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Cite as: [2004] UKVAT V18769

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Baines & Ernst Ltd v Customs and Excise [2004] UKVAT V18769 (23 September 2004)

18769

VAT — unjust enrichment — debt management services — originally classified as standard rated but following tribunal decision in appeal by Debt Management Associates(Decision No 17880) accepted by Customs as two discrete exempt services — Customs further acceptance that VAT on appellants initial service did not result in unjust enrichment —whether VAT paid on appellants management services would result in its being unjustly enriched — finding on facts that it would — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BAINES & ERNST LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mr J D Demack (Chairman)

Sitting in public in Manchester on 27, 28 and 29 July 2004

Mr David Milne QC instructed by Messrs Horwath Clark Whitehill, chartered accountants, London, for the Appellant

Mr Peter Mantle of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

Introduction

On 9 April 2003, the appellant company, Baines & Ernst Ltd ("B&E") submitted a voluntary disclosure to the Commissioners of Customs and Excise seeking repayment of £5,969,399 it had paid as VAT which was not due. (It later reduced the claim to £5,951,579). The claim related to the excess of output tax declared over input tax. The disclosure was submitted following the Commissioners' acceptance that debt management services provided by B&E, which had previously been standard-rated, were exempt. The Commissioners rejected the disclosure on 21 August 2003, and confirmed rejection on 15 October 2003, on the basis that B&E would be unjustly enriched were they to act on it. It is against the rejection on review that B&E now appeals.

B&E's debt management service is available to individuals who are unable to repay unsecured debts on their creditors' agreed terms. The service consists, first, in an initial service of negotiating with the creditors an agreed plan of repayments the client can afford, and, secondly, in a management service of collecting monthly payments from the client for distribution among his creditors in terms agreed with each of them. For the initial service, the client pays a single flat-rate fee; and for the management service, further fees calculated as a percentage of each monthly aggregate payment.

Initially, the Commissioners rejected the voluntary disclosure in its entirety. But, shortly before the hearing, they accepted liability for that part of it which reflected the VAT paid in respect of B & E's initial services. Consequently, my decision deals only with the claim for recovery of VAT on management fees.

The facts

I make the following findings of fact from the parol evidence of Mr R B Cochrane, a director of B&E, Mr C J Kirkland, a senior Customs officer, and the contents of two bundles of copy documents provided by the parties. (Unless otherwise stated, all page references to documents relate to the main bundle).

B&E was formed in 1996 as a debt collection agency. As such, it made standard-rated supplies and registered for VAT. But not long after beginning trading, on its share capital being acquired by Mr J O'Neill, it changed to providing the debt management services referred to at para 2 above. When the change took place it contacted its local VAT office for advice as to its future liability to tax. It was informed that all aspects of debt management services were standard-rated supplies. The company acted on that advice, and continued to charge VAT on its services.

Mr O'Neill knew nothing about debt management services and therefore initially decided to follow the practices of the then leader in the industry, Gregory Pennington Ltd ("GP"). GP operated, and continues to operate, a service seemingly identical in all material respects to that of B&E. Mr O'Neill obtained a copy of the terms and conditions on which GP dealt with its clients, and instructed solicitors to plagiarise them for B&E's own use.

In particular, as Mr O'Neill had no idea what to charge for B&E's new services, it followed GP's example in charging 15 per cent plus VAT (i.e. 17.625% in total) of clients' disposable incomes for "on-going management services," and a flat rate negotiation fee (including VAT) equal to a client's first monthly payment.

The plagiarised form of GP's charging clause for management fees, used by B&E from 1996 until late 1999, took the following form:

"6.1. Unless we agree otherwise with you we will take from each monthly payment under the Monthly Payment Plan a fee equal to 15% of the periodic payment under the Monthly Payment Plan. This figure is subject to a minimum fee of £25 per month and does not include VAT, which we have to charge by law. (At present this total sum amounts to 17.625%)."

The terms and conditions of B&E's contract defined Monthly Payment Plan as one produced by it in consultation with the client "by which you can pay off your creditors out of your disposable income at rates you can afford. The Monthly Payment Plan will let you make monthly payments to us and will take account of your creditors and our Fees. It will not take account of any matters you have not told us about… It will also take account of the differing requirements of your different Creditors, if there is more than one".

(Until the hearing, B&E had not produced to the Commissioners a copy of the contract it used in its early years of trading, and had maintained that until 1999 its charging clause for management fees was in terms indicating that clients were simply charged 17.625 per cent, and ignored all reference to VAT. Mr Milne QC, for B&E, apologised for its having misled the Commissioners).

When Mr Cochrane became a co-director of B&E with Mr O'Neill in 1997, he assumed particular responsibility for finance and administrative matters. He acquired 40 per cent of its ordinary share capital, Mr O'Neill continuing to hold the remaining 60 per cent.

Mr Cochrane also claimed that in 1998 or 1999 he identified as a "specific problem" the possibility either that B&E's VAT status, or the standard rate of tax, might change during the course of a repayment plan, increasing or, less likely, decreasing its liability to tax, with a resultant impact on profits. He maintained that since all clients were individuals, and thus not VAT registered, "their only interest was in the gross cost to them of the service provided, so we worded the contract in such a way that the fee payable to the company would remain the same no matter what the applicable VAT rate". Further, Mr Cochrane added, the company, or perhaps I should say Mr O'Neill as principal shareholder, decided that its management fees should not then, or in the future, fall below 17.625 per cent, whether liable to VAT or not, and irrespective of any price reductions its competitors might make in the event of fees being found to be exempt from VAT: it had determined not to compete with its competitors on price, but rather on service. I shall deal with that decision shortly.

At some time very late in 1999, B&E introduced a new form of contract containing the following sub clause relating to management charges:

"6. How you pay us.

6a. Unless we agree otherwise, we will deduct, from payments we issue to your creditors, a fee equal to 17.625% of the monthly payment you make to us under the monthly payment plan. However, we have a minimum fee of £29. The actual amount of our fee is shown in the monthly payment plan."

Following introduction of the new contract, Mr Cochrane maintained that, on a client entering into it, B&E dispatched his "Credit Commitment and Financial Statement Details" to him and to his creditors (pp 47-48), but, he contended, the details sent to creditors differed from those sent to the client in one, very important, respect. In the section dealing with credit commitments in the creditor's copy, B&E's management fee was shown as "15% + VAT", whereas in the client's copy it was simply shown as 17.625 per cent. Mr Cochrane's evidence on the point was less than convincing, so that I am not satisfied on the balance of probabilities that both forms were in use, or, if they were, they were dispatched as Mr Cochrane claimed.

When Mr Kirkland paid a control visit to B&E in January 2000 the sample Monthly Payment Plan with which he was provided (p.72) showed the management fee to be 15 per cent plus VAT. Mr Kirkland's Visit Report (pp. 88-89) confirmed that B&E was charging its clients 15 per cent plus VAT for management services.

Reading the clause set out in para 13 above in the context of the whole of the evidence, but particularly in the light of that in the penultimate and last preceding paragraphs, in my judgment it was simply an alternative way of expressing the fact that B&E continued to charge 15 per cent plus VAT for its management services. It did not represent a change in price: nor did it represent a change whereby B&E, although accounting for VAT on supplies, did not charge its clients tax. The very fact that B&E continued to account for VAT reflects a recognition on its part that it was still charging 15 per cent plus VAT, even if it was not explicitly informing its clients of the fact.

Also in 1999 B&E sought further advice from the Commissioners as to the VAT liability of its services, maintaining that they were exempt. With its correspondence B&E submitted a form of contract intended for use by a new subsidiary company. The contract included a charging clause for management services identical to that at para 13 above except that the rate of charge was 17.5 per cent. As the new subsidiary never traded, B&E did not introduce the 17.5 per cent charge rate. It was not until 25 August the following year that the Commissioners rejected its claim for exemption (letter p.35). However, when they eventually did so, they admitted that there was an argument for exempting B&E's collection and money handling services which might have been persuasive had not those services been but an element in a "larger administrative service". B&E could have appealed the Commissioners' decision to the tribunal, but did not do so.

Unknown to B&E, at sometime in 1999 for a limited, undisclosed period the Commissioners accepted that at least some of GP's services were exempt. During that period GP charged its clients 15 per cent for management services.

Mr Cochrane maintained that the market was not at all sensitive to the rates of fees, claiming that that was demonstrated by B&E having increased its market share whilst charging 17.625 per cent during the period GP was making exempt supplies and charging 15 per cent management fees. He explained that from having no market share in 1996 when GP had 80 per cent of the market, B&E had overtaken it by 2001. He added, "Indeed, the only price resistance we have experienced is from those who believed that a service such as ours should always be provided free of charge to the consumer". Whilst accepting that B&E increased its market share as claimed, I am unable to accept Mr Cochrane's statement for early in 2001 the Office of Fair Trading ("the OFT") wrote to B&E following complaints about the manner in which it presented its charges (see p.160 of the main bundle and pp.32-33 of the supplemental bundle) and pointed out that under the Unfair Terms in Consumer Contracts Regulations 1999 "unfair terms are not binding on consumers".

The OFT indicated that it would not take court action against B&E if it were to withdraw or amend its terms and conditions to include, inter alia, in a prominent position on the front page of its contract a statement of its fees and show how they were made up. In evidence, Mr Cochrane said, and I accept, that the OFT would not accept terms which included no reference to VAT; the OFT required all references to fees to have added "plus VAT". But in the event, in a contract introduced early in 2001, B&E answered the question, "How much do our services cost?", as follows:

"You will pay us an initial fee and then a monthly management fee. The initial fee is an amount equal to a single payment under your monthly payment plan as at the time you sign these terms of business. This payment includes VAT …

The monthly management fee is equal to 17.625% (including VAT), rounded to the nearest pound, of each monthly payment plan. However, you will have to pay us at least our minimum monthly fee of £29 (including VAT). We collect the monthly fee when we pay your creditors."

In my judgment, both those clauses, whether read separately or together, would quite clearly have indicated to a client of B&E that he was paying fees for its services which included VAT. And when read in conjunction with Mr Cochrane's admission that the OFT required all reference to fees to be "plus VAT", notwithstanding that the terms introduced were not strictly those so required, I also find that such clients were charged VAT: it was not merely being accounted for by B&E. I am unwilling to read the term "including VAT" as "including VAT (if any)", as Mr Milne submitted I should. (see para 42 below). Further I am unable to accept that the words "including VAT" were inserted solely to indicate to clients that they would not be expected to bear the burden of any change in the VAT position, as B&E claimed. (Even as late as 8 April 2003, in what appeared to be a standard letter addressed to a Mr Saxby, a client of B&E, (p.128), and which Mr Cochrane was unable to explain either in terms of origin or content, B&E specifically stated that it charged its clients VAT on management fees).

There matters rested until, in Debt Management Associates Ltd v CEC (2002) Decision No 17880, the tribunal decided that negotiation and management services in all respects identical to those of B&E were two discrete exempt services. The Commissioners then accepted that B&E's services were also exempt and de-registered it for tax. That resulted in B&E making the voluntary disclosure out of which its appeal arises, and increasing its charging terms for management to 17.625 per cent.

Having dealt with the charging terms B&E used between 1996 and 2003, I must now deal with other aspects of its business that may impact on its claim. First, I should explain that B&E's business expanded at a phenomenal rate in the period in question. In the year to 30 June 1997 turnover was a mere £16,095; by 2002 it had increased to £24,277,434.

The turnover comparison between B&E and GP in the years between 1996 and 2002 was as follows:

	1996	1997	1998	1999	2000	2001	2002
B&E	0	16,095	388,937	1,727,923	6,148,240	21,512,740	24,277,434
G\|P	2,800,000	2,800,000	2,800,000	2,800,000	6,270,809	7,945, 545	9,558,671

It will be recalled that in 1998 or 1999 B&E claimed to have decided under no circumstances in future to reduce its management fees below 17.625 per cent, whether exclusive or inclusive of VAT (see para 12 above). But in a discussion paper produced in December 2002 (pp 118-122), in proposals which incidentally were never effected, B&E invited creditors to consider the following "alternative approach" to dealing with debtors:

"Our proposal is that creditors should commit to write off any balance of a client's debt if that client makes 72 payments or repays at least 90% of his total debt, whichever occurs first. We believe that this arrangement would have a dramatic effect on client longevity since it offers the client a far greater potential benefit than just having the fee paid. We believe that the result of this concession would be to reduce the current decay rate by at least 2/3.

We recognise that this concession by creditors would be of benefit to Baines & Ernst, so we would be willing to reduce the management fee retained on debts to creditors accepting this arrangement to 10% rather than the existing 15%, thus increasing the actual amounts paid to participating creditors." (emphasis added)

(I understand the phrase "decay rate" to be used to describe the rate at which contracts are terminated. Apparently, after about 2 years, most clients of B&E's choose to make their own arrangements for repayment with creditors, or continue repayment direct on the terms arranged by B&E).

The creditors addressed in the discussion paper were not local traders but major organisations and companies such as Barclaycard and Co-op Bank. Since each would be concerned to recover its own debt as quickly as possible, it would undoubtedly consider most carefully the whole of any proposed repayment package put to it, having the power to reject the whole package. It is against that background that I turn to consider B&E's conditional proposal to reduce its management fees from 15 per cent to 10 per cent.

I am quite sure that the reference to existing management fees of 15 per cent in the discussion paper was deliberate, and no mere error on the part of B&E. The paper was addressed to a group with the ability effectively to determine its level of fees, and it was essential that B&E presented a case showing those fees to be reasonable. (Indeed, in evidence, Mr Cochrane admitted that creditors were consulted about B&E's level of charges). I find that it represented to creditors that its management fees in December 2002 were 15 per cent, albeit subject to VAT. The proposal to reduce fees from 15 per cent to 10 per cent clearly indicated a willingness substantially to reduce its management fee level if creditors were prepared to create conditions likely to increase the length of the term clients would remain committed to B&E (estimated to increase from 22 months to 43 months).

I find that, after B&E changed its contract terms in 1999, it continued to charge its clients 15 per cent plus VAT for management services until it de-registered for VAT.

I do, however, accept that B&E charged new clients management fees of 17.625 per cent after the Commissioners accepted that its services were VAT exempt, and continues to charge at that rate. But I am unable to accept that B&E necessarily would have continued to charge at 17.625 per cent irrespective of an adverse effect on its business of a change in rate by a major competitor, being told by creditors that its charges were too high and had to be reduced, or being faced either with the possible consequences of the OFT re-opening its case on the presentation of its charges, or with a client claiming its contract terms to be unfair. (Those consequences, I remind myself, include unfair terms not binding on consumers). I find that B&E now has by far the largest share of the debt management market and maintains its dominant position despite the fact that certain of its smaller competitors have reduced their rates slightly below the 17.625 per cent rate. I should also add that B&E produced a discussion document dated 17 October 2002 (p. 111) entitled, "Subject: reduce our management fee" which was on the agenda for a board meeting on 21 November 2002 (minutes pp. 114-115) as was an agreement between Debt Management Associates and Barclaycard offering free management services to clients which would have been of obvious concern to the B&E board. No evidence was adduced to indicate that the proposals in the document at p. 111 were acted upon.

Mr Cochrane gave as another reason B&E would never have reduced its management fees from 17.625 per cent to 15 per cent the fact that it would have found itself making losses. I accept that it was most unlikely that it would have done so had its fees in the disclosure period been exempt from VAT, for its irrecoverable input tax would then have been a charge on profits and may well have resulted in losses. But in the period with which I am concerned, its services were throughout treated as fully taxable, so that different considerations apply. As B&E's voluntary disclosure shows, during the first year of the disclosure period, input tax and output tax were little different, due mainly, I infer from the whole of the evidence, to B&E having spent very large sums in advertising its services, and on other items that contributed to its very rapid expansion. In the year to 30 June 2001 B&E increased its turnover from approximately £6 million to over £21 million, and overtook GP as market leader. In the last two years of the disclosure period output tax was considerably in excess of input tax, again I infer from the whole of the evidence, because B&E continued to obtain advantage from earlier expenditure on advertising etc and thus had to spend little, if anything, on further expansion in the latter part of the disclosure period.

Mr Cochrane freely admitted that, were I to allow the appeal, B&E intended to return to its clients none of the moneys to be repaid. Referring to contracts entered into up to and including 1999, he maintained that the company could not refund moneys estimated at £1.7 million to persons on those contracts in the voluntary disclosure period as it did not know where they were. I am unable to accept that, without making any attempt to contact them, it is unaware of the whereabouts of all such persons; a single standard letter to former clients would produce some responses on which B&E could act. And, Mr Cochrane added, B&E would not be refunding moneys to those who contracted with it from 1999 onwards as they had not been charged VAT. In my judgment, all of B&E's clients, whether pre- or post 1999 would be entitled to the return of moneys it charged as VAT which was not due were I to allow the appeal, they, as I have already found, having been charged the tax in question.

I might also observe that the instant case differs from those cases involving retailers for B&E entered into individual contracts with clients and must necessarily have known their names and addresses, whereas retailers were unlikely to be able to identify individual customers.

The Law

The only relevant statute law is s. 80 of the Value Added Tax Act 1994, subsections (1) and (3) whereof provide as follows:

"80 Recovery of overpaid VAT

(1) Where a person has (whether before or after the commencement of this Act) paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

(2) . . .

(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant."

It is common ground that the expression "unjust enrichment" must be interpreted in accordance with the jurisprudence of the Court of Justice of the European Communities ("the ECJ"), and that the purpose of subsections 3A, 3B and 3C of s. 80 is merely to transpose that jurisprudence into the UK legislation: and those subsections must therefore be interpreted to give effect to that purpose. (The principles of that jurisprudence are summarised in the next following paragraph, so that I need not deal with those subsections further).

As Mr Milne kindly pointed out in a most helpful skeleton argument, the ECJ jurisprudence on unjust enrichment is conveniently brought together in two recent cases, those of Société Comateb v Directeur général des douanes et droits indirects and related references [1997] STC 1006 and Weber's Wine World v Abgabenberufungskommission Wien (Case C-147/01), the Advocate-General's opinion in which was published on 20 March 2003. He observed that it is clear from those cases, and particularly the opinion of the Advocate-General (Jacobs) in Weber' s Wine World (at paras 45 to 61) that, inter alia:

1) the burden of proving unjust enrichment is on the Commissioners;

2) as a first step towards proving unjust enrichment, the Commissioners must show that the VAT has been "passed on" to clients;

3) there can be no presumption that the VAT has been passed on simply because the retail price was necessarily deemed to be inclusive of VAT;

4) even where the burden of a charge to VAT has been passed on in whole or in part, repayment to the trader of the relevant amount does not necessarily entail his unjust enrichment (A-G Jacobs at para 47; ECJ in Weber's Wine World at para 98).

5) "For example, the trader may choose to curtail any increase in his retail prices and maintain his volume of sales by limiting his profit margin to absorb all or part of the tax. Or else, having decided not to take that course but to increase his prices by the exact amount of the tax, he may find that his profits drop because he is making fewer sales. And he may even choose to absorb part of the tax himself yet still find a drop in sales. In all such cases which are plausible in a situation of keen competition between traders he will have suffered an economic loss as a result of the imposition of an unlawful tax, so that it cannot be said either that he has passed on (all) the burden of that tax to third parties or that he would be unjustly enriched if (an appropriate proportion of ) the tax were reimbursed to him" (A-G Jacobs, para 48: see also ECJ para 99);

6) the Tribunal "must take all available relevant evidence into consideration and reach a fair decision taking full account of whatever likelihood there may be that the Appellant bore any part of the burden of the tax or suffered any economic loss as a result of its imposition": A-G Jacobs, para 60;

7) "Accordingly, the existence and the degree of unjust enrichment which repayment of a charge which was levied though not due . . . entails for a taxable person can be established only following an economic analysis in which all the relevant circumstances are taken into account": ECJ in Weber's Wine World, para. 100; see also para. 80.

Mr Milne observed that the above principles have consistently been followed in the UK courts, see e.g. Marks and Spencer plc v CEC [1999] STC 205 at pp. 236-241 per Moses J, and CEC v National Westminster Bank plc [2003] STC 1072 at paras 19 to 27 per Jacob J.

Submissions for B&E

Mr Milne submitted that the company had not been unjustly enriched. He maintained that it had charged the same percentage rate for management services throughout the period concerned, and contended that its gross sales would not have differed had its supplies been exempt from VAT. The most cogent evidence in support of its claim, he contended, was what had happened since B&E's supplies were accepted by the Commissioners as exempt: the company had maintained its management service fees at 17.625 per cent. He further submitted that if B&E had received an exempt ruling on making application in that behalf in 1999, its subsequent profits would have been exactly the same except as enhanced by VAT.

He explained the main part of B&E's case as one of loss of profits, submitting that it should not be held against it that important decisions had been taken informally; nor should any lack of evidence (see Marks and Spencer at p. 241). In consumer protection terms, the price of a product was what the consumer had to pay. Throughout its existence, B&E's clients had been charged management fees at the rate of 17.625 per cent. If B&E had attempted to make surreptitious changes in the terms of existing contracts some of the Commissioners' allegations might have been justified, but it had not done so.

Mr Milne was unable to recall any case in which it had been held against a taxpayer that it had accounted for VAT in accordance with the Commissioners requirements.

He contended that it was important to look at B&E's input tax situation, for the figures demonstrated that it would have had to continue charging 17.625 per cent (or thereabouts) in 2000 when input tax more or less equalled output tax, otherwise it would have been losing profits.

He submitted that the charging clause for management fees included in the contract introduced in 2001 (17.625 per cent including VAT) meant 17.625 per cent "including VAT if any", the phrasing being totally irrelevant to the clients. He contended that the last thing B&E would have done with an exempt ruling would have been to reduce its fees to 15 per cent: it was confident that it could maintain its charges at 17.625 per cent.

Mr Milne finally submitted that it was unnecessary for the tribunal to indulge in conjecture as to what B&E might have charged: in the real world it would have continued to charge 17.625 per cent. If B&E had been exempt from VAT, it would have made extra profits of £5.9 million.

Submissions for the Commissioners

Mr Mantle accepted that the burden of proving unjust enrichment was on the Commissioners, and for their case to succeed they had to show that, on the balance of probabilities, VAT had been passed on to B&E's clients. Passing on must not be presumed. Mr Mantle submitted that where no mention was made to clients of VAT it did not follow that VAT had not been passed on to them; nor was there any rule that a conscious decision to pass on by a supplier must be proved to establish passing on.

Mr Mantle further submitted that the documentary evidence adduced clearly indicated that throughout the disclosure period B&E charged its clients 15 per cent plus VAT for management services; and even when its management fees were set at 17.625 per cent, mathematically that represented a charge of 15 per cent to which VAT at the standard rate had been added.

He emphasised that unjust enrichment was not a rigidly defined concept, but rather one to be applied by national tribunals to the facts evidenced before them. Further, opinions of Advocate-Generals of the ECJ, whilst undoubtedly relevant and of potential interest, were not binding or authoritative, or of any more than persuasive value, unless the relevant parts of them were incorporated, by quotation or reference, in the judgment of the ECJ: judgments of the ECJ and courts applying them were the authoritative and secure points of reference on matters of law. The Commissioners' refusal to pay B&E's claim did not put them into a position where they had to absorb inputs, B&E never having had to absorb them.

VAT status did have an influence on what inputs a taxpayer purchased. Had its supplies been exempt, B&E would probably have used less advertising: it should not be assumed that it would have made the same purchases had they been exempt.

Mr Mantle submitted that I should deal with the appeal on the hypothesis that B&E did not, and never intended to, charge 17.625 per cent for its management services: I should look forward from 1996 rather than backward from 2003 to see the true picture of what had happened to B&E and to discern its pricing policy. If I were to do so, he contended, I should find that in a free market its charges would never have reached 17.625 per cent. When it commenced its debt management business in 1996 it simply copied GP, so that in a VAT-free world it would probably have charged 15 per cent, or 15 per cent plus irrecoverable input tax. Mr Mantle dismissed Mr Cochrane's claim that B&E changed its policy in 1999 because of concerns about its VAT status, or a possible change in the rate of tax, effectively saying that it was irrelevant, for any change in status or rate of tax would equally have applied to GP and its other competitors; and had B&E known that GP itself had reduced its fees to 15 per cent on the Commissioners temporarily accepting its services were exempt, bearing in mind that GP's turnover exceeded B&E's at the time and it was clearly intent on changing that situation, it was inconceivable that B&E would not have wanted to compete on price with GP. Mr Mantle claimed that B&E continued to charge and account for VAT on the basis of charges of 17.625 per cent tax inclusive – and that remained the case until its charges became exempt.

Mr Mantle contended that Mr Milne's best point was that B&E continued to charge management fees of 17.625 per cent on its supplies being accepted by the Commissioners as exempt. He observed that, by then, clients of both GP and B&E had been paying a total of 17.625 per cent for a considerable time; they were used to it, and it could be inferred that they were prepared to bear it. In any event, he claimed, B&E was a different company in 2003 from 2000: it was bigger, had more market share and more employees. That might have enabled it to do things it could not have done in 2000 when its market share was smaller.

In conclusion, Mr Mantle invited me to find that B&E would not have charged 17.625 per cent for its management services in the disclosure period had those services been exempt; and to determine that this was not a loss of profits case.

Conclusion

Whilst in principle a member State of the European Union must reimburse national charges levied in breach of Community law, it need not do so where that would entail the unjust enrichment of the recipient.

As Mr Mantle observed, unjust enrichment is not a rigidly defined concept, but rather one to be applied to the facts found by courts and tribunals. A-G Jacobs explained its application at para 46 of his opinion in Webers Wine World in the following terms.

". . . A trader who has paid a tax but has in fact passed on the whole burden of it to his customers, without himself suffering any concomitant loss, will clearly be unjustly enriched if he then obtains reimbursement of that tax because it is found to have been unlawful."

But, as A-G Jacobs then observed (at para 47), even where the burden of the charge has been wholly passed on, repayment to a trader does not necessarily entail his unjust enrichment, citing the examples at para 36(5) of my decision.

I first turn to consider whether B&E passed on the tax to its clients.It is quite plain from my findings of fact that the VAT B&E charged under the terms and conditions of the contract in use from 1996 to late 1999 was passed on to its clients. Likewise, in the contract in use from 2001 to 2003, the VAT was passed on.

That leaves the contract in use from late 1999 until early 2001. Although I earlier found that the charging clause relating to management fees was simply an alternative way of B&E expressing the fact that it charged 15 per cent plus VAT, it does not necessarily mean that the VAT was passed on to its clients. However, as I have also found that introduction of the new clause meant that B&E continued to charge its clients tax, it appears to me logically to follow that it did pass on the tax.

(In that connection, I observe that, whilst it is not for a taxpayer to prove that he has passed on the burden of the tax to a third party, the tax authorities cannot be expected to prove that the burden has been passed on without the taxable person's co-operation and access to such relevant records as he may have kept (paras 58 and 59 of the opinion of A G Jacobs in Weber's Wine World. By extension, those observations must also apply to a claim for loss of profits).

Attractive though Mr Milne's submission that this is simply a case where B&E's profits would have been £5.9m million more had not it had to pay VAT may be, I am unable to accept it. In contrast, I believe the submissions of Mr Mantle to have considerable force. In my judgment, in a free market B&E's management charges would not have reached 17.625 per cent. At the outset, it simply copied GP's operation. In 1999, it rephrased its contracts but, as I earlier found, that did not represent a change in price, nor did it mean that its clients did not pay VAT.

It is quite plain from the evidence, and I find, that by 1999 B&E was intent on expanding at as rapid a rate as possible, and determined to replace GP as market leader. Against that background, I agree with Mr Mantle that it is inconceivable that B&E would not have competed on price with GP had it known that GP was charging exempt management fees of 15 per cent. All the evidence points to B&E having kept the rate of its management charges under continual review in the disclosure period, if necessary with a view to their being reduced to compete with GP and other debt management agencies.

It is also clear from my various findings of fact that B&E represented to its clients and their creditors that its charges were 15 per cent plus VAT: they were not 17.625 per cent.

In my judgment, B&E passed on the whole burden of the VAT to its clients, and itself suffered no concomitant loss; it would not have charged management fees of 17.625 per cent in the disclosure period had its services been exempt from VAT. It follows that it would be unjustly enriched were I to allow its appeal. I therefore dismiss the appeal.

I make no direction as to costs.

DAVID DEMACK

CHAIRMAN

RELEASE DATE: 23 September 2004

Amended Decision Release Date: 4 October 2004

MAN/03/661

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