Heads we win and tails we refuse to lose – the increasing defence of ‘unjust enrichment’

15 December 2015

David Wilson

Four years after the European Courts found in their favour, members golf clubs may now receive the repayment of VAT they overpaid on visitors green fees.

If a business, or golf club, has over accounted for VAT, a reasonable question is ‘Why can’t I get it back?’ It seems increasingly the case that when HMRC breaches EU (or UK) VAT law, rather than refunding the VAT incorrectly levied, HMRC is attempting to invoke a defence that the repayment would unjustly enrich the taxpayer. But is it correct to do so?

Here’s where we explain the ‘offside rule’ of tax repayments

Tax authorities cannot impose restrictions rendering it ‘virtually impossible or excessively difficult to secure repayment of VAT incorrectly applied’. Where VAT paid is subsequently found to contradict EU rights, as in golf club visitors’ fees, taxpayers are entitled to a refund of that tax. Exceptionally, the repayment of a tax wrongly paid can be refused where it would entail the unjust enrichment of the person concerned; ie where the burden of the tax has been passed on by the taxpayer to a third party.

HMRC seems to see the question of unjust enrichment merely as whether the business charged the improperly levied VAT to the final customer. But, this is somewhat simplistic.

In determining unjust enrichment, it’s not the output tax that has to be considered, but who suffers the ‘burden’ of the tax. The onus of proving any enrichment, and that the enrichment is unjust, rests with HMRC.

This is a two-stage process and requires HMRC to prove that the economic burden of overcharged VAT has been borne, in its entirety, by the customer, then address whether passing it on resulted in any economic loss or damage to the taxpayer making the claim. Where only part of that burden has been passed on, the tax authorities must repay the taxpayer the amount of the burden that hasn’t been passed on.

In the case of golf clubs, the tax tribunal decided that HMRC didn’t meet the burden of proof required, and decided that the economic theory and models presented by golf clubs better reflected the visitors green fee market.

A defence of unjust enrichment must be considered case by case, and then only when VAT has been levied in breach of EU law. To attempt to apply an unjust enrichment defence across a whole sector, as HMRC attempted in relation to golf clubs, smacks of desperation.