The FTT has supported HMRC’s refusal of the taxpayer’s claim for overpaid VAT on the basis of unjust enrichment.
This case concerns a claim for overpaid output tax of £12 million on infrastructure connection charges for water and sewerage. The Fleming claim spans the period between 1 April 1990, when the charges were introduced as part of privatisation, and 4 December 1996, from when the taxpayer zero rated the charges. The infrastructure charges are one of the charges for connecting new premises to the mains. On privatisation such charges were regulated and the rules included maximum rates that could be charged. HMRC did not dispute that the charges should be zero rated where the supply of the water is zero rated. They accepted that the liability of the charges should follow the underlying supply. However, they refused the claim on the grounds of unjust enrichment. The First-tier Tribunal (FTT) agreed with HMRC and dismissed the appeal.
The FTT noted the existing case law, such as Lady & Kid (C-398/09), which stated the exception to a repayment of tax by the authorities is justified where a refund by the authorities would mean the taxpayer would essentially be paid the tax twice – once by the customer and once by HMRC. This would be the case where the customer and not the supplier bore the burden of the VAT incorrectly charged and paid (i.e. the VAT was passed on). The FTT also noted Weber’s Wine World Handels-GmbH (C-147/01) where it was stated that even where the VAT is passed on an unjust enrichment defence does not always apply if the taxpayer has suffered a fall in sales as a result of VAT being incorrectly charged and so has suffered a loss in that way. Therefore, the existence and extent of unjust enrichment could only be established following economic analysis. The initial burden of proof to show VAT has been passed on lies with HMRC, it is then up to the taxpayer to demonstrate any loss once passing on has been evidenced.
The taxpayer accepted that it did not suffer any fall in sales on the charging of VAT. It was a monopoly, the supply was essential, and the price of connection compared to overall building costs was so small that charging VAT in itself would not have resulted in a fall in demand. The taxpayer’s argument however, was that the maximum permitted charge, which the taxpayer always charged, had been set as a gross sum, taking VAT into account and was lower than it would have been if zero rating had applied, causing loss of profit.
The FTT concluded that on the balance of probabilities, it was more likely than not that the charges for connection would have been set at the same level irrespective of VAT. The main reason given was that the Regulator would not have considered gross price as being relevant in this sector. The FTT noted that in the Ofwat period, (post 1994) no mention of VAT was made in documentation and reports etc. In 1989 again the Regulator would have known that most supplies of water were zero rated and that where VAT was charged on non-domestic heavy industry supplies that VAT would have been recoverable.
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