What is unjust enrichment?

At the heart of HMRC’s VAT rebate to private members’ golf clubs on green fee income is the issue of ‘unjust enrichment’. Adrian Houstoun details what it is, why it has played such a prominent role in the case and what the bearing of it on the final amount clubs can claim will be

Whether or not golf clubs receive a refund for the VAT they accounted for on visitor playing fees depends on defeating HMRC’s defence of ‘unjust enrichment’, but what is unjust enrichment?

The aim of HMRC’s defence of unjust enrichment is to prevent businesses from being enriched at the expense of others who, for all practical purposes, bore the burden of the wrongly charged VAT. It is not a question of whether the enrichment was, in moral terms, unjust, but whether the business would be enriched at the expense of the customer to whom the improper VAT charge was made.

In theory, HMRC ought to consider whether it is appropriate to invoke the unjust enrichment defence in every case where a VAT refund is made under section 80 of the VAT Act 1994. In order to do this, HMRC will need to make appropriate enquiries and obtain from the business information, documentation and so on on their pricing structure and policy in relation to the goods or services that are the subject of the claim. The first, and probably the most important piece of information, is whether the business is claiming an amount that it has passed on to its customers, in other words who bears the economic burden of the VAT. HMRC does not accept that a refund is due if the economic burden has been passed on to the customer, as it sees that as the claimant receiving the VAT twice. For example, if in the absence of VAT a retailer sells an item for £120. If, when he charges VAT, the retailer bears the whole of the VAT the price is maintained at £120, but the retailer would receive only £100 because it pays £20 to HMRC. In this case the retailer bears the VAT and could reclaim the £20 if it turned out that VAT was not due on that supply. If, on the other hand, the retailer increased the price to £144 HMRC would claim unjust enrichment and not pay the VAT.

A relatively recent case on unjust enrichment arose as a result of the court’s determining that green fees paid by visitors to non-profit making golf clubs should be exempt, whereas HMRC had argued that they were taxable and that only fees paid by members were exempt. HMRC having lost on the main point argued that to make repayments to golf clubs would unjustly enrich them. Consequently four golf clubs thought to be representative of golf clubs generally across the country were the appellants although the judgement was in the name of three of them: The Berkshire Golf Club, The Wilmslow Golf Club and The Glen Golf Club.

Included in the evidence was the expert opinion of two eminent economists. The economist instructed by HMRC was asked, prior to HMRC pleading unjust enrichment, to address the following:

(1)   How competitive is the market for non-member golf at the club?

(2)   What is the price elasticity of demand for non-member golf in the relevant market?

(3)   What is the price elasticity of supply for non-member golf in the relevant market?

(4)   What direct evidence exists from club records or other sources on how changes in VAT rates affected prices charged to non-members?

The economist appointed by HMRC considered that the clubs were operating in what approximates to a perfectly competitive market. Whereas the clubs contended that the clubs had significant local competition and that the marginal costs are substantially lower than the green fees charged so that the clubs have suffered a significant economic loss by the incorrect imposition of VAT.

The tribunal stated that it is common ground between Professor Szymanski, HMRC’s expert, and Mr Trussler, the appellants’ expert, that the clubs have suffered an economic loss through the incorrect imposition of VAT on green fees. The economic loss comprises the VAT absorbed by the clubs which could or was not passed on to the green fee visitors and the net profit on rounds of green fee golf that would have been played had some potential visitors not been deterred by the increased price due to the imposition of the VAT. However, the experts parted company as to the extent of that loss and how it should be calculated. The clubs accepted that there was some unjust enrichment but submitted that for the four clubs between 82 and 94 percent was the real loss. HMRC did not make such an estimate, and the tribunal therefore decided that although full repayment would constitute unjust enrichment, a figure of 90 percent, based on the clubs’ estimate of 82 to 94 percent of the potential repayment would be reasonable, and that 10 percent represented unjust enrichment.

The tribunal also determined that the supply of corporate days and supplies through the tour operator’s margin scheme should be taxable at the standard rate. Finally it also decided that if the course is used for both exempt and taxable activities (for example sponsorship and equipment hire) then the relevant VAT on those costs can be recovered in accordance with its partial exemption method.

It is understood that HMRC accept the decision and is not making an appeal to the Upper Tribunal. Most clubs who fit the profile should by now have made a claim but if not they should do so without delay.

Adrian Houstoun is VAT partner at top 20 accountant Kingston Smith LLP. Contact him on 020 7566 3802