In a significant case for insolvency practitioners (IPs), following a judicial review the Administrative Court has held that HMRC can refuse to pay a refund of overpaid VAT to a supplier.

The supplier had become insolvent making it impossible or excessively difficult for the customer (who had paid the overcharged VAT to the supplier) to obtain a refund from the supplier. Previously such refund payments would have gone into the general pot for distribution to creditors, but no longer.

The decision in Premier Foods (Holdings) Ltd, R (on the application of) v HM Revenue and Customs & Anor [2015] represents what will now become policy for HMRC in dealing with similar cases in the future.

Background

Premier Foods (Holdings) Limited (Premier) was VAT registered and a customer of Q Cold Limited (QCL). QCL had wrongly invoiced Premier for VAT (totalling just under £4 million) on goods that should have been zero rated. QCL had accounted to HMRC for the VAT it collected from Premier. Premier had in turn offset the VAT against its own output VAT.

Premier had no right to reclaim the incorrectly collected VAT from HMRC as section 80 of the Value Added Tax Act 1994 (VATA) only granted that right to QCL. QCL would, in the ordinary course, reclaim the VAT from HMRC and then account to Premier.

Unfortunately, QCL entered into administration after submitting a claim for the refund to HMRC. If HMRC had repaid the c£4 million to QCL that refund would have been used to satisfy all creditor claims in the administration with Premier being one of the many unsecured and non-preferential creditors.

As Premier had offset the VAT on the incorrect invoices against its own output VAT, it faced having to account to HMRC for just under £4 million under various assessments and then being left as an unsecured creditor of QCL and likely to get only a nominal dividend in QCL's administration. This would have represented a huge windfall for QCL's administrator and creditors generally.

Premier argued that HMRC could make use of the unjust enrichment defence in section 80(3) of VATA to refuse to pay QCL and could instead pay the refund to Premier, effectively a paper reconciliation cancelling the assessment that had been raised against Premier.

HMRC decided the defence was not available to it and relied on the Scottish decision of the Inner House of the Court of Session in Customs and Excise Commissioners v McMaster Stores (Scotland) Ltd (in receivership) [1995].

In that case the Inner House held that the tribunal was entitled to find that payment by HMRC to an insolvent supplier (McMaster) under a provision not materially different in wording to section 80 would not give rise to "unjust enrichment", even though the effect of such payment was that the customers who had borne the burden of VAT, and who were unsecured creditors, had to share the amount with other unsecured creditors.

The court reasoned that a repayment to McMaster was the only mechanism by which McMaster's customers could get recompense (through the dividend they would receive as unsecured creditors) as the customers had no direct claim against HMRC.

Decision

The court held that the McMaster decision was no longer good law and that it was not obliged to follow decisions of the Court of Sessions. The current legal position was represented by a decision of the European Court of Justice in Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze [2008].

The Reemtsma decision applied the principles of fiscal neutrality, effectiveness and non-discrimination so that a Member State must repay the customer directly where the supplier was insolvent or it would be impossible or excessively difficult for the customer to recover the refund from the supplier. The customer thereby acquired a direct claim against HMRC. The decision in Reemtsma was endorsed by the Court of Appeal in Investment Trust Companies (In Liquidation) v The Commissioners for Her Majesty's Revenue and Customs [2015].

The court held that by virtue of the Reemtsma decision and section 80(3) of the VATA, HMRC had grounds and the machinery to decline QCL's claim and to make a refund directly to Premier. This translated into a paper reconciliation exercise with the court ordering that the assessments raised against Premier be quashed.

Comment

This decision will come as a relief for customers who have overpaid VAT and more so for those who then face a claim from HMRC having used those VAT payments when calculating their own input VAT.

Where the customer has overstated its own input VAT, as a result of the mistakenly charged VAT, HMRC's practice appears to be to notify the customer by way of an assessment after it receives a statutory claim for a refund from the supplier.

Customers who receive such assessments should immediately make enquiries as to the solvency of the supplier. If there is any doubt as to the suppliers solvency the customer should assert a Reemtsma claim to HMRC for the refund to be repaid to the customer directly.

The decision will be a disappointment for office holders and the general body of creditors of insolvent suppliers. Questions remain as to what happens where the customers are members of the public who are not VAT registered and who are ultimately out of pocket by having borne the mistakenly charged VAT. Will HMRC track down all such customers and pay them directly? It is clear that will not be an option as HMRC will not have access to information to identify the customers.

We suspect that this decision means that HMRC is even more unlikely to pay the refund to any insolvent supplier as it could then face duplicate claims from customers asserting a direct Reemtsma claim.

If such customers have proved in the supplier's insolvency and their claims include an element of VAT, the IP should inform the customers to contact HMRC and assert their claims for refunds. That will in turn extinguish part of the customers' provable debt. Customers must make claims to HMRC within three years.