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Revenue drops unjust enrichment defence on VAT

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HM Revenue and Customs (HMRC) has announced that it has readjusted its policy of refusing some claims made by businesses for the repayment of overpaid VAT on the grounds that the repayment would unjustly enrich the firm.

The move follows a House of Lords ruling that confirmed HMRC must give back to Marks and Spencer some of the VAT that the company paid on its teacake sales.

The case arose over whether Marks and Spencer teacakes qualified as cakes or as biscuits, a definition that would make them either subject or not subject to VAT.

HMRC had argued that any repayment of VAT would unjustly enrich Marks and Spencer since customers who had bought the teacakes while VAT was charged on them would not be compensated.

Where a business has accounted for too much VAT and makes a claim to recover it, HMRC could refuse to pay that claim if they can show that payment would unjustly enrich the claimant.

A change in the law in 2005, however, limited the unjust enrichment defence to claims made before 26 May 2005.

But now HMRC has said that, as a result of the Lords judgment, the unjust enrichment defence will no longer be used against any claim made before 26 May 2005 (when the law was amended to remove the discrimination that meant unjust enrichment could only be used against a specific category of claimants).

HMRC went on to say that claims “made before 26 May 2005 that were refused on the grounds of unjust enrichment and have still not been settled will now be paid, subject to verification” and that claims “where the unjust enrichment defence was not challenged or was upheld, in the courts, may be resubmitted for consideration, subject to the relevant time limits”.