were two distinct transfers of value: from the ITCs to the managers under contract, and from the managers to HMRC under statutory obligation. These could not be collapsed into a single transfer. The managers were not agents; the funds were not traceable; there was no sham; and the judge had rejected even a “but for” causal link. Accordingly, the ITCs had no claim in unjust enrichment against HMRC in principle.

Section 80

Although strictly unnecessary, the Court held that section 80, read with section 80A and the 1995 Regulations, constituted an exhaustive code. Section 80(3) created a passing-on defence; the reimbursement arrangements ensured consumers could be repaid via the supplier; and section 80(4) imposed a three-year time limit to protect public finances. It would be inconsistent with that scheme to permit concurrent common law claims by consumers subject to a longer limitation period. Section 80(7) was construed as excluding such claims.

EU law

Applying San Giorgio, Reemtsma and Danfoss, EU law generally permits a system under which only the supplier may claim reimbursement from the tax authority, provided the consumer can recover from the supplier. A direct claim against the tax authority is required only where recovery from the supplier is impossible or excessively difficult (e.g. insolvency). Here, the ITCs had an enforceable common law claim against the managers, who were solvent. The dead-period amounts were irrecoverable only because of the section 80(4) time limit, which is conceded to comply with EU law.

Implications

The Supreme Court allowed HMRC’s appeal and dismissed the ITCs’ cross-appeal. The decision clarifies several aspects of the law of unjust enrichment:

• The “at the expense of” requirement demands a transfer of value, normally direct, between claimant and defendant. Vague formulations such as “sufficient economic connection” are inadequate.
• Recognised equivalents to direct transfers include agency, assignment, sham transactions, traceable property, debt discharge, and genuinely co-ordinated single schemes.
• Incidental benefits and connections grounded only in economic reality are insufficient.
• Section 80 of the VAT Act 1994 is an exhaustive code excluding parallel common law claims, including by consumers.
• EU law does not require a direct restitutionary remedy against the tax authority where the consumer can effectively recover from the supplier.

The decision is significant for tax practitioners, VAT-registered businesses, and consumers seeking restitution of wrongly charged VAT, confirming that statutory routes via the supplier are generally the exclusive mechanism. It is also a leading authority for the law of unjust enrichment more broadly, providing structure and discipline to the “at the expense of” inquiry. The Court expressly left open the position where the supplier is insolvent, and the scope of genuine exceptions to the direct transfer requirement.

Verdict: The Supreme Court allowed HMRC’s appeal and dismissed the Lead Claimants’ cross-appeal. The investment trust companies had no common law claim in unjust enrichment against HMRC; any such claim was in any event excluded by section 80 of the Value Added Tax Act 1994; and that result was compatible with EU law.

Source: Revenue and Customs v The Investment Trust Companies [2017] UKSC 29