In a long-awaited judgment in test proceedings brought against the Revenue by a number of closed-ended investment trusts (The Commissioners for Her Majesty’s Revenue and Customs v Investment Trust Companies (In Liquidation)  UKSC 29), the Supreme Court has held, overturning the decision of the Court of Appeal, that a person who has mistakenly paid VAT to a supplier, who has in turn accounted for it to the Revenue, has no claim in unjust enrichment to recover it directly from the Revenue. Nor does that mistaken payor have a direct claim against the Revenue under EU law. It is only from the supplier, to whom the VAT was directly paid, that the payor can recover the money in an unjust enrichment claim. Furthermore, given the attenuated limitation period under the Value Added Tax Act (“VATA”) 1994 applicable to the supplier’s own entitlement to reclaim from the Revenue VAT which it has mistakenly accounted for (three years at the material time in that case, now four years), suppliers will have a change of position defence to any claim to recover VAT mistakenly paid to them in respect of accounting periods ending more than four years from the date on which proceedings are commenced.
The claims by the investment trust companies (“ITCs”) were commenced against the Revenue following a decision of the European Court which decided in 2007 that, under EU law, services provided to such investment trusts by their management companies (“Managers”) should have been exempt from VAT. The Revenue reimbursed the Managers in respect of the VAT mistakenly accounted for within the (then) three year limitation period (and for a further period which was not time-barred as a result of transitional provisions), and the Managers, in turn, paid over what had been recovered to the ITCs. However, since the ITCs had mistakenly been paying VAT for a number of years before that, they brought proceedings against the Revenue directly in order to recover the additional VAT which should not have been paid.
Three issues arose in the Revenue’s appeal: (i) did the ITCs have a common law claim against the Revenue in unjust enrichment for mistake, on the grounds that the Revenue had been unjustly enriched at the ITCs’ expense?; (ii) if they did, was it excluded by a provision in VATA 1994 (section 80(7)) in a part of the Act dealing with the circumstances in which a person who mistakenly accounted for VAT to the Revenue could recover it from them?; and (iii) if the ITCs did not have a common law claim in unjust enrichment, or they did, but it was excluded by section 80(7), did they have a San Giorgio right under EU law to recover the VAT from the Revenue?
On the first question, both the judge at first instance (Henderson J) and the Court of Appeal (Moore-Bick, Patten, and Beatson LJJ) had held that the ITCs did have a common law claim in unjust enrichment directly against the Revenue to recover the mistakenly paid VAT. On the second question, Henderson J held that the common law cause of action was nonetheless excluded by section 80(7); but he was overturned on this by the Court of Appeal. On the third question Henderson J also held that the ITCs did not have an EU San Giorgio right to recover the VAT so as to override the domestic statutory exclusion, but the issue did not arise in the Court of Appeal given their conclusion that the common law cause of action was not excluded by section 80(7).
In the Supreme Court, giving a judgment with which the rest of the Justices all agreed, Lord Reed held that the ITCs did not have a common law claim in unjust enrichment against the Revenue; that, even if they did, it would have been excluded by section 80(7); and that the ITCs did not have an EU San Giorgio right to recover the VAT from the Revenue, so as to make up for the absence of a common law claim, or to avoid the effect of the statutory exclusion.
The judgment of the Supreme Court on this issue has been eagerly awaited, especially by scholars of the law of Unjust Enrichment, because of the general issue raised as to the circumstances in which a party may rely upon a cause of action in unjust enrichment to recover money (or some other benefit) from a recipient to whom the money was not directly paid by the party seeking its recovery. The question turns upon the scope of one of the requirements for a cause of action in unjust enrichment; namely, that the enrichment which a claimant seeks to recover from the defendant have been “at the expense of” the claimant. In recent years, a line of Court of Appeal authority (including the Court of Appeal in this case) has taken the view that a benefit could be said to have been obtained by one party at the expense of another if, having regard to “underlying economic or commercial reality” the claimant could be regarded as effectively the source of the defendant’s enrichment, even if the defendant did not receive it directly from the claimant. It was on that basis that Henderson J and the Court of Appeal concluded that the ITCs had a cause of action against the Revenue because, although the ITCs had not paid any VAT to the Revenue, the fact remained (as Henderson J put it) that “in economic terms the person at whose expense unlawful VAT is paid to the HMRC is indubitably the consumer”.
However, in conducting a general review of the scope of the “at the expense of” requirement, Lord Reed rejected the concept of “underlying economic or commercial reality” as being too vague a test for when a benefit can be recovered from an indirect recipient. Moreover, he analysed the existing caselaw in a way which looks set to curtail significantly the circumstances in which a claimant may have a cause of action in unjust enrichment against someone upon whom he has not directly conferred a benefit. Lord Reed also warned that the adoption of the concept of unjust enrichment in the modern law, as a unifying principle underlying a number of different types of claim, does not provide the courts with a tabula rasa entitling them to disregard or distinguish all authorities predating Lipkin Gorman.
The Supreme Court also unanimously dismissed a related cross-appeal by the ITCs concerned with what the measure of the Revenue’s enrichment would have been if the Managers did have a cause of action in unjust enrichment against the Revenue. The ITCs’ contention was that the Revenue were enriched by the full amount of VAT accounted for by the Managers, even if some of that amount had not actually been paid to the Revenue as a result of the Managers’ deduction of input tax. The Supreme Court held, however, that the measure of the Revenue’s enrichment would only have been the amount actually paid over to them by the Managers, because it could not be said that the Revenue benefitted from the discharge of an obligation to reimburse the Managers in respect of input tax in circumstances where the Managers were not entitled to deduct it because the services they were providing were exempt from VAT.
Stephen Moriarty QC of Fountain Court Chambers acted for the successful Revenue in the appeal and cross appeal, leading Andrew Macnab of Monckton Chambers. The judgment of the Supreme Court can be found here, and the Supreme Court’s press summary here.