B E T W E E N

JUDGMENT
 
DATED: 20 July 1993

THE TRIBUNAL (R Rowland QC)

In each of these appeals, which were by agreement heard together, the Commissioners have declined to repay to the Appellant companies an amount of overpaid value added tax following a claim by the Appellants in that behalf pursuant to section 24 of the Finance Act 1989.

The Appellant, Creative Facility Limited (herein called "Creative"), carries on business as graphic designers, publishers and premises at Stanwood House, 5 Commercial Street, Birmingham. Creative has been registered for value added tax with effect from 11th May 1984. On 2nd May 1991 Creative placed itself into voluntary liquidation and was de-registered for value added tax with effect from 18th February 1992. A liquidator was appointed. By letter dated 19th May 1992 Creative's representatives made a claim under section 24 of the Finance Act 1989 in respect of overpaid VAT in the sum of £62,595.44. In that letter they pointed out that errors had been made in VAT returns rendered prior to liquidation. Output tax was overpaid as a result of an incorrect taxable liability being applied to supplies of printing works. A standard rate of value added tax had been applied to some items which were properly zero rated. A schedule was prepared and sent with the letter of 19th May which indicated that the sum of £62,595.44 comprised 44 separate sums, each of which related to a supply upon which VAT had been charged, and upon which output tax had been accounted for by Creative. It was contended, and it is now agreed, that these supplies were zero rated and Creative now claim a refund of the tax wrongly paid.

The Appellant Oblique Press Limited (herein called "Oblique") has carried on business as printers from the same address as above and has also been registered for value added tax. Oblique also placed itself in voluntary liquidation and was de-registered for value added tax with effect from 19th December 1991. The same liquidator was appointed for this company as for Creative. Oblique made a similar claim in respect of the tax overpaid in the sum of £3,427.82 which comprised 13 separate sums upon each of which VAT had been charged and output tax accounted for on re-sale. It is now agreed that these supplies, too, were zero rated.

In the case of each Appellant the Commissioners have rejected the claim for repayment of overpaid tax for reasons which are common to both companies. The reasons are:

(i) Each Appellant would be unjustly enriched if such a repayment were made.

(ii) The Appellants' representatives have confirmed that there is no intention to pass the benefit of the repayment back to the customer who, it is said, wrongly paid VAT to the Appellant in the first place. Therefore both companies would be unjustly enriched if the Commissioners repaid the sums sought to the liquidator of each company.

The relevant decision, which is now being appealed, is contained in the Commissioners' letter dated 22nd July 1992 the relevant part of which reads:

'The action your clients wish to take in respect of the credit notes raised has been carefully considered, and as advised on 7 July 1992, the voluntary disclosure claim cannot he approved on the grounds of unjust enrichment since your clients advise that there is not intention to pass back the VAT overpayment made to the customers affected.

In addition, examination of the sales invoices provided has revealed that a significant number of the supplies made were originally correctly standard rated.

It also appears that a number detail both standard and zero rated supplies. Credit notes would therefore be applicable to the zero rated element only.'

Two matters in that letter require mention at this stage. First, the parties have now agreed that the various sales invoices which relate to zero rated supplies and standard rated supplies can be left over to be sorted out, agreed and settled at a later stage. Meanwhile the parties have requested the Tribunal to hear and determine the main issue of principle, namely whether a repayment of overpaid tax to the liquidator would amount to unjust enrichment. Because the details of the sales invoices are to be arranged later the result may mean a reduction in the amounts claimed. The second matter is a bad debt claim in respect of the accounting period ending 31st May 1991. This is no longer contested; the Appellants are not pursuing it and no order is required from this Tribunal.

The question of unjust enrichment is the only question for decision. The Commissioners regard themselves in the position of stakeholders in the present case; they are ready and willing to make a repayment of overpaid tax to the liquidator on a strict undertaking by the latter that he would pass it on to the individual customers who paid it in the first place. The liquidator has not felt able to give that undertaking. He says he is obliged to collect the assets of the two companies including debts owed and distribute them under the rules of insolvency.

Section 24 of the Finance Act 1989 provides (so far as material):

'24(1) Where a person has paid an amount to the Commissioners by way of value added tax which was not due to them, they shall be liable to repay the amount to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose.

(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.'

Before setting out the respective submissions of the parties one additional matter arising from the Commissioners' decision letter of 22nd July is relevant and should be mentioned. In it there is a reference to "credit notes".

Prior to the liquidation in May 1991 Creative operated a design, marking and consultancy service. Oblique were printers who serviced its parent company -- Creative. Both companies supplied printed matter which can create difficulties in deciding between standard rated supplies and zero rated supplies. Both companies raised invoices for printed matter and charged tax at the standard rate. After the liquidation it became apparent that some, at least, of the supplies should be zero rated. The companies had, however, received cash for those invoices, at least in part, and output tax had been declared on the re-sales prior to liquidation. When it was discovered that some of the invoices should have been zero rated the companies sought to remedy the situation by issuing credit notes to all the customers who had wrongly paid tax on zero rated supplies. The validity of those credit notes is no longer in dispute between the parties. It is agreed that they are valid. At the hearing of the appeal Mr GAF Coward, the liquidator, testified that it was his duty as liquidator to realise the assets and get in all outstanding monies owing to the companies and to distribute the proceeds to creditors in order of priority laid down in the Insolvency Act 1986. If this repayment were to be made to him as claimed the consequence would be to increase the amount due to creditors in the liquidation. It would be his intention to write to each recipient of a credit note and tell them that they had a claim in the liquidation. He said that it transpired that some of those who had been issued with a credit note had not actually paid the company so they would not get paid in any event.

As regards the application of the realised amounts, Barclays Bank have a debenture for £15,000 as a first charge on the assets of Creative. There are no preferential creditors. The unsecured creditors are entitled to the repayment of loans and monies due to associated companies. The monies realised in respect of the Creative liquidation would be sufficient to pay Barclay's Bank debenture and leave something for distribution. As regards Oblique's liabilities -- there are only two creditors one of whom, the Department of Trade, is a trade creditor. They would get 3 p in the pound.

In the case of Creative, the creditors would get 10p in the £ and some of these would be the original customers who wrongly paid tax, if they proved in the liquidation.

On behalf of the Appellants, Mrs Harding submitted:

(i) Neither Creative nor Oblique would be unjustly enriched because the funds, including the overpaid tax, would be redistributed to creditors.

(ii) The VAT would not be paid directly to the customers but these customers could well benefit from the VAT repayment as they will from part of the creditors of the company.

(iii) The credit notes were properly issued to recover tax which should not have been charged and to maximise the Appellants' assets available for distribution to its creditors.

(iv) Although the repayment to the Appellants would enrich them by reducing their net deficiency, this is not unjust enrichment because the repayment would be applied to the full extent permitted by law for the benefit of the customers overcharged.

(v) The instant case is covered by the Tribunal decision in Lamdec Limited v. Commissioners of Customs & Excise (MAN/90/1018 No 6078) where a credit note was issued by the liquidators (to correct a liability error) who wanted to realise all potential assets. It was held that there would be no unjust enrichment if the repayment were to be applied for the benefit of the person overcharged and the person to whom the repayment is made will not be entitled to keep the remainder, if any, for himself (for a company in liquidation that would include the shareholders but not the creditors).

On behalf of the Respondents Mr N Gibbon submitted:

(i) Section 24 of the Finance Act 1989 makes it clear that the person who is entitled to claim repayment is the person who had made the overpayment to the Commissioners, that is, the registered taxable person. In this case that means the two Appellant companies. Mr Coward, the liquidator, is agent for them in the disposal of the assets.

(ii) There is no definition of what constitutes unjust enrichment for the purposes of the Act but it is a question which has to be decided by the national courts. In deciding the question it is legitimate to consider whether an overcharge has been or will be repaid to the customers.

(iii) In the context of value added tax unjust enrichment invokes a consideration of the formal incidence of the tax as well as the effective incidence of the tax. The two may be distinguished thus by way of example where £1,000 value added tax finds it way into the hands of the Commissioners:

(a) The customer pays £1,000 value added tax to the company (Creative, for example) for a supply of goods (to the customer that is £1,000 input tax). That is the effective incidence of the tax.

(b) The company pays £1,000 value added tax to the Commissioners (to the company that is output tax charged on a sale). That is the formal incidence of the tax. (c) The customer reclaims the £1,000 input tax on his tax returns. Now, if a mistake on liability to tax has been made we then get a repayment situation and the sequence then looks like this:

(a) Customer has already paid £1,000 to the company (and he has received that back as input tax)

(b) The customer is assessed for £1,000 wrongly claimed as input tax (because the supply was zero rated). He pays the £1,000 directly to the Commissioners on foot of the assessment.

(c) The Commissioners repay the £1,000 to the company under section 24 because of the mistake on liability.

The loss occurs because the customer has paid £1,000 to the company and has not been repaid. So the Commissioners say that in order to avoid unjust enrichment it is their duty to ensure that the money should get back into the hands of the person who wrongly paid it.

(iv) The fact of liquidation does not change the situation. The moment a company receives payment from the Commissioners it is enriched and it is at the point of receipt that one has to say whether or not it is unjust enrichment. If the company is not in liquidation and it uses the money to pay its trade creditors it is already enriched at the point of receipt. What the company does with the money after receipt is not relevant to the question of just or unjust. On the other hand if the company is in liquidation the same principles apply and the question is the same as before -- is the customer going to get his money back?

(v) The decision in Lamdec Limited is to be distinguished. The question of unjust enrichment was not essential to the decision in that case which was decided on other grounds. The views expressed by the tribunal on unjust enrichment were obiter. On the facts of that case it was found that if the repayment was made as claimed there would be enough money, with the other assets, to pay the debenture holder, the secured creditors and the preferential and ordinary creditors of whom "Petrolite" (the company wrongly charged to tax) would be one. It would appear that the tribunal in Lamdec was urged by the Appellant to take into account that the shareholders of Lamdec (as opposed to the creditors) would get nothing.

(vi) To sum up, the correct approach is to identify the claimant and determine whether, in the context of value added tax, he intends to pass on the whole benefit to the customer who had previously paid the tax to him. In the instant case the benefit of the repayment will not be passed on to the customer even if the latter does prove in the liquidation because all the customer will get is 10p in the £ and he is the loser in this affair.

In the final analysis the issue which the Tribunal has to determine is a narrow one which may be stated in a few propositions. We begin with the liability of the Commissioners to repay to a person value added tax which was not properly due to them. That is section 24(1). To enable them to repay, a claim must be made to the person who paid the tax to them. Section 24(2). It is a defence to the claim that the repayment of an amount would unjustly enrich the claimant. Section 24(3). The Commissioners acknowledge that they are liable to repay the tax to the two companies in the instant case because the tax which was paid to the Commissioners "was not tax due to them". But they say that they have a defence to the claim because the two Appellant companies would be unjustly enriched if the repayment were made since the companies have no intention of directly reimbursing the customers who wrongly paid the tax in the first instance. The liquidator will apply the repayment to increasing the assets available for distribution among the creditors of whom the customer will form part. He says that as the companies are in voluntary liquidation he, the liquidator, is obliged to apply the assets according to law and the customers who prove in the liquidation will share in the distribution and therefore neither of the companies will be unjustly enriched. The Commissioners say they are willing to make the repayment as claimed but only on the strict understanding that the customers will be repaid in full. Since there is no intention to repay the customers in full by reimbursing them with the repayment the companies will be unjustly enriched.

It would appear to the Tribunal that the principle of unjust enrichment is closely linked to the common law remedy of money had and received which is the proper course of action to recover money paid by mistake. As long ago as 1760 Lord Mansfield sought to rationalise the action for money had and received to the use of the plaintiff in these words:

'This kind of equitable action to recover back money which ought not in justice to be kept is very beneficial, and therefore much encouraged. It lies for money which, 'ex aequo et bono', the defendant ought to refund; it does not lie for money paid by the plaintiff, which is claimed of him as payable in point of honour and honesty, although it could not have been recovered from him by any course of law; as in payment of a debt barred by the Statute of Limitations, or contracted during his infancy, or to the extent of principal and legal interest upon a usorious contract, or for money lost at play: because in all these cases the defendant may retain with a safe conscience, though by practice law he was debarred from recovering. But it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through impositions (express or implied); or for extortion; or oppression; or an undue advantage taken of the plaintiff's situation, contrary to the laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money" (Moses v. Macfarlan (1760) 2 Burr 1005, 1012).

The principle of unjust enrichment as expressed by Lord Mansfield and by other judges such as Lord Wright, Lord Atkin and Lord Denning is that the law holds that it would be unjust to allow the defendant to retain a benefit received at the plaintiff's expense. We may take as an example Lord Wright's speech in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Coombe Barbour Ltd [1943] AC 32 at p 61:

'The claim was for money paid for a consideration which had failed. It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognised to fall within a third category of common law which has been called quasi contract or restitution."

There are other authorities, of which a recent one is Woolwich Building Society v. Inland Revenue Commissioners [1992] BTC 470, which support the view that it is reasonable that a man who denies the legality of tax should have a clear and certain remedy. Of course, we have to look at the present case in the context of three interested parties and not merely two. The authorities cited above are relevant to the situation where as here it is the customer who has wrongly paid the tax in the first instance to the two companies. It is they who were unjustly enriched at the expense of the customer who paid tax on an invoice which was claimed as standard rated supply whereas in truth and in fact it should have been a zero rated supply. The authorities cited above support the view that the customer should be able to recover from the two companies the tax wrongly paid on the grounds that they, the companies, have been unjustly enriched and that he can do so in an action for money had and received. But the matter is complicated by the incidence of value added tax in which the companies are required to pass on to the Commissioners the tax on a sale as output tax. The tax so passed on is still unlawful (because the supply was zero rated) and it becomes "overpaid VAT" which is recoverable by the two companies in accordance with the prescribed remedy laid down in section 24(1). That remedy is fixed by statute. It is a remedy which is available only to those who "have paid an amount to the Commissioners by way of value added tax" namely the two companies Creative and Oblique. There are no statutory provisions available which enable the customer to recover the overpaid tax directly from the Commissioners. But just as the two companies were enriched the moment they received the tax from the customer so by the same token the two companies are also enriched the moment they receive the repayment from the Commissioners. The question is, will they be "unjustly enriched"? We may observe in the first place that if repayment were to be made by the Commissioners to the liquidator acting for both companies he would be holding money which by the ties of natural justice he is obliged to refund to the person who wrongly and mistakenly paid it -- the customer. It appears to the Tribunal that the whole essence of unjust enrichment is that the claimant must put the other party back into his original position. It seems he can only do that by refunding the tax in full to those who paid it. Otherwise it would be unjust to allow the liquidator, on behalf of the companies, to retain a benefit received at the expense of the customer. The Tribunal has therefore come to the conclusion that if the liquidator were to apply the repaying money in the liquidation he would be doing that which may be permissible under insolvency law but which on the facts of this case would be contrary to the principles of natural justice. Section 24 of the 1989 Act is silent as to the recovery of overpaid value added tax in cases where the claimant is in liquidation; but it does provide a specific defence to a claim for repayment of tax if that repayment would unjustly enrich the claimant. The Tribunal can see no reason why insolvency law should take precedence over the law relating to unjust enrichment. In the present case in the opinion of the Tribunal it is legitimate for the Commissioners in deciding whether there will be unjust enrichment to consider whether the claimant will repay the tax to the various customers who are entitled to have it repaid. The unjust benefit principle should be regarded as the correct theoretical principle of restitution. As Lord Wright said in Brooks Wharf and Bull Wharf Ltd v. Goodman Brothers [1937] 1 KB 534 at p 545:

'The obligation to repay is imposed by the Court simply under the circumstances of the case and on what the Court decides is just and reasonable having regard to the relationship of the parties. It is a debt or obligation constituted by the act of the law, apart from any consent or intention of the parties or privity of contract."

One final point on this aspect of the case should be noted. It is agreed on both sides that the credit notes were issued bona fide following liquidation to correct a genuine mistake in the form of an overcharge. If it were otherwise the Commissioners would not have accepted the validity of the credit notes recognising, as they must have done, the law as laid down in the Tribunal decision of Larullah Ltd [1985] 2 BVC 148 where it was held that the real reason for issuing the credit notes was to provide finance to a company ("Coconut Ltd") to pay its creditors. It could not therefore be said that the credit notes were issued bona fide to correct a mistake or overcharge or give a proper credit. That issue, the validity of the credit notes, formed a large part of the decision in Lamdec Ltd, upon which the Appellants rely in the present appeal. The tribunal's observations on the question of unjust enrichment were therefore not necessary to the decision in that case. There are however important observations with which this Tribunal would agree. For example at page 26 of the written decision:

"In the instant case the matter is further complicated by the fact that Petrolite is one of the Appellant's ordinary creditors and would receive part, though by no means the whole, of the benefit of the repayment; in that case it could be argued, if the Appellant is enriched, part of the enrichment is just (because Petrolite will receive it) and part is unjust (because Petrolite will not receive it). In this connection we see no half-way house on Section 24(3) which seems to us to mean that the repayment is to be made either in full or not at all."

Later the tribunal said:

"Obviously Petrolite ought to be reimbursed as far as possible. But the scheme of Section 24 is that repayment must be made, not direct to Petrolite, but to the Appellant, leaving Petrolite to take its chances as a creditor. If repayment by the Commissioners is refused, Petrolite will get nothing at all. If repayment is made at least Petrolite will get something, which is better than nothing. If we were required to express a view, we would say that there is no unjust enrichment if the repayment will be applied to the extent permitted by law, for the benefit of the person overcharged and the person to whom the repayment is made will not be entitled to keep the remainder, if any, for himself in which expression, in relation to a company in liquidation we would include the shareholders but not the creditors. In the instant case, therefore, we would hold that the repayment ought to be made."

The Tribunal, in the present case, has tried to show that under the application of the law relating to unjust enrichment the customer should not be left to take its chances in the liquidation. The Commissioners are holding the tax which the customers wrongly paid and which in law should be returned to them in full. Under the law of unjust enrichment the claimant must return the repayment, when made, to its rightful source. If it is not returned to the customers then the claimant has, by retaining it to pay the creditors, become unjustly enriched. For the foregoing reasons the Tribunal holds that the Commissioners are entitled to consider what the effect of a repayment by them to the claimant would be and if, as they have been told, the repayment will not be passed directly back to the customers, the claimants would be unjustly enriched by retaining it. The Commissioners have a good defence to the claim under section 24(3) and are entitled to withhold the repayment of the tax wrongly charged.

The appeals are dismissed with no order as to costs.