Common law remedies available in VAT cases where s.80 has been ousted by the effect of EU law.

04 April 2013
Author: JHA

Robert Waterson, Senior Associate at Hage Aaronson explains why the Further Judgment in ITC is good news for taxpayers who suffered unlawfully levied VAT but had no direct right of action against HMRC under s.80 VATA.

By Robert Waterson

Investment Trust Companies (In Liquidation) v The Commissioners for HMRC [2013] EWHC 665 (ch)

The ITC litigation concerns the recovery of VAT by Investment Trust Companies (ITCs) who had paid VAT on services supplied to them by management companies (the managers). The imposition of VAT on these services was found to be contrary to EU law by the CJEU in Abbey National and JP Morgan Claverhouse.

The process of recovering overpaid VAT is codified in statute in s.80 Value Added Tax Act 1994 (VATA). That mechanism is open only to those who have accounted to HMRC for the relevant VAT. Consequently, the ITCs had no direct way of recovering their money since they had not accounted to HMRC for the unlawful VAT: the managers had. Claims were therefore made by the managers who then passed on the recovered sums to the ITCs. A difficulty arose however because the managers were unable to recover all the VAT the ITCs had paid. Under s.80, HMRC were obliged only to repay the VAT paid to them. As the managers had made deductions for attributable input tax, the amount repaid was less than the VAT suffered by the ITCs and they remained out of pocket for the difference. In the ITC case this sum was referred to as “the £25”.

In the first judgment, Henderson J found that the Revenue had been enriched to the full extent of the VAT, including the deducted input tax and that the ITCs had no means of recovering the £25 at English law because s.80 prevented them from doing so and any action against the managers would have been futile because they had, as Henderson put it, a “cast iron defence of change of position”.

At EU law the position was different. Henderson J found, following the CJEU’s decisions in Danfoss and Reemtsma, that it was clear that the ITCs must have a direct right of action to recover the £25 from HMRC, notwithstanding the exclusionary nature of s.80. What was less clear was how this was to work in practice. The questions of law which surround this issue are complex and were at that time relevant to issues which were the subject of a reference to the CJEU in Littlewoods and in the FII GLO before the Supreme Court. Henderson J decided to issue a preliminary judgment which dealt with the issues he could determine and reserve his position until judgments were delivered in Littlewoods and FII.

After those judgments were delivered, there was a further hearing at which HMRC argued for the exclusionary scope of s.80(7) to be limited only in so far as it enabled the claimants to make Woolwich style restitutionary claims. They argued that, although EU required claims to be available in circumstances where recovery from the taxable person (in this case the managers) was not possible, the courts must lift the bar on the use of common law remedies instituted by parliament only to the minimum extent necessary to accommodate rights conferred by EU law. Such a finding would have limited the ITCs’ claims to 6 years from the date of the payment of the tax, effectively killing off their claims.

Henderson disagreed with this analysis. Citing the decision of the Supreme Court in FII he found that once the statutory scheme had been overridden by EU law, the situation must be as it would have been if all common law causes of action had been available to the ITCs. Henderson found no justification in EU law jurisprudence for a court engaging in an exercise of identifying a minimum remedy or one which would provide the best fit for existing but unavailable remedies. That was the approach which the Court of Appeal had taken in FII, but that approach had been roundly rejected by the majority decision of the Supreme Court. Drawing from LittlewoodsHenderson found that the job of the national court is to apply such procedures as are “appropriate to safeguard the individual rights conferred by EU law”. Henderson found that this gave no encouragement for the notion espoused by HMRC that a national court is obliged to provide only the minimum remedy, but rather facilitate the type of remedy and choice which English law would normally afford. Once the statutory scheme was ousted the English law domestic principle that a claimant has the freedom to choose its cause of action should not be interfered with.

The ITCs were therefore free to opt for their preferred DMG “mistake” based remedy which would enable them to recover sums paid under a mistake of law for a period of six years from the discovery of the mistake, but importantly, those claims could go back to the time at which the unlawful tax charge began to be levied. The judgment is therefore a comprehensive win for the taxpayer for all periods apart from the so called ‘Dead Period’ where Henderson found that EU law principles were not engaged and recovery could not be sought.

This ruling has wider significance in that it embodies a broader approach than in previous UK court decisions to the availability of common law remedies to taxpayers asserting their EU law right to an effective remedy. The case is likely to go on appeal, but in the mean time, it is expected that those with protective high court claims stood behind ITC may make applications for interim payments.

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