Commissioners of Customs and Excise v McMaster Stores (Scotland) Ltd

CourtCourt of Session (Inner House - First Division)
Judgment Date26 May 1995
Date26 May 1995

Court of Session (Inner House).

Lord President Hope, Lord Allanbridge and Lord Johnston.

Customs and Excise Commissioners
McMaster Stores (Scotland) Ltd

JR Campbell (instructed by Shepherd & Wedderburn WS) for Customs.

JE Drummond-Young QC and Colin Tyre (instructed by Dorman Jeffrey & Co) for the taxpayers.

The following cases were referred to in the judgment:

Amministrazione delle Finanze dello Stato v SpA San Giorgio(Case 199/82) [1983] ECR 3595

Ayerst (HMIT) v C & K (Construction) Ltd ELR[1976] AC 167

C & E Commrs v Fine Art Developments plc ELRVAT[1989] AC 914; (1989) 4 BVC 174

Commrs for General Purposes of Income Tax for City of London v GibbsELR[1942] AC 402

Farmers' Mart Ltd v Milne 1914 SC (HL) 84

Hans Just I/S v Danish Ministry for Fiscal Affairs (Case 68/79) [1980] ECR 501

Lamdec Ltd (LON/90/1018) No. 6078; VAT[1991] BVC 721

Morgan Guaranty Trust Co v Lothian Regional Council 1995 SLT 299

Oriental Inland Steam Co, Re, ex parte Scinde Railway Co (1874) 9 Ch App 557

Paragasu Steam Railroad Co, Re Black & Co's Case(1872) 8 Ch App 254

Taylor v Wilson's Trustees SC1975 SC 146

Value added tax - Adjustment to returns - Claim for increased input tax - VAT charged by taxpayers to shop tenants in error and paid over to Customs - Credit notes issued for amounts charged - Taxpayers in receivership so any tax repaid would be for the benefit of all creditors, not paid wholly to tenants - Whether repayment by Customs would be unjust enrichment of taxpayers - Value Added Tax (Accounting and Records) Regulations 1989 (SI 1989/2248), reg. 7 (SI 1995/2518 section 38Value Added Tax (Regulations) 1995 (SI 1995/2518), reg. 38); Finance Act 1989, s. 24(3) (Value Added Tax Act 1994 section 80 subsec-or-para (3)Value Added Tax Act 1994, s. 80(3)).

This was an appeal by Customs against a decision of the Edinburgh VAT tribunal ((EDN/93/213) No. 12,322; [1995] BVC 1061) that VAT charged to tenants in error and paid over to Customs was not recoverable by a company in receivership.

The company let parts of its department stores to tenant concessionaires at a rent consisting of a percentage of the tenants' takings.

Until Sch. 6A of the Value Added Tax Act 1983 came into force on 1 August (inserted into the 1983 Act by the Finance Act 1989) the grant of the right to occupy the internal shops was an exempt supply within Sch. 6, Grp. 1, item 1 of the 1983 Act. From April 1990 to December 1992, having elected to waive the exemption pursuant to Sch. 6A, para. 2, the company charged VAT on the rents and paid the tax over to Customs.

When receivers were appointed over the property and undertaking of the company in December 1992, they discovered that the company had failed to notify Customs of the election to waive the exemption. The result was that the election was invalid. The receivers, therefore, wrote to all the tenants notifying them that the option to tax was invalid and that VAT had been wrongly imposed. They issued credit notes for the VAT paid and explained that the amount would be added to any unsecured claim they might have against the company.

Customs refused a claim for adjustment to the company's VAT returns. The issue was whether an adjustment complied with the Value Added Tax (Accounting and Records) Regulations 1989 ("the 1989 regulations"), reg. 7, and if not, whether an alternative claim under the Finance Act 1989, s. 24 for recovery of tax paid which was not due was met by Customs' defence under s. 24(3) that repayment would unjustly enrich the company.

The tribunal held that there had been a decrease in the consideration, taken to be the combined rent and VAT (see s. 10(2) of the 1983 Act), which the tenants had paid for occupation of the premises and that the receivers would accept claims by the tenants for repayment. Accordingly, the company was entitled to an adjustment under reg. 7 of the 1989 regulations. The tribunal added that the company could also have recovered the VAT under s. 24(1) of the 1989 Act.

Customs contended that the company would be unjustly enriched by recovery of the VAT paid mistakenly. The repayment would enable the company to satisfy a greater proportion of its debts and any VAT recovered would not be returned to the tenants who had been wrongly charged but would be available for distribution among all the company's creditors.

Held, dismissing Customs' appeal:

1. An adjustment under reg. 7 of the 1989 regulations was not appropriate. That regulation was concerned only with the making of adjustments to the VAT account to reflect an increase or a decrease in consideration which included an amount of tax chargeable on the supply. It did not apply to an exempt supply where no VAT had been due.

2. While a claimant could be said to be "enriched" by the recovery of VAT even if he held the money as trustee or was bound by contract to pay it to another person, the question whether he was "unjustly" enriched was a question of fact and degree. The tribunal were entitled to conclude that the company would not be unjustly enriched, since, due to the company's insolvency, it would receive no benefit as a result of the repayment for the company or its shareholders.


Lord President Hope: This is an appeal under s. 11(7) of theTribunals and Inquiries Act 1992 against a decision of the VAT tribunal dated 14 June 1994 by which they allowed an appeal by McMaster Stores (Scotland) Ltd (in receivership) ("the taxpayers"), who are the respondents in this appeal, against a decision by Customs. Customs had disallowed an adjustment to the taxpayers' VAT returns, the effect of which was to increase their claim for repayment of input tax by the sum of £351,216.43.

The issues between the parties before the VAT tribunal were:

  1. (2) whether the adjustment complied with reg. 7 of the Value Added Tax (Accounting and Records) Regulations 1989; and

  2. (3) if not, whether the taxpayers' alternative claim in terms of s. 24 of the Finance Act 1989 for the recovery of overpaid VAT was met by Customs' defence under s. 24(3) that repayment of the amount claimed would unjustly enrich the claimant.

The tribunal held that the adjustment claimed did comply with reg. 7 of the 1989 regulations and on this ground they allowed the appeal. But they made it clear in their decision that, had it been necessary for them to resolve this issue, they would have held that the taxpayers were entitled to succeed also on their alternative claim made under s. 24 of the 1989 Act. It is against this decision that Customs have now appealed.

The claim for repayment arose in the following circumstances. The taxpayers own several department stores in Scotland, parts of which include separate internal shops which had been let to concessionaires. The rent payable by the tenant concessionaires consisted of an agreed percentage of the tenants' takings in each of the internal shops which they occupied. The grant by the taxpayers to the tenants of the right to occupy the internal shops was a supply of goods or services within the meaning of s. 2(1) of the ValueAdded Tax Act 1983. But it was not a taxable supply within the meaning of subs. (2) of that section because it was, in terms of s. 17 of and Sch. 6 to that Act, an exempt supply. This is because an exempt supply in terms of s. 17 of the Act includes "the grant of any interest in or right over land or of any licence to occupy land": Sch...

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