Case Study: VAT Reclaims & ‘Unjust Enrichment’

Ensuring HMRC repay your claim

In a discussion with a client who supplied digital content online, we established that their supplies should correctly be classified as subject to VAT at the zero rate – and the client had declared VAT over the last couple of years at the standard rate.  No VAT invoices had been issued as the supplies were to consumers.  We assisted the client identify the (six-figure) level of VAT overpaid to HMRC and arranged the submission of this significant VAT reclaim to correct the accounting error.

HMRC responded to the claim by suggesting that it could be refused by invoking a defence of ‘unjust enrichment’ where a taxpayer

  • has charged VAT to his customers that he ought not to have charged
  • has passed the economic burden of the wrongly charged VAT on to his customers
  • has suffered no loss or damage as a result of having passed the mistaken charge to his customers
  • is unable or unwilling to reimburse his customers with any amounts paid to him by HMRC

Unjust enrichment is said to be the scenario where a taxpayer has charged and collected VAT incorrectly and seeks repayment of the VAT, without repaying that VAT to their customer – so that they end up better off to the value of the VAT refunded.

The tone and approach of HMRC was to deny the claim, meaning we had to push back on their position to make clear that the client had not charged or shown VAT separately and had simply inadvertently accounted for VAT on receipts.  In challenging the HMRC position, it was particularly helpful to look at their own published guidance and reflect that back to them.  It set out a number of tests including

  • whether customers were VAT registered or consumers
  • competitiveness of the particular market and price sensitivity / elasticity / price changes over time
  • nature of the supply / availability of substitutes

In each case, we were able to show – by their own tests – that HMRC could not resist the claim.  By reflecting their own guidance back, HMRC almost immediately backed down and arranged for the claim to be made.

This is an illustration of the need to be firm with HMRC – not to accept that they ‘must be right’ as they are the taxing authority and understanding that they work to guidance – and if you can show them that their guidance allows the claim, they simply need to follow that.

Needless to say, the client was very happy to have the repayment (and we’re now looking for statutory interest on top because HMRC took so long!)

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