HMR Commissioners v Investment Trust Companies (in liquidation), [2017] UKSC 29

The Lead Claimants, who were investment trust companies, received supplies of investment management services from their investment managers (the "Managers”) under contracts which provided for the Managers to be paid fees plus VAT “if applicable.” The Managers mistakenly charged the Lead Claimants VAT on the supply of those services (as a result of the UK statute not properly reflecting an exemption required by EU law), which the Lead Claimants paid. The reasons focused on a simple example where the Managers charged output tax of £100 on their supplies of investment management services, deducted input tax of £25 (also on the mistaken belief that they were making taxable supplies), and remitted £75 to the Commissioners. Primarily at issue was whether (i) the Lead Claimants had an actionable claim against the Commissioners for unjust enrichment (respecting “dead periods" during which a statutory right of recovery of such tax was statute-barred) and (ii), if so, whether it was for £100 or £75.

In finding, respecting the second issue, that the amount at issue was £75, not £100 (i.e., the Commissioners had been “enriched” only by £75), Lord Reed stated (at paras 29-30):

… [T]he Managers could not both claim reimbursement of the output tax which they had paid to the Commissioners…on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable.

The Commissioners were not, therefore, enriched by the Managers’ retention of the notional £25, and the Managers have, in principle, no defence to a claim by the Lead Claimants for the restitution of that amount. …

On the first issue, Lord Reed first noted (at para 33), respecting the requirement that the enrichment be at the claimant’s expense:

The Lead Claimants owed no money to the Commissioners. Furthermore, the payment of the tax element of the invoices submitted by the Managers to the Lead Claimants was not the cause of the payment of tax by the Managers to the Commissioners: …the Managers were liable to account for tax to the Commissioners once they had supplied the relevant services

He then found (at paras 71-73):

...There was a transfer of value, comprising the notional £100, from the Lead Claimants to the Managers, under the contract between them. … There was a subsequent transfer of value, comprising the notional £75, from the Managers to the Commissioners. … These two transfers cannot be collapsed into a single transfer of value from the Lead Claimants to the Commissioners.

… The first transfer did not even bring about the second transfer as a matter of causation.... [T]he fact that, as a matter of economic or commercial reality, the Lead Claimants bore the cost of the undue tax paid by the Managers to the Commissioners does not in itself entitle them to restitution from the Commissioners.

It follows that the Lead Claimants did not in principle have any right to restitution against the Commissioners. They did, on the other hand, have a right to restitution against the Managers. That right was to restitution of the entire amount paid in respect of VAT, ie the notional £100. The Managers did not in principle have a change of position defence in respect of the notional £75 which they paid to the Commissioners, since that change of position was reversible under [the refund provisions of] section 80 of the 1994 Act… . Nor did they have a change of position defence in respect of the notional £25 which they retained.

In elaborating on the Lead Claimants’ rights against the Managers, Lord Reed stated (at para 93):

[T]he Lead Claimants had a common law right to restitution of the amounts mistakenly paid to the Managers, whose enforcement was neither impossible nor excessively difficult. The Managers had a statutory right to recover the notional £75 from the Commissioners, under arrangements which ensured that it was passed on to the Lead Claimants. The Managers retained the remaining £25 and were not insolvent. They were therefore in a position to refund it to the Lead Claimants. The only amounts which the Lead Claimants could not recover were the amounts which they had paid during the “dead periods”, to the extent that those amounts had been paid by the Managers to the Commissioners: that is to say, the notional £75 whose recovery from the Commissioners was time-barred under section 80(4) of the 1994 Act. Although a claim by the Lead Claimants against the Managers in respect of the dead periods would not have been time-barred, because of the more generous limitation period allowed by section 32(1)(c) of the Limitation Act 1980, the Managers would have a defence of change of position, since the amounts which they paid to the Commissioners during those periods were irrecoverable.

Using Lord Reed’s simplified facts, the invoice to an investment fund of its manager included VAT of £100 based on a UK VAT provision which was later determined to have improperly treated (contrary to the EU Directive) the manager’s services as taxable rather than exempt. The manager claimed input tax (i.e., an ITC) of £25 in the same mistaken belief that it was making taxable supplies, and remitted £75 to HMRC. Recovery of the £75 from HMRC was now statute-barred.

Lord Reed held that the fund had no common law claim of £75 against HMRC for unjust enrichment given inter alia that the manager’s supposed £75 remittance obligation to HMRC had been independent of its £100 charge to the fund in the sense that the former was triggered by the provision of its services rather than the receipt of the £100 from the fund. However, the fund had a valid £25 claim for unjust enrichment against the manager.