VAT Law and the Compatibility of Statutory Schemes with EU Law: A Case Study, Lecture notes of Law

Download VAT Law and the Compatibility of Statutory Schemes with EU Law: A Case Study and more Lecture notes Law in PDF only on Docsity! Hilary Term [2017] UKSC 29 On appeal from: [2015] EWCA Civ 82 JUDGMENT The Commissioners for Her Majesty’s Revenue and Customs (Appellants) v The Investment Trust Companies (in liquidation) (Respondents) The Commissioners for Her Majesty’s Revenue and Customs (Respondents) v The Investment Trust Companies (in liquidation) (Appellants) before Lord Neuberger, President Lord Mance Lord Reed Lord Carnwath Lord Hodge JUDGMENT GIVEN ON 11 April 2017 Heard on 17, 18 and 19 May 2016 Appellants/Respondents (HMRC) Respondents/Appellants (Investment Trust Companies) Stephen Moriarty QC Laurence Rabinowitz QC Andrew Macnab Andrew Hitchmough QC Michael Jones (Instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs) (Instructed by PricewaterhouseCoopers Legal LLP) Page 4 7. It was also possible for an ITC to be registered for VAT (if it invested in securities outside the EU), and in that event to recover, as input tax, some of the VAT which it had paid to its Manager. The F&C Trust and the M&G Trust made no such supplies, but the Kleinwort Trust did, and recovered 58.4% of the VAT charged by its Manager (that being the percentage of its portfolio which was invested outside the EU). Its claim against the Commissioners has therefore been adjusted to take account of the sums which it has already recovered as input tax: rather than claiming every £100 which it paid to its Manager in respect of VAT, it claims £41.60, being the difference between the £100 and the £58.40 which it recovered as input tax. 8. The essential pattern was therefore as follows: 1. The Managers supplied investment management services to the Lead Claimants under contracts providing for the payment of fees plus VAT if applicable. 2. The Managers charged the Lead Claimants VAT on the supply of those services, and included the VAT charges on the invoices which they issued to the Lead Claimants. 3. The Lead Claimants paid the invoices. They might or might not be able to recover some of the VAT as input tax. 4. The Managers made periodic VAT returns in which they: (i) accounted for the VAT chargeable on their supplies of investment management services as output tax; (ii) deducted as input tax the VAT which they had paid to third parties for supplies received in the course of their business; and (iii) paid the difference between their output tax and input tax to the Commissioners. 9. It transpired that the supplies of the investment management services were exempt from VAT under article 13B(d)(6) of the Sixth VAT Directive (77/388/EEC). That was established by the European Court of Justice in JP Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Comrs (Case C- 363/05) [2007] ECR 1-5517. Although the UK failed to transpose article 13B(d)(6) Page 5 correctly into national legislation until 1 October 2008, it had direct effect at all material times. It is therefore common ground between the parties that the Lead Claimants paid the Managers the amounts they did in respect of VAT, and that the Managers accounted for VAT to the Commissioners, under a mistake of law. The Managers’ claims against the Commissioners 10. In early 2004, when the Claverhouse litigation began and was publicised, the Managers of the F&C Trust and the M&G Trust made claims to the Commissioners under section 80 of the Value Added Tax Act 1994 for refunds in respect of VAT accounting periods from 2001 to 2004. It will be necessary to return to section 80, the material provisions of which are set out in para 75 below. Claims were not made in relation to earlier accounting periods because of the three year limitation period imposed by section 80(4). For the same reason, no claim was made by the Managers of the Kleinwort Trust, which had gone into winding up in 1998. Following the Claverhouse judgment, the Commissioners allowed the claims and repaid the relevant amounts (as will be explained shortly) to the Managers, with interest. In accordance with section 80, and regulations made pursuant to section 80A, the Commissioners required the Managers to enter into approved “reimbursement arrangements” with the Lead Claimants, so that the refunded VAT and interest were passed on by the Managers to them. 11. Subsequently, the decision of the House of Lords in Fleming (trading as Bodycraft) v Revenue and Customs Comrs [2008] UKHL 2; [2008] 1 WLR 195 established that the retrospective manner in which the three year limitation period had been introduced (by an amendment to the 1994 Act, effected by the Finance Act 1997, which reduced the previous period) was incompatible with EU law, and that the time bar had to be disapplied in respect of rights which had accrued before it came into effect on 4 December 1996. The Managers then made further claims in respect of accounting periods ending before that date. These claims were again allowed, with interest, and the appropriate repayments were made to the Managers, who in turn passed them on to the Lead Claimants. 12. As a result of these arrangements, the Lead Claimants were refunded the VAT which they had paid to the Managers, subject to two exceptions. First, the Managers were unable to make claims in respect of accounting periods ending on or after 4 December 1996 which were time barred under section 80(4). In practice, that meant that claims could not be made by the Managers of the Kleinwort Trust in relation to accounting periods ending between 4 December 1996 and 20 March 1998, when the Kleinwort Trust went into liquidation. The corresponding periods in relation to the F&C Trust and the M&G Trust ended on 6 and 1 April 2001 respectively. Those periods have been referred to in these proceedings as the “dead Page 6 periods”. It is common ground that the limitation period in section 80(4) is compatible with EU law. 13. Secondly, the amounts repaid to the Managers were calculated on the basis that, under section 80(2A), it was necessary to set against the output tax for which they had accounted, the amount of the input tax which they had deducted. It is a matter of agreement that that was the correct approach to the application of section 80. In the illustrative example given in para 6 above, that means that the Managers were entitled to repayment of the £75 which they had paid to the Commissioners, but not of the £25 which they had retained in their own hands. 14. It is a matter of agreement that, although the Managers were only entitled under section 80 to reimbursement of the notional £75, the Commissioners could have made the refunds conditional on the Managers’ undertaking to repay to the Lead Claimants the full amount which they had been mistakenly charged (ie, the notional £100). It is agreed that the Commissioners did not do so because they accepted the Managers’ assertion that, if they had known that the input tax was non- deductible, they would have passed on that cost to the Lead Claimants by charging a higher price for their services. In the present proceedings, however, it is accepted that that assertion was erroneous: had the true position been known, the Managers would not have sought to increase the price of their services to the Lead Claimants. Instead, as Henderson J found after trial, they would have absorbed the input tax as a business expense. In the event, the notional £25 was later refunded to the Kleinwort Trust and the F&C Trust by their respective Managers, but it was not refunded to the M&G Trust. The proceedings below 15. The ITCs brought proceedings against the Commissioners in which they sought payment of the amounts which had been paid by them to their managers, to the extent that they had not been recovered under the statutory scheme established by section 80 or otherwise: in other words, the amounts which the managers could not claim because any claim would be time-barred, and the amounts which the managers had not paid to the Commissioners but had retained and set against input tax (unless those amounts had been refunded to the ITC in question by its manager). The ITCs’ claims were based on unjust enrichment, or alternatively on EU law. 16. The claims of the Lead Claimants proceeded to a trial on liability. After trial, the judge held [2012] EWHC 458 (Ch): Page 9 22. In this appeal by the Commissioners against the decision of the Court of Appeal (in respect of the notional £75 paid in respect of dead periods), and cross- appeal by the Lead Claimants (in respect of the notional £25), there are three key questions. First, did the Lead Claimants have a common law claim against the Commissioners in principle, subject to any statutory exclusion of such a claim? Secondly, if so, did section 80 of the 1994 Act bar such a claim? Thirdly, if the Lead Claimants have no claim against the Commissioners, either because no such claim is recognised at common law or because a common law claim is barred by section 80, is that compatible with EU law? The common law claim 23. The Lead Claimants argue that customers who pay undue VAT charged by their supplier have a claim against the Commissioners based on unjust enrichment, unless such a claim is excluded by statute. The first question is whether that is correct. If not, that in itself provides an answer to the claims made in these proceedings, subject to any issue arising under EU law. 24. In answering the question, both parties followed the approach adopted by Lord Steyn in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227, and asked: (a) Has the defendant been benefited, in the sense of being enriched? (b) Was the enrichment at the claimant’s expense? (c) Was the enrichment unjust? (d) Are there any defences? Were the Commissioners enriched? 25. There is no dispute that the Commissioners were enriched to the extent of the notional £75. What is in dispute is whether they were also enriched to the extent of the notional £25 which they did not receive. The judge held that they were. Although the £25 was not paid to the Commissioners by the Managers, it enriched the Commissioners, in his view, by being set against the input tax which the Commissioners would otherwise have been obliged to pay or credit to the Managers: Page 10 that is to say, the tax which the Managers had paid on the goods and services supplied to them for the purposes of their business of supplying investment services. 26. The Court of Appeal considered this reasoning to be fallacious on the basis that if the supply of services by the Managers was not taxable, then the Managers had no right to deduct as input tax the VAT which they had paid to their own suppliers. The Managers retained the notional £25 in satisfaction of what the court regarded as a purported obligation, on the part of the Commissioners, which never existed. The Commissioners did not, therefore, benefit from the Lead Claimants’ payment of the notional £25. An order compelling them to pay that amount to the Lead Claimants would not reverse an enrichment but leave them worse off, having received £75 and made “restitution” of £100. Any claim to restitution of the £25 should therefore have been directed against the Managers. 27. In this appeal, counsel for the Lead Claimants argued that when the £25 was paid to the Managers, the position under the applicable UK legislation was that the Managers were entitled to deduct their input tax in satisfaction of an obligation owed to them by the Commissioners. They continued to be entitled to account to the Commissioners for VAT, notwithstanding that it was not lawfully due under EU law, and therefore remained entitled to claim reimbursement in respect of input tax, until the position under UK law was changed: Becker v Finanzamt Münster- Innenstadt (Case C-8/81) [1982] ECR 53; VDP Dental Laboratory NV v Staatsecretaris van Financiën (Joined Cases C-144/13, C-154/13 and C-160/13) [2015] STC 1133. The Court of Justice had rejected the argument that a domestic levy which was incompatible with EU law was to be treated as having never existed: Ministero delle Finanze v IN CO GE’90 Srl (Joined Cases C-10/97 to C-22/97) [1998] ECR I-6307. 28. I am unable to accept this argument. The case of Ministero delle Finanze v IN CO GE’90 Srl merely establishes that national legislation which is incompatible with EU law, although inapplicable in so far as it is incompatible, is not a nullity for all purposes. The case concerned claims for the repayment of a charge which had been levied under Italian legislation which was inconsistent with EU law. A preliminary issue before the national court was whether the claims fell within its jurisdiction: an issue which turned on whether they were of a fiscal or a civil nature. The question which troubled the national court was whether, in deciding that issue, it should treat the national legislation as set aside in its entirety, or whether it could have regard to the legislation for the purpose of characterising the nature of the relationship between the parties at the time when the contested amounts were paid. The Court of Justice held that, subject to compliance with the principles of non- discrimination and effectiveness, the detailed rules which applied for the repayment of a charge, and the classification for that purpose of the legal relationship established when the charge was levied, were matters to be determined under national law (para 26). Page 11 29. The cases of Becker and VDP Dental Laboratory are more directly in point. In the former case, VAT had been levied under domestic law in respect of services which were exempt under the relevant directive, and an issue was raised as to the consequences of granting the exemption retrospectively after the mistake was discovered. In the course of its judgment, the Court of Justice stated that, by availing themselves of an exemption from VAT, persons entitled to the exemption necessarily waived the right to claim a deduction in respect of input tax (para 44). An analogous conclusion was reached in the VDP Dental Laboratory case, where an exemption provided for under national law was incompatible with the relevant VAT directive. The court held that the taxable person was not entitled both to benefit from the exemption and to exercise the right to deduct input tax (para 40). It follows from these authorities that the Managers could not both claim reimbursement of the output tax which they had paid to the Commissioners, under section 80 of the 1994 Act, on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable. 30. The Commissioners were not, therefore, enriched by the Managers’ retention of the notional £25, and the Managers have, in principle, no defence to a claim by the Lead Claimants for the restitution of that amount. That conclusion is as one would expect. The Lead Claimants’ claim to restitution against the Commissioners proceeds on the basis that the supplies which they received from the Managers were exempt from VAT. That being so, it would be surprising if they could present that claim, in relation to the measure of restitution, on a basis which was predicated on the supplies being taxable. 31. It follows that the Commissioners’ enrichment was only to the extent of the notional £75. Was the enrichment at the Lead Claimants’ expense? 32. There is no doubt that, in economic terms, the Commissioners were enriched at the expense of the Lead Claimants. On the mistaken premise that the supplies were taxable, the Lead Claimants were charged tax by the Managers, and paid it to them in accordance with their contract. On the same premise, the Managers were obliged to account to the Commissioners for the tax chargeable on their supplies, and to pay them the output tax in respect of each accounting period, after deducting their input tax. The net result of the mistake was that the Lead Claimants were worse off by the amount of the Managers’ output tax, and the Commissioners were better off to the extent that that amount exceeded the Managers’ input tax. Page 14 39. First, it is important, when dealing with personal claims based on unjust enrichment, to bear in mind what was said by Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 578, when rejecting a submission that, when dealing with a claim to restitution based on unjust enrichment, it was for the court to consider the question of injustice or unfairness on broad grounds, and that it should deny recovery if it thought that it would be unjust or unfair to hold the defendant liable: “The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle.” As Lord Steyn remarked in Banque Financière, unjust enrichment ranks next to contract and tort as part of the law of obligations (p 227). A claim based on unjust enrichment does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis: legal rights arising from unjust enrichment should be determined by rules of law which are ascertainable and consistently applied. Without going as far as Scrutton LJ, who described the legacy of Moses v Macferlan (1760) 2 Burr 1005 as “a history of well-meaning sloppiness of thought” (Holt v Markham [1923] 1 KB 504, 513), McLachlin J rightly cautioned against the “tendency … to view the action for unjust enrichment as a device for doing whatever may seem fair between the parties”: Peter v Beblow (1993) 1 SCR 980, 988. 40. Secondly, the adoption of the concept of unjust enrichment in the modern law, as a unifying principle underlying a number of different types of claim, does not provide the courts with a tabula rasa, entitling them to disregard or distinguish all authorities pre-dating Lipkin Gorman. The point is illustrated by the judgment of Floyd LJ in TFL, where the decision in Ruabon Steamship Co Ltd v London Assurance [1900] AC 6 was put to one side on the basis that “the House of Lords … was not looking at the case through the eyes of the modern law of unjust enrichment” (para 39). Although judicial reasoning based on modern theories of unjust enrichment is in some respects relatively novel, there are centuries’ worth of relevant authorities, whose value should not be underestimated. The wisdom of our predecessors is a valuable resource, and the doctrine of precedent continues to apply. The courts should not be reinventing the wheel. 41. Thirdly, as the judge observed in the present case, in remarks with which Lord Clarke expressed agreement in Menelaou (para 19), Lord Steyn’s four questions are no more than broad headings for ease of exposition. They are intended to ensure a structured approach to the analysis of unjust enrichment, by identifying Page 15 the essential elements in broad terms. If they are not separately considered and answered, there is a risk that courts will resort to an unstructured approach driven by perceptions of fairness, with consequent uncertainty and unpredictability. At the same time, the questions are not themselves legal tests, but are signposts towards areas of inquiry involving a number of distinct legal requirements. In particular, the words “at the expense of” do not express a legal test; and a test cannot be derived by exegesis of those words, as if they were the words of a statute. 42. The structured approach provided by the four questions does not, therefore, dispense with the necessity for a careful legal analysis of individual cases. In carrying out that analysis, it is important to have at the forefront of one’s mind the purpose of the law of unjust enrichment. As was recognised in Menelaou (para 23), it is designed to correct normatively defective transfers of value, usually by restoring the parties to their pre-transfer positions. It reflects an Aristotelian conception of justice as the restoration of a balance or equilibrium which has been disrupted. That is why restitution is usually the appropriate remedy. 43. The nature of the various legal requirements indicated by the “at the expense of” question follows from that principle of corrective justice. They are designed to ensure that there has been a transfer of value, of a kind which may have been normatively defective: that is to say, defective in a way which is recognised by the law of unjust enrichment (for example, because of a failure of the basis on which the benefit was conferred). The expression “transfer of value” is, however, also too general to serve as a legal test. More precisely, it means in the first place that the defendant has received a benefit from the claimant. But that is not in itself enough. The reversal of unjust enrichment, usually by a restitutionary remedy, is premised on the claimant’s also having suffered a loss through his provision of the benefit. 44. This was recognised in Menelaou, as was noted in para 37 above. It was explained more fully by Lord Clyde in Banque Financière, citing a maxim of Pomponius: “My Lords, the basis for the appellants’ claim is to be found in the principle of unjust enrichment, a principle more fully expressed in the Latin formulation, nemo debet locupletari aliena jactura [no-one should be enriched by another’s loss] ... Without attempting any comprehensive analysis, it seems to me that the principle requires at least that the plaintiff should have sustained a loss through the provision of something for the benefit of some other person with no intention of making a gift, that the defendant should have received some form of enrichment, and that the enrichment has come about because of the loss.” (p 237) Page 16 45. It should be emphasised that there need not be a loss in the same sense as in the law of damages: restitution is not a compensatory remedy. For that reason, some commentators have preferred to use different terms, referring for example to a subtraction from, or diminution in, the claimant’s wealth, or simply to a transfer of value. But the word “loss” is used in the authorities, and it is perfectly apposite, provided it is understood that it does not bear the same meaning as in the law of damages. The loss to the claimant may, for example, be incurred through the gratuitous provision of services which could otherwise have been provided for reward, where there was no intention of donation. In such a situation, the claimant has given up something of economic value through the provision of the benefit, and has in that sense incurred a loss. Direct and indirect provision of a benefit 46. Situations in which the defendant has received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit, usually arise where the parties have dealt directly with one another, or with one another’s property. Common examples are the gratuitous payment of money, or provision of goods or services, by the claimant to the defendant, where there was no intention of donation. In such a situation, if the enrichment of the defendant is unjust - if, in other words, the transfer of value is defective in a sense recognised by the law of unjust enrichment - then the claimant is prima facie entitled to have the enrichment reversed. 47. There are, however, situations in which the parties have not dealt directly with one another, or with one another’s property, but in which the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real. 48. One such situation is where the agent of one of the parties is interposed between them. In that situation, the agent is the proxy of his principal, by virtue of the law of agency. The series of transactions between the claimant and the agent, and between the agent and the defendant, is therefore legally equivalent to a transaction directly between the claimant and the defendant. Similarly, where the right to restitution is assigned, as in Equuscorp Pty Ltd v Haxton [2012] HCA 7; 246 CLR 498; 86 AJLR 296, the claimant stands in the shoes of the assignor, and is therefore treated as if he had been a party to the relevant transaction, and the defendant’s enrichment had been directly at his expense. Another situation is where, as in Relfo, an intervening transaction is found to be a sham (para 121). Since the sham is created precisely in order to conceal the connection between the claimant and the defendant, it is disregarded when deciding whether the latter was enriched Page 19 that a person should contribute to an outlay merely because he has derived a material benefit from it” (p 15). 54. The Earl of Halsbury LC, in a speech with which the other members of the Committee agreed, emphasised the fact that the owners were strangers to the exercise undertaken by the insurers, and the absence in those circumstances of any reason why, in justice, they should contribute towards its cost: “[T]his is the first time in which it has been sought to advance that principle [of contribution] where there is nothing in common between the two persons, except that one person has taken advantage of something that another person has done, there being no contract between them, there being no obligation by which each of them is bound, and the duty to contribute is alleged to arise only on some general principle of justice, that a man ought not to get an advantage unless he pays for it. So that if a man were to cut down a wood which obscured his neighbour's prospect and gave him a better view, he ought upon this principle to be compelled to contribute to cutting down the wood.” (p 12) The Lord Chancellor’s example did not involve anything which might have been argued to be an unjust factor, but the position would scarcely be different if it had: if, for example, the man had cut down the wood in the mistaken belief that the trees were diseased. 55. Another illustration of the need for a loss to be incurred through the provision of the benefit, also cited to the Court of Appeal in the TFL case, is the case of Edinburgh and District Tramways Co Ltd v Courtenay 1909 SC 99. It concerned a contract between a tramway company and an advertising firm, under which the firm paid a rental for the right to display advertising on the tramcars. It was up to the firm to provide the boards around the upper deck of the tramcars, on which the advertisements were displayed. The tramway company subsequently constructed new tramcars with “decency boards” already supplied, saving the advertising firm the expense of fitting its own. The tramway company’s claim against the advertising firm for the cost of fitting the decency boards was rejected, on the ground that the tramway company had not incurred any loss through the provision of the benefit. Lord President Dunedin observed that “there are certain marks or notes of the situation in which recompense is due, and I think that one mark or note is that the person who claims recompense must have lost something” (pp 105-106). The Lord President also emphasised that the company had been acting for its own purposes. Referring to earlier authorities, he remarked that in the case at hand “you have the same element that went to the decision of some of these eases, that the thing done Page 20 was as much for the benefit of the man who did it as for that of the other person” (p 106). The Lord President illustrated his opinion with an illuminating example: “One man heats his house, and his neighbour gets a great deal of benefit. It is absurd to suppose that the person who has heated his house can go to his neighbour and say - ‘Give me so much for my coal bill, because you have been warmed by what I have done, and I did not intend to give you a present of it.’” (p 105) 56. The importance of identifying a loss arising through the provision of a benefit is also illustrated by the case of TFL, where a claim based on unjust enrichment was brought by a company, A, against a defendant, B, in order to recover the costs which A had incurred in earlier legal proceedings. Those proceedings had been brought by A in order to recover a debt from a third party, C, and had been successfully defended on the ground that the debt was due, not to A, but to B. After B recovered the debt, A brought proceedings against B on the basis that A had conferred a benefit on it by bringing the earlier proceedings and thereby clarifying B’s right to recover the debt. Since A had done so under an erroneous understanding of its rights, it argued that B had therefore been unjustly enriched at its expense. The Court of Appeal, by a majority (Sir Stanley Burnton dissenting), held that the claim could not be summarily dismissed. The court had understandable difficulty in identifying the benefit which had supposedly been conferred by A on B (para 50), and accepted that the benefit, “whatever it consists of”, had not been directly provided by A to B (para 54). It appears to have considered that a causal link between A’s payment of the costs of the proceedings and an indirect benefit to B was nevertheless arguably sufficient (para 64). The fact that A had been acting in its own interests was considered to be no answer (para 67). 57. The court could hardly have reached the same conclusion if, when considering the “at the expense of” question, it had focused on the need to identify a transfer of value from the claimant to the defendant. A had not provided any benefit directly to B. At best, B had received an incidental benefit as the result of A’s pursuit of its own interests. The facts of the case, so far as the “at the expense of” question is concerned, were not materially distinguishable from those of Lord Dunedin’s example of the householder whose heating warms his neighbour’s house. Furthermore, A’s erroneous understanding of its legal rights did not in any event bear on the justice of B’s incidentally benefiting from the clarification of the legal position: one might cite Pollock CB’s rhetorical question in Taylor v Laird (1856) 25 LJ Ex 329, 332, “One cleans another’s shoes; what can the other do but put them on?” A had received the legal services it had bargained for when it incurred the expense (and, if it also had to meet its opponent’s costs, that was a risk inherent in litigation, which it voluntarily assumed). Even bearing in mind that the Court of Page 21 Appeal was dealing with a strike-out application, the majority of the court were wrong in not summarily dismissing the claim. 58. It is interesting to note that similar claims were rejected long ago in Scotland, on the basis that the litigant had been pursuing his own interests. More, in his Notes to Stair’s Institutions (1832), states: “a person who, for his own benefit, carries on an expensive law-suit, which, in the result, establishes some point as beneficial to other neighbouring proprietors as to himself, can make no claim against them for any part of the expense incurred by him. And Lord Stair, in the text, states the case of a person who reduces [sets aside] a right as void, and thereby lets in the claims of third parties, which are ultimately preferred to his own, yet he says, that ‘as he was doing his own business, not theirs, he can claim no share from them of his expenses.’” (p liv) Hume’s Lectures (1786-1822) are to the same effect, stating in relation to the person who brings an action: “Now, though it should so happen, (as very often it must,) that he settles some point of law, in the decision of this lawsuit of his, and thus does a service to a number of other persons, whose property, or concerns, are in the like situation; yet still the cost of this lawsuit is his peculiar and exclusive concern. He can recover no part of it from his neighbours, or any of them, for whose benefit he probably never would have stirred in the matter.” (Vol III, p 167, citing the unreported case of Ferguson v Smyth, 18 November 1802, SC Old Sess Pap, vol 437, No 30.) Economic reality 59. Nor is the “at the expense of” requirement satisfied by a connection between the parties’ respective benefit and loss merely as a matter of economic or commercial reality. Economic reality is not only a “somewhat fuzzy concept”, as Moses LJ described it in Menelaou [2014] 1 WLR 854, para 62, but one which is difficult to apply with any rigour or certainty in this context, or consistently with the purpose of restitution on the ground of unjust enrichment. An inquiry into where the economic burden of an unjust enrichment has fallen is liable to be a very complex Page 24 64. Lord Carnwath analysed the case in terms of the law of equity rather than unjust enrichment. He considered that the moneys held by the solicitors following the sale of the first property, and used to purchase the second property, were held on a Quistclose-type trust for the bank (Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567). On that footing, it followed that the bank was subrogated to the lien of the unpaid vendor of the second property, so as to give it an equitable interest in the property. In other words, the vendor had a lien over the property, to secure his right to payment of the purchase price, as long as he remained unpaid. The bank, on discharging the parents’ obligation to pay the vendor, became entitled in equity to the benefit of that lien (or, strictly analysed, to a new lien to secure its own right to repayment) by subrogation. 65. The other members of the court held that the bank should be subrogated to the unpaid vendor’s lien on the basis of unjust enrichment, since it had mistakenly authorised the use of the proceeds of sale of the first property (which it could otherwise have required to be applied to discharge the debt owed to itself) to purchase the second property, thereby providing the defendant with a benefit at its expense. Lord Clarke proceeded on the basis that “the two arrangements, namely the sale of [the first property] and the purchase of [the second property], were not separate but part of one scheme, which involved the bank throughout” (para 25). Lord Neuberger agreed, observing that “it is appropriate not merely to consider the purchase of, and charge over, [the second property] as a single composite transaction”, applying the approach to property purchases involving a charge which was adopted in Abbey National Building Society v Cann [1991] 1 AC 56, but that it was “also appropriate in the present case to treat the sale of [the first property] and the purchase of [the second property] as one scheme, at least for present purposes” (para 67). Lord Kerr and Lord Wilson agreed with both judgments in relation to this issue. 66. On that basis, Lord Clarke considered that the conclusion that there had been a transfer of value between the bank and the defendant gave effect to “the reality of the transaction”, notwithstanding the absence of a direct payment by the former to the latter (para 33). Lord Neuberger agreed, stating: “[T]here was in reality a single transaction, and it was from that transaction that [the defendant] directly benefitted, even though the benefit was effected at the direction of the Menelaou parents. The benefit to [the defendant] was direct because it arose as the immediate and inevitable result of the very transaction to which she was party and which gave rise to the unjust enrichment.” (para 73) Page 25 “At the expense of” in the present case 67. Turning to the issue raised in the present case, the only English authority cited in argument which contains a discussion of the “at the expense of” question in relation to taxation is the decision of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380. The case concerned a claim by a bank for restitution of money which it had paid to a local authority under a void swap transaction. The bank had also entered into hedging arrangements with a third party which protected it against loss. In considering whether English law recognised a defence of passing on, the Court of Appeal discussed the requirement that the defendant’s enrichment should be at the expense of the claimant. Evans LJ, delivering the leading judgment with which Saville LJ agreed, referred to a range of authority and academic writing from other jurisdictions, including two authorities concerned with taxes paid under a mistake: the decision of the United States Federal Court of Appeals for the Second Circuit in 123 East Fifty-Fourth Street Inc v United States (1946) 157 F 2d 68, and the decision of the High Court of Australia in Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd. He noted that the cases raised a “question, akin to agency, which is whether the taxpayer should be regarded as having collected tax from his customers on behalf of the taxing authority”, and that it had been said by Learned Hand J in the 123 East Fifty- Fourth Street case that any tax recovered by the taxpayer would be held by him as a fiduciary for his customers. Similarly, in the Royal Insurance case it had been said that if it was established that the plaintiff had charged its policy-holders the tax as a separate item, it would be entitled to recover the money from the tax authority but would then hold it as a constructive trustee. In the event, however, Evans LJ found the taxation cases of little assistance, since on the facts of the case no question of a constructive trust or of any obligation to account to customers could arise (p 391). Morritt LJ, with whose judgment Saville LJ also agreed, emphasised that the plaintiff was legally and beneficially entitled to the money it paid to the authority, and that the case was not one in which the claimant held the money claimed as a bare trustee or tax collector such as, arguably, in the 123 East Fifty-Fourth Street case (p 400). 68. It has not been argued in the present appeal that the Managers held the amounts paid to them by the Lead Claimants in respect of VAT as agents or trustees or in any other fiduciary capacity. In the circumstances, it is unnecessary to consider the American and Australian authorities in any detail. The dissenting opinion of Learned Hand J in the 123 East Fifty-Fourth Street case was concerned with a simpler situation than the present case, where the supplier of services collected sales tax from his customers, as a separately identifiable amount paid for the purpose of meeting the tax, and then remitted the whole of that amount to the tax authority. The same was true in the case of Wayne County Produce Co v Duffy-Mott Co (1927) 244 NY 351, where Cardozo CJ adopted a similar approach. The reasoning in these cases was approved by Mason CJ in the Royal Insurance case, in an opinion in which the Page 26 other members of the court did not join, but he distinguished the case before him on the basis that the amount collected was not paid separately from the price of the services supplied. 69. In considering these authorities, it is necessary not only to bear in mind the differences from the facts of the present case, but also to remember that American and Australian law adopt a broader approach to constructive trusts than English law. In particular, one of the essential requisites for a trust in English law is that there must be identifiable trust property (or its traceable proceeds) in the hands of the recipient which is not available to him as part of his general assets: see Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705. 70. In the present case, the contracts between the Managers and the Lead Claimants provided for the Managers to be paid fees plus VAT “if applicable” (or words to similar effect). The contractual obligation of the Lead Claimants was therefore to pay the fees plus whatever sum, if any, was necessary in order to meet the VAT chargeable on the supply in question. This was reflected in the invoices issued by the Managers, which drew a distinction between their fees, on the one hand, and the VAT due on their fees, on the other hand. There is, however, no evidence that the Managers were expected to keep the amounts paid to them by the Lead Claimants in respect of VAT separate from their other funds: on the face of things, they were entitled to treat them as part of their general assets. It follows that in paying those amounts to the Managers, the Lead Claimants must be taken to have intended to part with any interest in the money, rather than to have impressed it with a special purpose trust. Furthermore, since the Managers were not aware of any mistake prior to making payment to the Commissioners, their conscience cannot have been affected so as to render them trustees: see Westdeutsche at p 709. In these circumstances, the right to the restitution of money paid under the contract as the result of a mistake gives rise, like the contract itself, to purely personal obligations. 71. Returning, then, to the question whether the unjust enrichment of the Commissioners was at the expense of the Lead Claimants, and focusing on whether there was a transfer of value from the Lead Claimants to the Commissioners, the answer is in the negative. There was a transfer of value, comprising the notional £100, from the Lead Claimants to the Managers, under the contract between them. It was defective, because it was made in performance of a contractual obligation which was mistakenly believed to be owed. There was a subsequent transfer of value, comprising the notional £75, from the Managers to the Commissioners. It was also defective, because it was made in compliance with a statutory obligation which was inapplicable because it was incompatible with EU law. These two transfers cannot be collapsed into a single transfer of value from the Lead Claimants to the Commissioners. Page 29 (2) The Commissioners shall only be liable to credit or repay an amount under this section on a claim being made for the purpose. (2A) Where - (a) as a result of a claim under this section by virtue of subsection (1) or (lA) above an amount falls to be credited to a person, and (b) after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit, the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains. (3) It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (lA) above, that the crediting of an amount would unjustly enrich the claimant. ... (4) The Commissioners shall not be liable on a claim under this section - (a) to credit an amount to a person under subsection (1) or (1A) above, or (b) to repay an amount to a person under subsection (1B) above, if the claim is made more than three years after the relevant date [ie the end of the prescribed accounting period]. ... Page 30 (7) Except as provided by this section, the Commissioners shall not be liable to credit or repay any amount accounted for or paid to them by way of VAT that was not VAT due to them.” 76. Section 80 is supplemented by section 80A, introduced by section 46(2) of the Finance Act 1997 and subsequently amended, which enables the Commissioners to make regulations providing for reimbursement arrangements to be disregarded for the purposes of section 80(3) except where they contain such provision, and are supported by such undertakings, as may be required by the regulations. The relevant regulations are contained in Part VA of the Value Added Tax Regulations 1995 (SI 1995/2518), as amended. They provide for “reimbursement arrangements”, defined by regulation 43A as arrangements for the purposes of a claim under section 80 which “(a) are made by a claimant for the purpose of securing that he is not unjustly enriched by the crediting of any amount in pursuance of the claim, and (b) provide for the reimbursement of persons (consumers) who have, for practical purposes, borne the whole or any part of the original amount brought into account as output tax that was not output tax due”. The regulations go on to require the claimant under section 80 to give undertakings to the Commissioners that he will apply the whole of the amount credited, and any interest on that amount, to the reimbursement of identified consumers whom he has reimbursed or intends to reimburse. 77. It is common ground that, for persons who have accounted to the Commissioners for VAT that was not due, section 80 and the associated regulations provide a code for the recovery of VAT which is exhaustive and excludes other remedies such as a common law claim based on unjust enrichment. It is also common ground that the ITCs could never have made a claim under section 80, since they did not pay or account for any of the VAT in question to the Commissioners. The first issue in dispute is whether the effect of section 80 is to exclude a common law claim by the ITCs, assuming, contrary to my earlier conclusion, that such a claim might otherwise be brought. 78. The argument for the Lead Claimants is based primarily on the structure and wording of section 80. They point out that subsections (1) to (6) are concerned with the crediting or repayment of undue VAT to the supplier, not the consumer. In subsection (7), the words “credit or repay” echo the language of earlier subsections, where they can plainly refer only to the repayment or crediting of the supplier. They submit that subsection (7) is similarly concerned with the supplier. Only a supplier of goods or services can “account” for an amount to the Commissioners, and only a supplier can be “credited” with an amount by them. Similarly, only a supplier can be “repaid” by the Commissioners, since only he has paid them in the first place. Section 80(7) is thus designed only to exclude claims, otherwise than under the section, by persons who have a claim under the section. That argument was accepted by the Court of Appeal. Page 31 79. On behalf of the Commissioners, it is argued that the word “repay” is capable of applying to any payment back by the Commissioners of VAT which they have received. From their perspective, there is a repayment if the VAT is refunded, whether to the supplier or to someone else. Furthermore, it is argued, it would be strange if section 80(7) barred a restitutionary claim by the supplier, but left the supplier’s customer in a better position. Moreover, it is argued, section 80 establishes a statutory scheme for the restitution of VAT which was not due, which by necessary implication excludes non-statutory restitutionary claims. The argument seeks to draw support from the decision of the Court of Appeal in Monro v Revenue and Customs Comrs [2008] EWCA Civ 306; [2009] Ch 69, where a common law claim was held to be excluded by a statutory scheme for the recovery of tax, since it would be inconsistent with the purpose of the scheme. 80. In agreement with the judge, I find the textual arguments inconclusive, when considered by themselves. The word “repay” is capable of bearing a wider meaning than the one for which the claimants contend, but could also be construed more narrowly. A purposive construction of the provision points more clearly to the correct conclusion. In that regard, section 80(3) and (4) are particularly important. 81. Under section 80(3), the Commissioners have a statutory defence to a claim under section 80 - a claim which, it is agreed, can only be made by a supplier - where crediting the supplier would unjustly enrich him. The possibility of unjust enrichment (in a non-technical sense) arises because the supplier normally recovers from his customers the output tax for which he accounts to the Commissioners. The subsection therefore creates a statutory defence of passing on. Section 80A, and the 1995 Regulations, then create a scheme under which the defence is disapplied where “reimbursement arrangements” are made with the purpose of ensuring that the payment to the supplier is used to reimburse the consumers who have borne the economic burden of the tax. Sections 80 and 80A, together with the 1995 Regulations, thus create a scheme which enables consumers who have been wrongly charged VAT to obtain reimbursement. The consumers are able to recover the VAT which they were wrongly charged, to the extent that it was remitted by the supplier to the Commissioners, through the medium of the supplier’s claim under section 80. 82. Although the consumers’ remedy is indirect, it can generally be expected to be effective: if the supplier is otherwise reluctant to make a claim, the consumers have a direct claim against him, as explained below. Subject to the question of time bar, these arrangements therefore remove any need there might otherwise be, in most circumstances, for the consumer to have a direct remedy against the Commissioners. It will be necessary at a later point to return to the question whether there may nevertheless be some circumstances in which a direct remedy is required by EU law. Page 34 section 80 of the 1994 Act has specifically been held to be reasonable: Marks & Spencer plc v Customs and Excise Comrs (Case C-62/00) [2003] QB 866, para 35. 91. The court has accepted that, in principle, a system under which only the supplier is entitled to seek reimbursement of VAT from the tax authorities, and the consumer can seek restitution from the supplier, meets the requirements of EU law: Reemtsma, para 39. The court added one caveat: “[I]f reimbursement of the VAT becomes impossible or excessively difficult, in particular in the case of the insolvency of the supplier, those principles may require that the recipient of the services to be able to address his application for reimbursement to the tax authorities directly.” (Reemtsma, para 41). 92. This approach has been applied and restated in later cases. In the Danfoss case, the Court of Justice put the matter in this way: “27. It follows that a member state may, in principle, oppose a claim for the reimbursement of a duty unduly paid made by the final consumer to whom that duty has been passed on, on the ground that it is not that consumer who has paid the duty to the tax authorities, provided that the consumer - who, in the final analysis, bears the burden of that duty - is able, on the basis of national law, to bring a civil action against the taxable person for recovery of the sums unduly paid. 28. However, if reimbursement by the taxable person were to prove impossible or excessively difficult - in particular, in the case of the insolvency of that person - the principle of effectiveness requires that the purchaser be able to bring his claim for reimbursement against the tax authorities directly and that, to that end, the member state must provide the necessary instruments and detailed procedural rules.” In these passages, the insolvency of the taxable person is given as an example of circumstances where reimbursement by that person might prove impossible or excessively difficult, and where the principle of effectiveness would therefore be infringed. It is the most likely example to arise in practice, but it cannot be treated as necessarily exhaustive. The governing principle of effectiveness means that the purchaser must, in principle (and subject to procedural rules which are compatible Page 35 with the principle of effectiveness, such as reasonable limitation periods), be able to recover from the member state where reimbursement by the taxable person would be impossible or excessively difficult. 93. In the present case, the Lead Claimants had a common law right to restitution of the amounts mistakenly paid to the Managers, whose enforcement was neither impossible nor excessively difficult. The Managers had a statutory right to recover the notional £75 from the Commissioners, under arrangements which ensured that it was passed on to the Lead Claimants. The Managers retained the remaining £25 and were not insolvent. They were therefore in a position to refund it to the Lead Claimants. The only amounts which the Lead Claimants could not recover were the amounts which they had paid during the “dead periods”, to the extent that those amounts had been paid by the Managers to the Commissioners: that is to say, the notional £75 whose recovery from the Commissioners was time-barred under section 80(4) of the 1994 Act. Although a claim by the Lead Claimants against the Managers in respect of the dead periods would not have been time-barred, because of the more generous limitation period allowed by section 32(1)(c) of the Limitation Act 1980, the Managers would have a defence of change of position, since the amounts which they paid to the Commissioners during those periods were irrecoverable. The inability of the Lead Claimants to recover those sums is not, however, incompatible with EU law: as explained earlier, it is conceded that the three year limitation period imposed by section 80(4) of the 1994 Act is compatible with EU law. 94. In these circumstances, the inability of the Lead Claimants to pursue a direct claim for restitution against the Commissioners is not incompatible with EU law. That follows from the application of well-established principles of EU law. There is therefore no need for any reference to the Court of Justice. Nor is it necessary or appropriate to consider what the position would be in a hypothetical case where the supplier was insolvent: the court has heard no submissions, and has no information before it, as to how reimbursement arrangements under section 80 might operate in that situation. Conclusion 95. For these reasons I would allow the Commissioners’ appeal and dismiss the Lead Claimants’ cross-appeal.