Investment Trust Companies v Revenue and Customs Commissioner

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLord Reed,Lord Neuberger,Lord Mance,Lord Carnwath,Lord Hodge
Judgment Date11 April 2017
Neutral Citation[2017] UKSC 29
Date11 April 2017

[2017] UKSC 29


Hilary Term

On appeal from: [2015] EWCA Civ 82


Lord Neuberger, President

Lord Mance

Lord Reed

Lord Carnwath

Lord Hodge

The Commissioners for Her Majesty's Revenue and Customs
The Investment Trust Companies (in liquidation)
The Commissioners for Her Majesty's Revenue and Customs
The Investment Trust Companies (in liquidation)

Appellants/Respondents (HMRC)

Stephen Moriarty QC

Andrew Macnab

(Instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs)

Respondents/Appellants (Investment Trust Companies)

Laurence Rabinowitz QC

Andrew Hitchmough QC

Michael Jones

(Instructed by PricewaterhouseCoopers Legal LLP)

Heard on 17, 18 and 19 May 2016

Lord Reed

(with whom Lord Neuberger, Lord Mance, Lord Carnwath and Lord Hodge agree)


This appeal arises out of the payment of value added tax which was not due, because the supplies in question were exempt from VAT under the relevant EU directive. At the time of the payment, however, the supplies were treated as taxable by the UK's VAT legislation, which had incorrectly transposed the directive, and were mistakenly believed to be taxable by the customer who paid an amount charged in respect of the tax, the supplier who received that amount, and the Commissioners to whom the supplier accounted for the tax. As the corollary of the supplies being believed to be taxable, the supplier and the Commissioners also believed that the supplier was entitled to deduct from the tax chargeable on its supplies to customers the tax which it had itself paid on taxable supplies received for the purposes of its business. It therefore accounted to the Commissioners for the tax chargeable on its supplies during each accounting period on the basis that it could deduct and retain the amount of the tax which it had paid to its own suppliers, and it paid the Commissioners only the remaining surplus, if any.


In that situation, does the customer have a common law claim against the Commissioners for restitution, or is he confined to a claim against the supplier? If he has a claim against the Commissioners, is it for the entire amount which he paid to the supplier, or only for the amount, if any, which the Commissioners received from the supplier? Does it make a difference if any claim for restitution by the supplier against the Commissioners is time-barred? Does it make a difference if there is a statutory scheme under which the customer can obtain reimbursement of the amount which the supplier paid to the Commissioners, but not of any amount which was retained by the supplier? Furthermore, if the statutory scheme has the effect of excluding a common law claim by the customer against the Commissioners, is that compatible with EU law? These are the principal issues which the court has to decide.

The factual background

The claimants are investment trust companies ("ITCs"). They are "closed-ended" investment funds constituted as limited companies: that is to say, the companies were established with a fixed number of issued shares and a term date when the company would be wound up and the assets distributed to the shareholders. They have now reached their term dates and are in winding up. The claims of three of the ITCs ("the Lead Claimants") have been taken forward as lead claims while the others are stayed to await the outcome of these proceedings. The Lead Claimants are Kleinwort Overseas Investment Trust plc, F&C Income Growth Investment Trust plc, and M&G Recovery Investment Trust plc. They will be referred to respectively as the Kleinwort Trust, the F&C Trust and the M&G Trust.


Between 1992 and 2002 the Lead Claimants received supplies of investment management services from their investment managers ("the Managers"). Those were respectively Kleinwort Benson Investment Management Ltd, F&C Asset Management Ltd and M&G Investment Management Ltd. Their services were rendered under contracts which provided for the Managers to be paid fees plus VAT "if applicable" (or words to similar effect). Under the provisions of the UK VAT legislation then in force, those services, unlike the other investment management services provided by the Managers, did not qualify for exemption. The Managers therefore charged VAT on the supplies of their services. The VAT charges were separately identified on the VAT invoices issued to the Lead Claimants, and the Lead Claimants paid the amounts charged.


The Managers were obliged to account to the Commissioners for the VAT due in respect of their chargeable supplies during each accounting period. It is relevant to note that the obligation to account for tax arises whether or not tax is charged on the supply or paid by the customer: it is the supplier, rather than the customer, who is under a liability to the Commissioners, and it is the supply, rather than payment by the customer, which triggers the supplier's liability. The customer's liability to pay an amount in respect of the tax rests upon contract. The Managers' obligation to account for the tax due did not, however, mean that they were obliged to pay the Commissioners the whole of, or indeed any part of, the sums they received from the Lead Claimants. Under general principles of VAT law, they were entitled to deduct from the tax chargeable in respect of any taxable supplies they had made, known as output tax, the tax chargeable in respect of any taxable supplies which they had received for the purpose of their business of making taxable supplies, known as input tax.


It therefore followed from the legislative treatment of the services supplied to the Lead Claimants as taxable, that the Managers were understood to be entitled to pay to the Commissioners only the surplus of their output tax over their input tax, and to retain the balance of the output tax in their own hands. If the input tax exceeded the output tax, they were entitled to a credit, which could be paid by the Commissioners or carried forward to later accounting periods. Thus, for example, if a Manager made taxable supplies to an ITC, and the VAT chargeable on those supplies was £100, then the Manager was bound to account to the Commissioners for £100. If the Manager had purchased taxable supplies during the relevant period on which the VAT was £25, the Manager was entitled to credit for that £25, and was required to pay the Commissioners only the balance of £75.


It was also possible for an ITC to be registered for VAT (if it invested in securities outside the EU), and in that event to recover, as input tax, some of the VAT which it had paid to its Manager. The F&C Trust and the M&G Trust made no such supplies, but the Kleinwort Trust did, and recovered 58.4% of the VAT charged by its Manager (that being the percentage of its portfolio which was invested outside the EU). Its claim against the Commissioners has therefore been adjusted to take account of the sums which it has already recovered as input tax: rather than claiming every £100 which it paid to its Manager in respect of VAT, it claims £41.60, being the difference between the £100 and the £58.40 which it recovered as input tax.


The essential pattern was therefore as follows:

1. The Managers supplied investment management services to the Lead Claimants under contracts providing for the payment of fees plus VAT if applicable.

2. The Managers charged the Lead Claimants VAT on the supply of those services, and included the VAT charges on the invoices which they issued to the Lead Claimants.

3. The Lead Claimants paid the invoices. They might or might not be able to recover some of the VAT as input tax.

4. The Managers made periodic VAT returns in which they:

(i) accounted for the VAT chargeable on their supplies of investment management services as output tax;

(ii) deducted as input tax the VAT which they had paid to third parties for supplies received in the course of their business; and

(iii) paid the difference between their output tax and input tax to the Commissioners.


It transpired that the supplies of the investment management services were exempt from VAT under article 13B(d)(6) of the Sixth VAT Directive (77/388/EEC). That was established by the European Court of Justice in JP Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Comrs (Case C-363/05) [2007] ECR 1–5517. Although the UK failed to transpose article 13B(d)(6) correctly into national legislation until 1 October 2008, it had direct effect at all material times. It is therefore common ground between the parties that the Lead Claimants paid the Managers the amounts they did in respect of VAT, and that the Managers accounted for VAT to the Commissioners, under a mistake of law.

The Managers' claims against the Commissioners

In early 2004, when the Claverhouse litigation began and was publicised, the Managers of the F&C Trust and the M&G Trust made claims to the Commissioners under section 80 of the Value Added Tax Act 1994 for refunds in respect of VAT accounting periods from 2001 to 2004. It will be necessary to return to section 80, the material provisions of which are set out in para 75 below. Claims were not made in relation to earlier accounting periods because of the three year limitation period imposed by section 80(4). For the same reason, no claim was made by the Managers of the Kleinwort Trust, which had gone into winding up in 1998. Following the Claverhouse judgment, the Commissioners allowed the claims and repaid the relevant amounts (as will be explained shortly) to the Managers, with interest. In accordance with section 80, and regulations made pursuant to section 80A, the Commissioners required the Managers to enter into approved "reimbursement arrangements" with the Lead Claimants, so that the refunded VAT and interest were passed on by the...

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