V7.324 Unjust enrichment

Part V7 Tax planning
Part V7 Tax planning | Commentary

V7.324 Unjust enrichment

Part V7 Tax planning | Commentary

V7.324 Unjust enrichment

Basic principle of unjust enrichment

The basic principle of unjust enrichment is that no taxable person should make a financial gain from the making of a VAT error. In effect, if any VAT rebate is paid by HMRC, the key question to ask is whether the rebate belongs to the taxpayer or to his customer that he has incorrectly charged VAT to in the first place. See Example 5.

Example 5

Smith Builders has just carried out some building work for a customer, and charged £5,000 plus £1,000 VAT. The customer pays £6,000 to settle his account. It is subsequently discovered that the work in question qualified for the 5% VAT rate so only £250 VAT should have been charged.

Smith reduces the Box 1 figure (output tax) by £750 on his next VAT return – and uses the £750 windfall to pay for a week's holiday in Spain.

Solution – the correct procedure is for Smith to issue a VAT credit to his customer for £750 – as it is the customer not the business who has paid the incorrect VAT. Smith should then send the customer a cheque (or cash) for £750. He is then entitled to reduce his Box 1 figure by £750.

When unjust enrichment applies and factors to consider

The legislation for unjust enrichment is contained in the VATA 1994, s 80(3) and, as with most aspects of VAT, there are grey areas as far as the application of the law is concerned.

The point to emphasise

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