High Court holds that HMRC should not refund VAT to insolvent company where its customer bore the VAT burden

In a judgment delivered yesterday in R  Premier Foods v HMRC  (Q Cold ltd intervening) [2015] EWHC 1483 (Admin),  Supperstone J resolved a dispute as to how to unravel the consequences of a mistaken overpayment of VAT by a supplier which later became insolvent.  The facts were that Q Cold supplied Premier with suet and poppadoms.  It mistakenly treated the supplies (which were in fact zero-rated) as standard-rated and accounted for VAT on them: likewise Premier deducted input tax on the supplies.  The mistake was discovered and Q Cold made a claim under section 80 of VATA for repayment of the wrongly paid VAT: HMRC also issued assessments against Premier for the incorrectly deducted input VAT.  Since Q Cold and Premier agreed that Q Cold would pay the VAT recovered under section 80 to Premier, the net effect of all of this should have been that all parties would have been put back where they started.

However, before any repayments were made Q Cold became insolvent.  HMRC took the view, based on the judgment of the Inner House of the Court of Session (the equivalent of the Court of Appeal in Scotland) in CEC  v McMaster Stores (Scotland) Ltd (in receivership) [1995] STC 846, that they had to pay Q Cold’s section 80 claim notwithstanding its insolvency and that (as a result) Premier would only receive part of the section 80 claim (it being no more than an unsecured creditor of Q Cold).  Since Premier still had to pay the assessments, it would be left substantially out of pocket.  Premier challenged HMRC’s decision to pay Q Cold, and to maintain the assessments against it, by way of judicial review (there being no appeal to the First-tier Tribunal against those decisions under section 83 of VATA).  Q Cold’s liquidators, however, intervened in the judicial review to argue that HMRC were bound to pay Q Cold’s section 80 claim notwithstanding its insolvency.  HMRC took the view that there was much force in Premier’s arguments but that, given McMaster, there were arguments the other way: HMRC were concerned to obtain a decision of the Court that would bind all the parties in order to avoid any risk that HMRC would have to pay Q Cold while being unable to enforce the assessments against Premier (which would result in a tax loss).  Pending the judgment, they agreed not to pay Q Cold’s claim and not to enforce the assessments.

The Judge accepted Premier’s argument that McMaster was no longer good law in the light of Reemtsma [2008] STC 3448, where the ECJ held that a customer in Premier’s position must be able to address a request for reimbursement to the tax authorities if it bore the burden of VAT that had been incorrectly accounted for by its supplier but where it would be impossible or excessively difficult for it to recover against its supplier, for example due to insolvency.  In McMaster, the Court of Session had had to consider whether HMRC could invoke the defence of unjust enrichment in section 80(3) against McMaster on the basis that a only a very small part of the payment to McMaster would (because of its insolvency) go to the customers who had borne the VAT burden: the Court had held that they could not invoke that defence because the consequence of invoking that defence would be that the customers got nothing at all – and on that basis McMaster’s enrichment could not be described as unjust (it was better that the customer got half a loaf than no loaf)  However, Premier argued, after Reemtsma it would have a direct claim against HMRC: and so, it argued, the consequence of paying Q Cold’s section 80 claim had to be that Q Cold’s enrichment was unjust, as it would mean that Premier would only obtain a proportion of the overpaid VAT as opposed to full payment of VAT direct from HMRC (it would get half a loaf instead of a whole loaf).

The Judge therefore granted a declaration that HMRC had a section 80(3) defence to Q Cold’s section 80 claim and need not pay out on it.  He also quashed the assessments issued against Premier, HMRC having accepted that, if the Court decided that Q Cold had no good section 80 claim and that there would therefore be no tax loss to HMRC if they did not enforce the assessments, and where in the unusual circumstances of this case it was clear that Premier would have a Reemtsma claim offsetting any assessment raised against it, they would not be obliged to raise those assessments and, indeed, that there would be no point in doing so (given Premier’s offsetting Reemtsma claim).

Practitioners may want to note the following points: –

• This is a classic example of where judicial review plays a part in challenging HMRC decisions.  Premier could not appeal to the First-tier Tribunal against the decision to pay Q Cold , there being no appeal against a decision to pay another party’s claim even where that decision has a significant impact on one’s own position (it being common ground that HMRC could not be required to suffer a tax loss as a result of the unwinding of the mistake).  And since there was no doubt that Premier had incorrectly deducted input tax, it had no basis to appeal against its assessments to the First-tier Tribunal: its point was that HMRC should have used its powers not to issue the assessments even though tax was due (a point that could only be argued in judicial review).  Further, the use of the judicial review procedure meant that Q Cold could be joined as a party and was bound by the result.
• It was a critical element of the case that there was no dispute that the overpaid VAT was passed on in full: had Q Cold been able to argue that it had not passed the VAT on, it is less obvious that judicial review would have been the right way of resolving what then would have been a complex factual dispute.
• It is also worth noting that because the mistake related to zero-rating and not to exemption there was no issue that Q Cold had wrongly deducted input tax on its own supplies which had to be taken into account in any section 80 repayment (the key point about zero-rating being, of course, that a supplier is entitled to deduct standard-rated VAT on inputs while charging 0% VAT on outputs, while no input tax deduction is available in relation to exempt supplies).  So the present case was in that respect very different from Investment Trust Companies v HMRC [2015] EWCA Civ 82, where major issues flowed from the fact that where the mistake was to treat exempt supplies as standard rated, unravelling the mistake had to take into account the fact that the supplier had wrongly deducted input tax on its own inputs, thereby reducing the amount of its section 80 claim.

Valentina Sloane appeared for Premier; George Peretz QC appeared for HMRC