In this appeal to the First-Tier Tribunal (FTT), the taxpayer argued that VAT repayments (and related interest) due to it were not subject to corporation tax. The taxpayer, which operated full-service food and drink vending machines, had wrongly treated both hot and cold drinks as subject to VAT at the standard rate and accounted such VAT to HMRC. The taxpayer’s argument was that it could freely choose to claim repayment of tax under any one of three mechanisms – (i) statutory claim under the VAT Act (ii) a claim for restitution of tax wrongly-collected (Woolwich claim), or (iii) a mistake-based restitution claim (a DMG claim). The taxpayer argued that it had wished to make its claim to repayment of VAT in reliance on the mistake-based route. Flowing from this argument was the assertion that HMRC should disgorge itself fully of the benefit of the wrongly collected tax and that subjecting the repayment of VAT and interest to corporation tax runs contrary to the basic foundations of the restitutionary remedies available for wrongful enrichment.
The FTT disagreed with this argument however. The FTT noted that in relation to the interest to be paid to the taxpayer, it (FTT) had no jurisdiction to determine whether it represented an “adequate indemnity”. If the statutory rate of interest did provide an adequate indemnity for the lost time value of the VAT wrongly-paid to HMC, then there could hardly be any question of the taxpayer invoking a wrongful enrichment argument as the statutory regime would apply. Moreover, the Tribunal found that, firstly, the common law remedy of disgorging all the benefits of an unjust enrichment could not result in the disapplication of corporation tax. Further, the VAT repayment and interest earned on it would have been taxable in the hands of the taxpayer had it not been paid mistakenly to HMRC. Therefore, the principle of effectiveness was satisfied where the taxpayer was repaid interest that was equally taxable.
