Case: Water company would be unjustly enriched if VAT overpaid on supplies reimbursed
 UKUT 0431 (TCC)
Mrs Justice Falk & Judge Jonathan Cannan
Decision released 27 December 2018
VAT-repayment of output tax – Section 80(3) VATA 1994 – Unjust enrichment – Water and sewerage charges set by regulators – Whether regulators took into account the incidence of VAT when setting the charges - Evidence before the FTT – Whether that evidence was probative of the decision the regulators would have taken if they had known that infrastructure charges were outside the scope of VAT – Approach to admission of new evidence by Upper Tribunal – Karoulla considered
Anglian Water Services Ltd  BVC 503
In March 2009 Anglian Water Services Ltd (AWSL) submitted a so-called Flemming claim for VAT overpaid on charges which it incorrectly treated as standard rated in the period 1 April 1990-4 December 1996. It was not disputed that the charges should have been zero-rated but HMRC refused to repay the overcharged VAT to AWSL on the grounds that it would be unjustly enriched. HMRC’s refusal was upheld by the FTT (TC05852). The UT heard AWSL’s appeal against this decision.
Section 80(3) VATA 1994 permits HMRC to refuse to repay a claim for VAT if ‘the crediting of an amount would unjustly enrich the claimant’.
AWSL had four grounds of appeal (see para 4 of the decision):
(1)The FTT failed to properly identify the principles in Baines & Ernst;
(2)The FTT failed to properly apply the principles in Baines & Ernest;
(3)The FTT reached conclusions and/or made findings of fact which no person acting judicially and properly instructed as to the relevant law could have reached; and
(4)The decision of the FTT would have been different if a letter dated 6 September 1996 from HM Customs & Excise to the Water Authorities Association had been before the FTT.
Baines & Ernst ( BVC 28) is a Court of Appeal decision concerning unjust enrichment. In its judgement the court set out various principles which should be applied when considering the issue.
In relation to Ground 1 the UT found that the FTT had not failed to properly identify the relevant legal principles to apply, i.e that ‘the burden of proof to establish unjust enrichment lay on HMRC, that no presumptions were to be applied and that unless HMRC could prove that a particular amount of VAT was passed onto customers then AWSL was entitled to full repayment of its claim’ (para 40). AWSL did not put forward a strong argument in relation to ground 1, as the UT stated its ‘real complaint is that the FTT failed to properly apply the principles, which is the subject of Grounds 2 and 3’ (para 41).
In relation to Grounds 2 and 3 AWSL argued that the FTT had engaged in ‘unwarranted speculation’ (para 44). The charges on which AWSL had incorrectly charged VAT were infrastructure charges which, under the terms by which the water industry had been privatised, were set by the regulator. The FTT had heard a great deal of evidence concerning the regulation of the water industry and how charges were set. However, this did not come directly from the decision makers themselves. AWSL submitted that in the absence of information direct from the regulator the FTT’s conclusions were ‘nothing more than speculation’ (para 60). In response HMRC argued that there had been evidence before the FTT including ‘inferences which the FTT drew as to what factors the regulators would have been likely to take into account ……..and what steps the Secretary of State would have taken….’(para 61).
The evidence before the FTT, and then the UT, on how the regulator would have set maximum infrastructure charges is set out in the decision. The evidence is complex and, as the UT states, Grounds 2 and 3 are ‘not straightforward’ (para 96). Having considered the information before it the UT concluded that the FTT had drawn ‘inferences on the balance of probabilities’ and had not engaged in ‘unwarranted speculation’ (para 96). Therefore, there was no grounds to overturn the FTT’s decision.
In relation to Ground 4, AWSL wanted to admit new evidence to the UT which had not been considered by the FTT. It is for the FTT to establish the facts of a case as appeals to the UT (and higher courts) can only be made on points of law. However, in summary, new evidence can be admitted if (1) it was not available to the lower court, (2) it would have an important influence on the outcome and (3) it is credible (see para 99 for more detailed analysis).
The UT considered that the letter which AWSL wished to admit to evidence ‘does not add anything material….and does nothing to undermine the FTT’s conclusion’ (para 110).
AWSL’s appeal was dismissed.
The UT’s approach will be of interest to other taxpayers against whom HMRC are employing an unjust enrichment argument. However, as the decision turned upon a consideration of the specific facts of AWSL’s business and the way in which its charges were regulated, it is unlikely to be of significant wider interest.
For commentary on unjust enrichment, see our In-depth commentary at ¶55-432.