But it is generally known that if the VAT should not have been charged in the first place, perhaps because the supply was really exempt, he cannot claim the over-charge as input tax. Nor can an exempt business, or private person, claim VAT whether or not correctly charged.

In these cases a wrong charge of VAT, either at too high a rate, or where VAT ought not to have applied at all, is generally only dealt with by the customer going back to the supplier and demanding a refund. If the supplier no longer exists once the overcharge has been discovered, or for another reason cannot or will not refund the excessive tax, the customer is left out of pocket or facing a difficult decision about what legal action ought to be taken. For such people, albeit only in clearly defined circumstances, the recent Europan Court (ECJ) decision in Sauer Danfoss could be of considerable interest.

 

Though Sauer Danfoss did not relate to VAT it is generally reckoned to apply equally to VAT. Sauer Danfoss was a customer for a product that was subject to a duty. It turned out to be an illegal duty, contrary to EU law. Sauer Danfoss paid a price to the supplier which had been uplifted to compensate the supplier for the duty he had to pay to the Danish government. The burden of the duty was passed on to the customer.

 

When it was discovered that the duty was illegal, Sauer Danfoss sought the return of the overpayment, but the supplier was no longer in a position to claim and pass the rebate down the line. Sauer Danfoss claimed directly against the Danish Government. The latter, sensing a windfall, refused purely on the grounds that only the supplier had that right, so the customer had no redress. The case proceeded to the ECJ.

 

The ECJ has decided that a claim can be made by a customer against the taxation authority if all of the following conditions are met:

 

• The over-levy was the clear fault of the government, such as where government policy to tax a service was later found to be wrong. So it cannot be purely the supplier's fault.

• Reimbursement is not available (or fully achievable) by applying to the supplier (who would then apply to the taxation authority in turn).

• It can be demonstrated that the customer bore the economic burden of the incorrect tax. So, if that burden was not passed on by the supplier (which is quite common where competing products were not afflicted with the burden), the customer has no claim, since he suffered no loss.

 

Considering these conditions, the middle condition arguably contains a nasty surprise for HMRC. Let us say that the supplier still exists and is prepared to work with the customer to retrieve the tax and to give the customer the benefit. That would seem to be the only recourse left to the customer. But if the liability is older than the four year cap, it could be argued that, to that extent, the supplier is unable to give redress to the customer. A civil action against the supplier in such a case would appear excessively difficult, particularly given the fact that the supplier had complied with what fully appeared to be the correct rules at the time. This might mean that the customer can consider the capped periods as still being within his grasp in respect of a direct claim against HMRC. 

 

HMRC is bound to argue that the cap applies to a claim of that ilk from a customer, but how solid is that? The claim in question would appear to be under common law, in the High Court, and sits outside the general scheme of the VAT rules. In such cases, where official error is clear, is HMRC facing uncapped liabilities to over-taxed customers?

 

Perhaps. Test cases are already in play. 

 

Consider in which cases you may have been over-charged for years, and where a claim directly to HMRC could put down a marker that might prove valuable in the years ahead.