First-tier Tribunal (Tax)

[2010] UKFTT 493 (TC)

TC00751

Appeal ref: MAN/2009/0172 & 0173

VALUE ADDED TAX ¾ unjust enrichment — claim for repayment of input tax without bringing the whole of output tax into account — whether permitted — no — repayment returns reduced to nil — whether justified — yes — appeal dismissed

FIRST-TIER TRIBUNAL

TAX

BENRIDGE CARE HOMES LIMITED Appellants

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: John N. Dent (Judge)

Sitting in public in Manchester on 24 September 2010

Nigel Gibbon, counsel, for the Appellants

Richard Chapman, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.          The appeal before us concerns legislation and regulations relating to unjust enrichment as they arise in respect of a Vat repayment claim.  The Appellants are Benridge Care Homes Limited and Mr and Mrs McLaughlin, who trade as Benridge Rest Home. Both appeals arise in identical circumstances, and so will be treated as one.

2.          Benridge Rest Home ran a residential care home for the elderly from premises situated at 53 Queens Road Southport from November 1980 until September 1986. The company was incorporated in September 1986 and operated the rest home from then.

3.          The Appellants sought registration for VAT on a voluntary basis in order to make a claim under the ruling in Kingscrest Associates Ltd v Commissioners of Customs and Excise [2005] ECR I-4427, [2005] STC 1547, ECJ. The Respondents received the Appellants’ long period first return on 19 December 2008 for repayments totalling £66922.77.

4.          On 21 January 2009 officers of the Respondents visited the Appellants’ accountants and established that the accountants had extracted the figures for the input tax from the annual accounts. This figure for the Limited Company had then had a 26/27 equation applied to it to account for the input tax of council residents but not in relation to the private residents. It was discussed whether or not it was viable to include all input tax from the annual accounts and use the turnover figure to reconstruct the output tax. The accountant stated there was no risk as output tax paid by the Appellants would be reclaimed by the councils. The officers notified the Appellants’ accountant that it was the Appellants’ records which were being inspected and not the councils' records, and that in order to verify the claim, the VAT return as a whole had to be considered, which included inputs and outputs and tax claimed and paid. Similarly, in respect of the partnership return, the information had been put together using the annual accounts and details forwarded by one council authority regarding residents at the home during the time of the return, Five councils had residents in the home, but only one had provided figures to the accountants, and this had been declared as output tax due. The figure for input tax on the annual accounts was available for the period of the partnership return but these figures had not been used to calculate the output tax due.

5.          By letters dated 2 and 3 February 2009 the Respondents notified the Appellants that the returns were reduced to nil. This was on the grounds that whilst the input tax claim was on the basis of the annual accounts, the output tax was not, and it was fair and reasonable to expect that figures could also have been extracted for the accounting of output tax as well as input tax. The Respondents further notified the Appellants that if this had been completed, all returns rendered would have been payment returns and as such, it would not have been in the Appellants’ interest to have registered for VAT during the period.

6.          The Commissioners accepted the Appellants’ claim so far as tuition fees were concerned and a repayment we understand has been made and thus that aspect of the matter does not concern us today.  The issue rather relates to the livery services provided by the Appellants to customers and in respect of which over a period Vat had been accounted for.  It was accepted by the Commissioners that while the claim was recognised because of the need to avoid any “unjust enrichment” being afforded to the Appellants a particular procedure would have to be followed as to repayment.  The Commissioners’ stance was that they needed to make arrangements to ensure that if repaid the sums representing Vat would go to the persons who bore the original cost.

The Law

7.          Mr Chapman referred the Tribunal to Sunningdale Golf Club, [1997] VATDR 79. The final paragraph of this decision states

“We should point out in conclusion that the argument for the Golf Club is based on a fundamental defect. It confuses the elements of the calculation of output tax for which it is required to account with the amount of tax paid. The defect is there whether or not the Golf Club invokes its Community law rights and it removes any answer the Golf Club might have to the Commissioners' "unjust enrichment" defence. The true position is that input tax is simply an element in the calculation of the output tax for which a taxable person must account. It was not suggested that the Golf Club had improperly been charged tax on supplies made to it for the purposes of its activity. It suffered the same amount of tax on these supplies on the assumption that its activities were taxable as it would have suffered if the activities had been regarded as exempt from the beginning. Based on the assumption that the activities were taxable, the tax on the supplies made to the Club was deducted in computing the amount of output tax for which it had to account. Where there is a net liability to output tax, it will never be appropriate for a taxable person to be "repaid" input tax by the Commissioners, since full credit for that input tax will already have been given. The most that they could ever be required to repay will be what has actually been paid over to them, namely the "gross" amount of output tax less the input tax properly recoverable against that tax by way of credit or deduction. By the same token had the Golf Club been in a repayment position, it would already have recovered all or part of the input tax by repayment from the Commissioners, and the question might well instead have been whether the Commissioners could reclaim tax repaid on the incorrect assumption that the Golf Club's activities were taxable.”

8.               Mr Gibbon referred us to Customs and Excise Commissioners v National Westminster Bank plc [2003] EWHC 1822 (Ch) on the questions of unjust enrichment and fairness.

9.               S. 83 (1)(c) of the VAT Act 1994 provides that appeal lies to the Tribunal with respect to the amount of any input tax which may be credited to a person and S. 83 (1)(p) with respect to the amount of an assessment

The parties’ arguments

10.            Mr Gibbon stated that the Appellants accepted that there should be additional output tax put into the repayment claim, and wished to negotiate an amount of output tax acceptable to the Local Authorities. He said that negotiations had broken down because the Respondents could not give reassurance to the Local Authorities that the output tax would be recoverable. Thus if the output tax were declared voluntarily, the Revenue would receive the output tax without the Local Authorities reclaiming it. He suggested that the Tribunal had no jurisdiction to look at the output tax position, and questioned the vires upon which the returns had been reduced to nil. He argued that there was no concept of unjust enrichment in these circumstances, and that the case did not come under S. 80 VAT Act 1994. In this regard he cited Customs and Excise Commissioners v National Westminster Bank plc [2003] EWHC 1822 (Ch).

11.            Mr Chapman argued that there were two issues to look at namely:

(a) the nature of the decisions made and

(b) whether the decision was correct

12. He argued that the decisions go to the question of the repayment claim as a whole. The Appellants were, in his submission, trying to reclaim input tax without bringing into account the whole of the output tax. He asked the Tribunal to take account of the final paragraph of Sunningdale.

13. He drew the Tribunal’s attention to the fact that the Appellants had accepted that there should be additional output tax. The question was whether the Appellants would be unjustly enriched if they received the benefit of input tax without allowing the full amount of output tax to be brought into the calculation. The Appellants were seeking to unravel the commercial difficulty in obtaining invoices showing the output tax. If the matter were dealt with afresh, there would be a net payment due to the Respondents, with output tax exceeding input tax. The Respondents would not seek to recover this amount, in accordance with Business Brief 28/04. He argued that the reduction of the input tax to nil was the end result, rather than the way of getting there, and that the effective decision of the Respondents was contained in their letters to the Appellants, which were themselves the assessments of output tax and input tax. The Respondents considered it improper to make an assessment requiring payment by the Appellants, as that would be penalising them. The Respondents were entitled to consider the return itself. The decision that the return was wrong was a matter which was within the jurisdiction of the Tribunal, and fell within S. 83.

The evidence

14.            The evidence was agreed. Only the matters of law set out above were in issue.

Conclusions

15.            The Tribunal found that the assessments made by the Respondents were those contained in the letters of 2 February 2009 and 3 February 2009 which accompanied the assessments reducing the claims to nil. The assessments cannot be separated from the letters accompanying, as those letters explain the reasons for the assessments being reduced to nil.

16. The Tribunal relies on the last paragraph of Sunningdale. The true position is that input tax is simply an element in the calculation of the output tax for which a taxable person must account. By corollary, output tax is simply an element in the calculation of the input tax for which a taxable person must account. It is not permissible for the taxpayer to under assess the output tax in order to make a claim to recover input tax. If the business accounts are capable of producing the figure of input tax, they are equally capable of producing the figure of output tax.

17.            The Tribunal has jurisdiction under S. 83 (1)(c) of the VAT Act 1994 to consider an appeal with respect to the amount of any input tax which may be credited to a person and under S. 83 (1)(p) with respect to the amount of an assessment

18.            The National Westminster Bank decision does not take the matter any further. The issue before the Tribunal was not one of unfairness. It was, in the finding of the Tribunal, a matter of calculation of the amount of output tax under S. 83 of the VAT Act, and the Respondents had come to the correct conclusion in determining that the proper method of calculation was to use the figures of income shown in the accounts. The reduction of the assessment to nil was for the benefit of the Appellants, in that, otherwise, the Appellants would have had an amount of tax to pay.

19.            In the view of the Tribunal, the recoverability of tax by the Local Authorities was not a consideration which the Respondents were able to bring into account

20.            The appeal is therefore dismissed

21.            The issue of costs on the earlier hearing is only to be restored at the request of either of the parties and is to be dealt with by Judge Gilliland

22.            This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN N. DENT

TRIBUNAL JUDGE
Release Date:  12 October 2010