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<b>Tax News:</b> Unjust enrishment rules on trial. By Nichola Ross Martin

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20th Feb 2006
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A popular theory that the 2005 Budget extended the rules on 'unjust enrichment' in relation to VAT refunds in anticipation of HMRC losing a string of cases involving local authorities is about to be tested.

HMRC has had to admit defeat in a string of cases brought in front of the VAT tribunal. Library and welfare services are all now deemed to be exempt from VAT, and the local authorities involved are due substantial VAT repayments. There have also been recent cases involving private sector supply of educational training services, such as motor cycle training schools and dance schools.

The latest case to reach the tribunal concerns the supply of off-road car parking, and was brought by the Isle of Wight Council, together with Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire.

HMRC lost again, and could have to repay millions of pounds if other local authorities apply for similar VAT treatment.

The question now is, will the local authorities be able to reclaim their VAT refunds, or can customs rely on the defence of unjust enrichment and still withhold the claims?

Customs may use 'unjust enrichment' as a defence when an incorrect VAT charge has been passed on to customers, and refuse to meet claims for repayment where repayment would unjustly enrich the claimant. There is also a three year cap on repayment claims.

The 2005 Budget amendment to s.80 VAT Act 1984, extended the 'unjust enrishment' rules to all claims regarding overpayment of VAT - including local authorities. It does not matter whether a claimant is in a net payment or repayment position on individual VAT returns.

Local authority activities carried out under a specific legal regime are deemed non-business activities and so are not normally subject to VAT. However, if it can be proved that this then creates a significant distortion of competition, the activities will fall within the scope of VAT.

Customs tried to argue that distortion of competition denies authorities non-business treatment of activities that are undertaken as public bodies, and left the local authorities to disprove this contention.

The Isle of White decision confirms not only that the burden of proof lies with Customs rather than the local authority, but also that the local authorities have been incorrectly claiming VAT.

HMRC will have to prove that the windfall profit represented by the repayment due for VAT incorrectly charged on parking represents unjust enrichment to those local authorities.

The main argument for the local authorities will be that ticket prices have not changed since VAT changes to car parking were applied. This means that authorities have always borne the effects of the VAT and not the customers. In short, market forces dictate car park pricing, and not VAT.

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