ECJ says 'unjust enrichment' rules cannot be applied to VAT claim on chocolate teacakes
The case relates to output VAT overpaid by a household name retailer on zero-rated teacakes, and looked at the taxpayer's rights under European Law to rely on domestic zero-rating, and HMRC's application of the unjust enrichment defence before May 2005.
HMRC had always considered that the Appellant’s chocolate covered teacakes were biscuits rather than cakes, and as such, were standard-rated. In 1994, HMRC accepted they had made an error, and that the teacakes were zero-rated. Following initial litigation, HMRC accepted the claim should not be time-barred, but insisted on only repaying 10% of the £3.5 million VAT repayment on 'unjust enrichment' grounds.
After going through the domestic courts, the House of Lords referred the case to the ECJ. The questions asked whether a taxpayer has a direct Community right or rights under general Community principles to zero-rate, and if so, whether the UK's unjust enrichment rules at that time were contrary to the Directive. This difference in treatment was between payment and repayment traders prior to 26 May 2005. Prior to this date, claims made under VATA 1994 s 80 were subject to the unjust enrichment defence only in respect of claims for 'repayment' of output VAT overpaid. Any repayment trader making an output tax claim did not at that time come within the terms of the unjust enrichment provisions of s80, as the claim would be for output tax overdeclared rather than overpaid, as repayment traders do not pay any VAT to HMRC. The ECJ ruled that whilst there is no directly enforceable Community law right to zero-rating, with it being a derogation, such derogations do not extend to removing claims for VAT mistakenly accounted for on zero-rated supplies entirely from the scope of the Directive, and the principle of fiscal neutrality provides a right for taxpayers to recover such sums mistakenly charged.
In terms of unjust enrichment, the ECJ looked at two principles. Firstly, the Court said that although unjust enrichment is a valid defence, it was contrary to the principle of fiscal neutrality to apply unjust enrichment to a payment trader but not a repayment trader, where they have marketed similar goods. With regards to the principle of equal treatment, which appeared to be broader in scope, this required that similar situations should not be treated differently unless differentiation is objectively justified. The Court indicated that the difference in treatment between similar claims by repayment and payment traders was not justified. The ECJ left it for the national court to determine whether these principles had been contravened.
Given that the ECJ judgement came out in April last year, the return of the case to the House of Lords suggested that we would see the national court's interpretation and views. However, HMRC have decided not to pursue the case, and have repaid the claim. The HoL therefore allowed the Appellant’s appeal with minimal comment. It is not clear why HMRC waited so long to decide not to pursue the case. Certainly, the decision indicates that they thought they would lose this case as soon as the ECJ had given its views.
HMRC's withdrawal leaves us all in the same position as we were after the ECJ decision, in that HMRC cannot reasonably apply the defence of unjust enrichment to any claim for overpaid output VAT by a payment trader made before 26 May 2005. Consequently, where such a claim still remains open, HMRC should now repay the claim subject to verification. Where a claim was made, rejected, or settled in part, but not appealed, and is hence closed, taxpayers can still seek repayment on the basis that HMRC are required to revisit the claim following the decision in this case. UK legislation contains a valid three-year time limit for claims, thereby blocking any fresh claims from being submitted for periods over three years old. Also, the discrimination point has been dealt with regarding claims made after the 2005 law change, so UK law is now EU-compliant in this area. This would suggest that the potential for revisiting blocked claims is limited to those claims which have already been lodged with HMRC before May 2005.
Marks & Spencer plc, ECJ (C-309/06), 10 April 2008, and House of Lords, 4 February 2009