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UK Drops 'Unjust Enrichment' Defence On VAT Reclaims

by Robin Pilgrim, for LawAndTax-News.com, London

20 February 2009


The UK tax authority, HM Revenue and Customs, has announced that, in the light of a recent House of Lords judgment, it will no longer use the 'unjust enrichment' defence to argue against value-added tax claims by businesses.

HMRC has arrived at this decision after the Lords ruled on February 4 that Marks and Spencer was entitled to a full refund of VAT paid in respect of teacakes sold over a twenty-year period.

In the long running case, the retailer had successfully proved that the tax authorities had misclassified the confection as a 'luxury' for VAT purposes, but HMRC had stubbornly refused to pay the refund, arguing in the courts that this would 'unjustly enrich' M&S. The Law Lords rejected this challenge however, ruling that HMRC was discriminating against M&S by invoking this defence.

Where a business has accounted for too much VAT and makes a claim to recover it, HMRC can refuse to pay that claim if they can show that payment would unjustly enrich the claimant. However, until the law was changed in 2005, this unjust enrichment defence could only be used against a specific category of claimants. This meant that it was possible that a claim by one business could be refused whilst a similar claim from another business could not.

Marks & Spencer fell within the former category and challenged the discriminatory nature of the legislation.

However, in an announcement on February 18, HMRC stated that the unjust enrichment defence would no longer be used against any claim made before May 26, 2005, the date on which the law was amended to remove the discrimination from the legislation.

The tax authority also announced that claims made before May 26, 2005, that were refused by HMRC on the grounds of unjust enrichment and have still not been settled will now be paid, "subject to verification." Furthermore, claims where the unjust enrichment defence was not challenged or was upheld, in the courts, may be resubmitted for consideration, subject to the relevant time limits.

As a result of the change in the law made in the Finance (No. 2) Act 2005, which applies the unjust enrichment defence to all categories of claimants, HMRC informed that the judgment of the House of Lords does not affect any claim made on or after May 26, 2005.


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