Unjust Enrichment

What on earth is unjust enrichment? SIMON AGER, of Mayer, Brown, Rowe & Maw,
explains that the answer lies among socks, extended warranty insurance and 'real
chocolate' teacakes.

CLAIMS FOR REPAYMENT of tax which was not tax due to Customs are not infrequent
but, surprisingly, there are as yet only a limited number of cases that deal in
detail with Customs' defence of unjust enrichment.
Two related decisions of the VAT and Duties Tribunal concerning insurance
premium tax provide some helpful guidance on the unjust enrichment defence which
applies also to VAT.
Unjust enrichment provisions
For insurance premium tax, the main unjust enrichment provisions are contained
in paragraph 8(3) of Schedule 7 to the Finance Act 1994 as supplemented by
paragraphs 1 to 3 of Schedule 5 to the Finance Act 1997 (introduced by section
50, Finance Act 1997 for landfill tax and excise duties as well). The equivalent
VAT provisions are sections 80(3) and 80(3A) to (3C), VAT Act 1994.
Put simply, the provisions are designed to prevent repayments of overpaid tax
where the cost of the overpaid tax has not actually been borne by the taxable
person. This is on the basis that any repayment would be a windfall to (and so
would unjustly enrich) the taxable person. In other words, there is no repayment
where the cost of the tax has been passed on (normally, to the customer).
However, loss or damage suffered by the taxable person because of the passing on
may mean that repayment of overpaid tax will not result in a windfall. In these
circumstances, repayment to the extent it compensates the taxable person for his
loss or damage is allowed.
Overriding principles
European Court of Justice case law makes it clear that tax authorities are
required to repay sums levied in breach of community law. In Société Comateb v
Directeur Géneral des douanes et droit indirects and related references (Joined
cases C-192/95 to C-218/95), the Court held that:
'entitlement to the repayment of charges levied by a Member State in breach
of Community law is a consequence of and an adjunct to the rights conferred on
individuals by the Community provisions prohibiting such charges. The Member
State is therefore in principle required to repay charges levied in breach of
Community law.'
However, where overpaid tax has been passed on, repayment may be resisted on the
grounds that the taxpayer would be unjustly enriched. In Comateb, the Court
ruled that:
'A Member State may resist repayment of a charge levied in breach of Community
law only where it is established that the charge has been borne in its
entirety by another person and that reimbursement of the trader would
constitute unjust enrichment. If the burden of the charge has been passed on
only in part, it is for the national authorities to reimburse the amount not
passed on.' (Emphasis added.)
Marks & Spencer
The recent ruling of the European Court of Justice in Marks & Spencer plc v
Commissioners of Customs and Excise (Case C-62/00) [2002] STC 1036 marks the
beginning of the end of a long lasting action. Marks & Spencer sought repayment
of VAT overpaid in respect of two items: sales of chocolate covered teacakes
after Customs conceded that they should be treated as zero rated not standard
rated, and the sale of gift vouchers at a discount (i.e. at less than face
value) to businesses following the European Court's decision in Argos [1996] STC
1359. Customs raised the unjust enrichment defence in response. Customs also
later applied the newly introduced three-year cap on claims for repayment (see
section 80(4), VAT Act 1994 as substituted by Finance Act 1997).
The decision of the tribunal (VAT decision 14692), which was upheld by the High
Court and Court of Appeal, was the first major case on repayment of overpaid tax
and unjust enrichment following the introduction of the unjust enrichment
defence into section 80.
It is important to note that the tribunal's decision was given before the
European Court's decision in Comateb, but the tribunal's decision is in line
with that decision.
Unjust enrichment issue
The tribunal explained the approach to be adopted. It first had to review the
evidence submitted by Customs to see if it was satisfied there was a prima facie
case of unjust enrichment. Essentially, Customs had to demonstrate passing on.
If there was a prima facie case, the tribunal had to consider all the evidence
presented by the taxpayer and then decide in light of this and Customs'
evidence, if Customs had satisfied the tribunal of their defence.
In the High Court, Mr Justice Moses approved the tribunal's approach. He held
that where the only evidence was from Customs and this showed that the overpaid
tax had been passed on, the unjust enrichment defence would succeed. However, if
the taxpayer produced material showing it had suffered damage in passing on the
overpaid tax, the national court must decide (in light of the evidence) whether
the defence of unjust enrichment is made out. The standard of proof is the
normal civil standard of proof.
In Comateb, the Advocate General pointed out that reversing the burden of proof,
so that it was on the tax authority, prevented the right to reimbursement being
nugatory; if the authorities cannot prove passing on, reimbursement will follow.
He also pointed out that, if a choice had to be made between the trader and the
authorities that have violated Community law, it should not be the taxpayer who
is penalised.
The Court of Justice held that there is no presumption that the entire charge
(the illegal tax) has been passed on (even where there was an obligation to
include the charge into the cost price of the product concerned).
Both Kapniki Mikhailidis AE v Idrima Kinonikon Asphaliscon v IKA Joined Cases
C-441/98 and 442/98 and Dilexport Srl v Amministrazione delle Finanze dello
Stato (Case C-343/96), which follow Comateb, support the view that the burden of
proof is on the tax authority. To raise unjust enrichment, Customs must produce
evidence to show passing on. They cannot just assert it happened. However, in
Marks & Spencer, Mr Justice Moses said that there was unlikely to be any
difficulty in showing passing on where VAT was concerned.
Teacakes and socks
In relation to the teacakes claim, the tribunal found that Marks & Spencer
regarded the VAT as a cost, so there was a prima facie case for passing on.
However, in the Marks & Spencer case concerning a claim for repayment of VAT
overpaid on boys socks sizes 4 to 7 following a change from their supply being
standard rated to zero rated (tribunal decision 14693), the tribunal held that
Customs had failed to prove that there had been passing on, and so the unjust
enrichment defence failed.
The crucial differences between the socks and the teacakes cases was that the
tribunal considered that VAT was not passed on in the price of socks and their
price would not have been adjusted after the change in the rate of tax; whereas
VAT was taken into account in the price of teacakes and the price was likely to
have reduced after the change in VAT treatment as a result of competition. The
tribunal also found that if teacakes did not sell well, other items would
replace them, so Marks & Spencer maintained its overall margin. It should be
noted that Mr Justice Moses felt this was a hypothesis too far. The tribunal
considered the same could not be said for size 4 to 7 boys' socks, as they had
to be stocked as part of a schoolwear range.
This makes it clear that, while Customs have to prove passing on, the taxpayer
should take steps to show that it has not passed on some or all of the tax to a
third party. To the extent this is successful, the unjust enrichment defence
cannot even be raised.
To do this, the taxpayer should carefully examine how it conducts its business,
in particular how it arrives at the prices for its supplies. It is also
important to consider the market in which the taxpayer operates. The taxpayer
cannot be considered in isolation. There is a practical difficulty in proving
how competitors act and what they do, as this information is likely to be
commercially sensitive, but to the extent that information is available, it
should be considered.
Quality of evidence
In Marks & Spencer, Mr Justice Moses made important points about the quality of
evidence. He stated that the taxpayer does not have to prove it was not unjustly
enriched. Gaps in the evidence should not be considered to the detriment of the
taxpayer. Any absence or uncertainty should not be held against the taxpayer. A
failure to provide detailed facts and figures by the taxpayer should not result
in the unjust enrichment defence being made out for that reason alone.
However, it is worth noting here that in Mr & Mrs J King trading as the Barbury
Shooting School (tribunal decision 17822), a decision on a preliminary issue
from a case concerning VAT on tuition fees charged by a shooting school, the
tribunal held that although the appellants had treated VAT as a cost, they had
set prices at an overall level and that they were influenced by the market
without any individual factor deciding upon an increase. The tribunal concluded
that the appellants were charging amounts they would have charged had they
realised the supplies were exempt. Customs' evidence as to competitor's prices
was rejected on the basis that it was slight and the tribunal could not make a
comparison with the appellants' business.
In the Marks & Spencer cases, there was extensive expert economic evidence from
both sides on the elasticity of supply and demand and the likely reaction of
customers to changes in price in a competitive market. The tribunal rejected the
notion that in such a market it was impossible for Customs to prove passing on.
In the teacakes case, it held that 90 per cent of the VAT had in fact been
passed on.
It is important to remember that expert evidence is not a requirement in dealing
with the unjust enrichment defence. Mr Justice Moses said that small traders
cannot be expected to have the resources to use expert evidence and that Customs
would have to be careful not to use experts where it would impose an excessively
difficult burden on the taxpayer.
GIL Insurance Ltd
In GIL Insurance Ltd and others v Commissioners of Customs and Excise (IPT00006
and IPT00009), the tribunal gave two preliminary decisions concerning a
challenge to the lawfulness of the 17.5 per cent rate of insurance premium tax,
i.e., the higher rate of insurance premium tax, on domestic electrical appliance
insurance (including extended warranty insurance).
The appellants are from four groups of companies and are either insurers or
taxable intermediaries (within the meaning of section 52A(5), Finance Act 1994)
who supply or arrange domestic electrical appliance insurance which is supplied
with the sale or rental of appliances. All claimed repayment of higher rate
insurance premium tax overpaid pursuant to paragraphs 8(1) and 8(2) of Schedule
7 to the Finance Act 1994. The grounds were that the tax is contrary to Articles
27 and/or 33 of the European Community Sixth Council Directive (77/388/EC) or
was an illegal state aid contrary to Article 87. Among other things, Customs
raised the unjust enrichment defence.
The appellants, who were insurers, underwrote extended warranty insurance, theft
and accidental insurance, payment protection insurance and rental service
insurance. Rental service insurance is sold in conjunction with the rental of
equipment and provides cover for repairs and service.
The appellants provided services to the insurers and their customers, arranging
and documenting insurance contracts and collecting premiums due. They were often
the electrical retailer or rental company, which allowed the sale of insurance
at the point of sale or rental.
The tribunal's first preliminary decision was issued in March 2001 and resulted
in a request for a preliminary ruling of the European Court of Justice on five
questions concerning the interpretation of Community law (see Case C-308/01
Official Journal C303 27 October 2001 page 8). These questions concern the
liability issue but not the unjust enrichment issue. The hearing before the
European Court has yet to take place.
Notwithstanding the decision to refer questions to the European Court, the
tribunal decided to take steps to consider the unjust enrichment defence.
Further representations and submissions were made in exchanges of documents and
then at a hearing in June 2002. The second preliminary decision was issued in
September 2002. That decision only deals with points of principle and no final
decision has been given on amounts to be repaid if the appellants are ultimately
successful on liability.
Customs' arguments
Customs' arguments on unjust enrichment in GIL went further than they had in
Marks & Spencer, dealing in much greater detail with the legislation and the
scope of the unjust enrichment defence, not just the evidence. They are
therefore worthwhile considering.
Customs argued that while the legal burden of the unjust enrichment defence was
on them, the evidential burden was on the appellants. They argued that they had
discharged the burden by pointing out aspects of the appellants' evidence that
supported their case. As discussed above, the approach of the European Court of
Justice and the United Kingdom courts does not support the contention that the
burden is on the taxpayer.
The tribunal rejected Customs' argument. In its first preliminary decision, the
tribunal made it clear that it did not approve of Customs' approach of using an
expert to criticise the appellants' evidence without bringing forward new
evidence to discharge the burden of proving that repayment would unjustly enrich
the appellants.
Whose loss or damage?
The legislation provides that only quantified amounts of loss or damage arising
from 'mistaken assumptions' may be brought into account when considering if
repayment would unjustly enrich the person claiming repayment. There is no
definition of mistaken assumptions. Customs submitted that if only higher rate
insurance premium tax (as opposed to the whole of the insurance premium tax
régime) was unlawful, there were no mistaken assumptions, as the appellants had
argued from the outset that the higher rate was unlawful. The tribunal,
following RIBA Publications (tribunal decision 15983) held that the mistaken
assumptions could be of either the taxpayer or Customs and these would be as to
the validity of the legislation.
Customs contended that the legislation only allowed a claim for repayment of tax
to the person who had paid the tax, and not other companies. The only loss or
damage that could be brought into account was that suffered by the taxpayer. The
tribunal, following the decision in Cresta Holidays Ltd and others v
Commissioners of Customs and Excise [2001] STC 386 (in which the Court of Appeal
held that certain holiday companies could not appeal against decisions by
Customs to refuse claims for repayment of overpaid higher rate insurance premium
tax, as they were not actually taxpayers who had paid the tax to Customs) found
the unjust enrichment defence only allowed the loss and damage suffered by the
taxpayer to be taken into account.
The legislation provides that, when considering unjust enrichment, the loss or
damage incurred as a result of mistaken assumptions shall be disregarded except
to the extent quantified as being the amount shown by the taxpayer to compensate
appropriately him for loss and damage shown to have resulted from any business
carried on by him from the mistaken assumptions.
Customs argued that the only loss or damage that could be taken into account was
that arising from a consequential reduction in sales and loss of profit on those
sales as a result of passing on. For insurance companies, Customs suggested that
there should only be repayment of tax overpaid which had been absorbed or passed
on to customers and that passing had caused loss or damage resulting from loss
of sales of insurance. For taxable intermediaries, there should only be
repayment of tax overpaid which had been absorbed or passed on to customers and
that passing on had caused loss or damage resulting from loss of intermediary
fees. In both cases they relied on Marks & Spencer and Comateb. Customs'
approach would have excluded losses such as those arising from closures of shops
or a change in the way the appellants conducted their business to mitigate
against the impact of higher rate insurance premium tax.
National law
The tribunal found that Comateb and Kapniki established that the quantification
of loss or damage suffered as a result of passing on an illegal tax had to be
tested under national law. The United Kingdom legislation was clear. The
reference was to loss and damage suffered in 'any business' carried on by the
person claiming repayment. Customs' restrictive interpretation was not correct.
That interpretation would have involved reading words into the statute.
It is important to note that the legislation does not refer to loss and damage
arising from passing on tax that was not due to Customs. It refers to loss and
damage arising from mistaken assumptions made in the taxpayer's case about the
operation of any provisions relating to the tax. Arguably, passing on is only
relevant in determining if the unjust enrichment defence can be raised.
Any business
Customs argued that the reference in the legislation to 'any business' was
designed to exclude non-business losses and that Schedule 5 to the Finance Act
1997 did not refer to 'loss of sales' because it applied to landfill tax (as
well as insurance premium tax and excise duties) and a landfill operator did not
sell anything. This can be countered by saying that a landfill operator can be
regarded as selling space in the landfill site.
In section 80(3C), VAT Act 1994 there is again a reference to 'any business'.
The VAT context illustrates the problem with Customs' argument. If Customs were
right, section 80(3C) should in theory refer to 'loss of profit on taxable
supplies'. Taxpayers who operate more than one business under the same VAT
registration will account to Customs for this VAT without differentiation
between the businesses. Customs' argument would allow them to argue that losses
suffered in one of the businesses may not be taken into account in considering
unjust enrichment in relation to overpaid tax that relates to the other
business, even though from a VAT perspective there would be no separation.
Customs submitted that only past losses could be brought into account. The
argument was that paragraph 2(3) of Schedule 5 to the Finance Act 1997 (whose
VAT equivalent is section 80(3C), VAT Act 1994) refers to loss and damage 'shown
by the taxpayer … to have resulted ... from the making of the mistaken
assumptions'. They argued that this excluded future loss as it did not refer to
losses which may be suffered.
The tribunal concluded that the wording of the statute was wide enough to cover
any loss and damage at the time or after the mistaken assumptions, if it can be
shown to have crystallised and have resulted from the mistaken assumptions. For
the appellants, this was important in the context of rental contracts where
income from customers was received over a long period of time. The termination
of a rental contract and the associated insurance contract (as a result of
passing on) resulted in loss of rental income as well as loss of insurance
premia, and also the loss of an opportunity to sell/rent further products to the
customer. The tribunal has suggested that losses may only be brought into
account so long as they have crystallised before the date of the final hearing.
Summary
In summary, in the absence of reimbursement arrangements complying with
regulations such as those referred to in paragraph 3 of Schedule 5 to the
Finance Act 1997 for insurance premium tax and section 80A, VAT Act 1994, the
approach to the unjust enrichment defence is that:
Only the person who has paid the tax may make a claim for repayment.
There is normally no obligation on Customs to make repayment where the
overpaid tax has been passed on, as that would result in unjust enrichment of
the person claiming repayment of the tax.
Even where the overpaid tax has been passed on, repayment should be made where
the passing on has resulted in loss or damage to the business of the person
claiming repayment of the tax.
The burden of proving unjust enrichment is on Customs. There is no presumption
of passing on.
Customs have to bring forward new and forceful evidence to satisfy the burden
of the unjust enrichment defence. It is not enough to simply criticise the
evidence brought forward by the person reclaiming the tax.
If Customs' evidence does not establish a prima facie case for passing on, the
unjust enrichment defence fails.
Gaps in the evidence may not be construed against the taxpayer.
A separate damages action may be available where the loss and damage suffered
exceeds the tax repaid.

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