B E T W E E N

JUDGMENT
 
DATED: 14 June 1994

The Appellants, who carried on business as department stores from premises in Ayr, have appealed against a decision of the Respondents dated 29 September 1993 disallowing an adjustment claimed by the Appellants to their VAT returns increasing their claim for repayment of input tax by the sum of £351,218.43p. The issues between the parties are (1) whether the adjustment complied with Regulation 7 of the Value Added Tax (Accounting and Records) Regulations 1989; and (2) if not, whether the claim in terms of Section 24 of the Finance Act 1989 was met by the defence under Section 24(3) that repayment would unjustly enrich the claimant.

The facts, which are not in dispute, are as follows. The Appellants own seven department stores in Scotland, parts of which included separate internal shops which were rented to "concessionaires" (hereinafter referred to as tenants), the rent payable being an agreed percentage in each case of the takings of the tenant. At that time the rents were exempt supplies for the purposes of Value Added Tax. In April 1990 the Appellants notified all the tenants that they were electing to waive the said exemption and that in future the rents would be subject to Value Added Tax. Thereafter the tenants were charged, and paid, Value Added Tax on the rents amounting between April 1990 and 29 December 1992 to a total of £936,987.37p. The said sums were included in the Appellants' returns as output tax and paid over to the Respondents. On 29 December 1992 the Appellants went into receivership in terms of a floating charge dated 28 April 1989 in favour of the Clydesdale Bank PLC granting a security over the whole property of the company, including all debts and obligations to become due. Early in 1993 the receivers discovered that the Appellants had failed to notify the Respondents of the exercise of their option to tax in 1990 and accordingly the option was invalid under the provisions of paragraph 3(6) of Schedule 6A to the Value Added Tax Act 1983. On 25 June 1993 the receivers wrote to all the tenants notifying them that the option to tax had been invalid and that the Value Added Tax had been wrongfully imposed. They issued credit notes to each tenant on said date which narrated the appropriate figure in each case for "credit re VAT charged in error for the period April 1990 to December 1992". In their letter the receivers explained that as the Appellants were in receivership they were unable to include payment with the credit note but that this would be added to any unsecured claim they might already have against the company. The tenants involved were listed by the receivers as unsecured creditors and their estimated dividend to them was 6.5p in the pound. No dividend will be payable to these creditors if the appeal is unsuccessful. It is not disputed that in this case it was procedurally correct either to adjust the output tax on a Value Added Tax return of the Appellants in accordance with the said Regulation 7 or alternatively the Appellants could claim a refund under Section 24 of the Finance Act 1989. The Respondents contend that in neither case are the Appellants entitled to the refund claimed.

Regulation 7 Regulation 6 provides that any claim under Section 24 of the Finance Act 1989 shall be made in writing to the Respondents and shall refer to documentary evidence in the claimants possession stating the amount of the claim and the method by which that amount was calculated. Regulation 7, which is headed "Adjustments in the course of business" provides:

"(1) This regulation applies where --

(a) there is an increase in consideration, or

(b) there is a decrease in consideration which includes an amount of tax and the increase or decrease occurs after the end of the prescribed accounting period in which the original supply took place.

(2) Where this regulation applies the taxable person shall adjust his value added tax account in accordance with the provisions of this regulation.

(3) The maker of the supply shall --

(a) in the case of an increase in consideration, make a positive entry; or

(b) in the case of a decrease in consideration, make a negative entry

for the relevant amount of tax in the tax payable portion of his value added tax account.

(4) The recipient of the supply, if he is a taxable person, shall --

(a) in the case of an increase in consideration, make a positive entry; or

(b) in the case of a decrease in consideration, make a negative entry

for the relevant amount of tax in the tax allowable portion of his value added tax account.

(5) Every entry required by this regulation shall, except where paragraph 6 below applies, be made in that part of the value added tax account which relates to the prescribed accounting period in which the increase or decrease is given effect in the business accounts of the taxable person.

(6) Where any entry required by this regulation is to be made in the value added tax account of an insolvent person then any such entry shall be made in that part of the value added tax account which relates to the prescribed accounting period in which the supply was made or received.

(7) None of the circumstances to which regulation applies is to be regarded as giving rise to any application of regulation 5."

The Respondents maintain that the adjustment made by the receivers does not comply with Regulation 7 because the credit notes did not show that there had been a decrease in consideration of the said supplies and that by implication from Regulation 7 any alteration in the consideration could not be imposed unilaterally by one party to the transaction. There had to be agreement between the parties. Any alteration in the value of a supply could not be made unilaterally because the customer might be worse off -- in this case because he will receive only a fraction of the underpayment by virtue of the rules of insolvency. There was no evidence of such agreement in the present case and the credit notes were accordingly invalid. Counsel for the Appellants stressed that Regulation 7 made no reference expressly or by implication to the need for agreement between the parties. The sole duty of the Appellants was to make the adjustments required by Section 7(1), (2) and (3) and it was not suggested that this had not been done in the present case. Indeed Counsel submitted that the receivers had carried out this procedure exactly. It was for the recipient to comply with the provisions of the Regulation applicable to him. In any event, the question of the applicability of Value Added Tax to the tenants' contracts arose as a matter of law and did not depend on agreement. Counsel pointed to the terms of the letter of 25 June 1993 which showed that the tenants, albeit in ignorance of the true legal position, had paid the Value Added Tax demanded of them by the Appellants. The credit notes as provided to the tenants were prima facie proof that there had been a decrease in the consideration, which in this context is equivalent to "price or rent". The credit notes having been issued by the receivers were a clear intimation that the receivers would accept a claim for the sums stated therein albeit that such claims would have to take their appropriate statutory ranking.

We agree with the Appellant's arguments on this matter and consider that the credit notes were valid and complied with the provisions of Regulation 7. That suffices for the decision of this case, but in view of its general importance we think it right to summarise the arguments under Section 24 of the Finance Act 1989.

"Section 24

(1) Where a person has paid an amount to the Commissioners by way of value added tax which was not tax 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."

The Respondents rely upon the defence of unjust enrichment of the claimant. The parties referred to European Law and to Scottish and English cases, all as undernoted, but we see no obstacle in any of these cases to deciding, in the present circumstances, whether there was enrichment, and if so whether it was unjust. The Respondents submitted that the Appellants (including the receivers) were enriched in respect that by receipt of the money they would benefit by the amount of reduction of the burden of debt. It was unjust if the receivers did not pass on to the tenants the full amount of loss which they had suffered. The Appellants' Counsel pointed out that the company and its shareholders would not be enriched by the payment in respect that the receivers will hold these payments in trust for the company's creditors (including the tenants), and that the receivers are bound as a matter of law to distribute the acquirenda in terms of Section 60 of the Insolvency Act 1986 and Rule 4.66 of the Insolvency (Scotland) Rules 1986. The Appellants' Counsel gave a lengthy history of the public policy pervading insolvency situations over the last 100 years which precluded any benefit reaching the company or equivalent in receivership liquidation or any equivalent. These provisions were fundamental and a matter of public policy. Any attempt to depart from the principle of equality was contrary to public policy and hence illegal and unenforceable (Farmers' Mart Ltd v. Milne, 1914 SC (HL) 84; and British Eagle International Air Lines Ltd v. Compagnie Nationale Air France, [1975] 1 WLR 758). Accordingly it could not be unjust to treat the tenants as other than bound by the said Section and Rules. Indeed, if the receivers did otherwise, they would be in breach of their duty under these statutory provisions. In law the tenants require to be treated as ordinary creditors and as such will receive a dividend.

We agree with these submissions and with the statement made by the Tribunal Chairman in the case of Lamdec Ltd (MAN/90/1018) where he said, obiter, "there is no unjust enrichment if the repayment will be applied, to the full 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 present case the company and shareholders cannot benefit at all.

We allow the appeal and find the Appellants entitled to the expenses thereof. We grant the parties leave to apply to this Tribunal within 50 days from the date hereof if agreement cannot be reached on the amount of these expenses.