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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Baines & Ernst Ltd v HM Revenue & Customs [2006] EWCA Civ 1040 (25 July 2006) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2006/1040.html Cite as: [2006] EWCA Civ 1040

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON MR JUSTICE WARREN
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
[2005] EWHC 2300 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		25th July 2006

Lord Justice Lloyd:

Introduction

1. Baines & Ernst Ltd, the Respondent, carries on a business consisting of the provision of debt management services. It took up this line of business in 1997, having previously traded as a debt collector. On its behalf, it was contended at the outset that its new business was exempt, for VAT purposes. The Customs & Excise disagreed, and the Respondent did not then pursue the point. It was registered for VAT already, and it accounted for VAT on the price charged for its services to its customers. It was remarkably successful. By the year ending June 2000, its turnover was over £6 million, almost as high as its main competitor, Gregory Pennington (GP). The following year its turnover exceeded £21 million and far outstripped that of GP. It rose again in the next year.
2. During 2002 the VAT and Duties Tribunal held, in Debt Management Associates Ltd v. CEC (2002) Decision No 17880, that services indistinguishable from those provided by the Respondent were exempt for VAT purposes. Thereafter the Respondent was treated as exempt. It could not recover the input tax on its purchases, but it did not have to account for output tax on its sales. It then sought to recover from the Customs & Excise the net amount of VAT for which it had accounted to them in the calendar years 2000 to 2002. The Customs & Excise relied in defence on unjust enrichment, under section 80(3) of the Value Added Tax Act 1994. The VAT and Duties Tribunal (Mr Demack) held that this defence was made out, and that no sum was repayable. The Respondent appealed. Mr Justice Warren held that the Tribunal had gone wrong. He allowed the appeal, but dealt with the three years differently. He held that for the year 2002 the net amount of VAT was repayable, but that for 2000 and 2001 there might be a proper basis on the evidence for holding that the defence was made out. He therefore remitted the claim in respect of those years to the Tribunal to be reconsidered.
3. HM Revenue & Customs (HMRC) appeal against both aspects of that order, with permission. The Respondent resists the appeal and has served a Respondent's Notice seeking the outright allowing of its appeal against the Tribunal's order as regards 2000 and 2001, instead of the remittal of the claim for those years.

Unjust enrichment as a defence to the repayment of wrongly paid VAT

4. Section 80 of the Value Added Tax Act 1994, as it was at the time relevant for these proceedings, provided as follows, so far as relevant:

"(1) Where a person has … paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.

…

(3) It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.

…

(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim."

5. The three year limit was introduced by the Finance Act 1997. Previously there was a 6 year limit, except in a case where tax had been paid by reason of a mistake, in which case the repayment claim could be made at any time within 6 years of the discovery of the mistake. Accordingly, if the repayment claim arose from a ruling that a particular service was exempt rather than standard-rated, the repayment claim made within 6 years of that ruling could relate back a long time. Thus, in Marks & Spencer plc v Customs & Excise Commissioners [1999] STC 205, Moses J had to consider (among other matters) an appeal against the refusal to order repayment of more than 10% of the VAT paid on the sale of teacakes from 1973, when VAT was first imposed, until the Commissioners' acknowledgement in 1994 that sales of teacakes should have been zero-rated. In the present case the Respondent could not claim back any tax paid before 2000.
6. Most VAT law is derived from one or more European Directives, but that is not true of the unjust enrichment defence. Nor, on the other hand, is it a purely domestic law concept. It is sanctioned by decisions of the European Court of Justice, albeit that these decisions have not, for the most part, involved VAT itself. Thus, in one of the earliest cases, San Giorgio (Amministrazione delle Finanze dello Stato v SpA San Giorgio) (Case 199/82) [1983] ECR 3595, the Plaintiff was required to pay health inspection charges which were levied, contrary to Community law, on the import of dairy products from other Member States. The Court reviewed earlier decisions, and said this:

"13. However, as the Court has also recognised in previous decisions ... Community law does not prevent a national legal system from disallowing the repayment of charges which have been unduly levied where to do so would entail unjust enrichment of the recipients. There is nothing in Community law therefore to prevent courts from taking account, under their national law, of the fact that the unduly levied charges have been incorporated in the price of the goods and thus passed on to the purchasers. Thus national legislative provisions which prevent the reimbursement of taxes, charges and duties levied in breach of Community law cannot be regarded as contrary to Community law where it is established that the person required to pay such charges has actually passed them on to other persons.

14. On the other hand, any requirement of proof which has the effect of making it virtually impossible or excessively difficult to secure the repayment of charges levied contrary to Community law would be incompatible with Community law. That is so particularly in the case of presumptions or rules of evidence intended to place on the taxpayer the burden of establishing that the charges unduly paid have not been passed on to other persons or of special limitations concerning the form of evidence to be adduced, such as the exclusion of any kind of evidence other than documentary evidence. Once it is established that the levying of the charge is incompatible with Community law, the court must be free to decide whether or not the burden of the charge has been passed on, wholly or in part, to other persons.

15. In a market economy based on freedom of competition, the question whether, and if so to what extent, a fiscal charge imposed on an importer has actually been passed on in subsequent transactions involves a degree of uncertainty for which the person obliged to pay a charge contrary to Community law cannot be systematically held responsible."

7. If the charges wrongly levied "have been incorporated in the price of the goods and thus passed on to the purchasers", then it could unjustly enrich the undertaking which paid the charges to be reimbursed for their amount, on the assumption that the benefit of the repayment would not be passed on to the customers who bore their burden in the price paid. That is the basis for the defence. VAT is a tax whose burden is designed to be passed on, so as to be borne by the end user of the goods or services. It can readily be regarded as passed on to users who are registered for VAT and entitled to recover input tax on purchases, usually by way of set off against the output tax for which they are accountable on their sales. The application of the concept of passing on in other cases requires careful consideration in relation to such a tax.
8. Since that case there have been several others in which the European Court of Justice has reviewed aspects of the right to repayment of taxes or charges wrongly levied, and the ability of the Member State to rely on the exception of unjust enrichment. One was Comateb, (Joined Cases C-192/95 to C-218/95) [1997] ECR I-165. In that case reference was made (at paragraph 28) to the need for the Member State to prove that the whole of the tax or charge has been passed on, if it is to be able to defend the repayment claim in its entirety. It also referred (at paragraph 32) to the possibility that, even if the tax has been passed on, the inclusion of the tax or charge in the cost price may, by increasing the price and reducing sales, have caused damage to the trader, and that this damage may exclude, in whole or in part, unjust enrichment which would otherwise be the result of repayment. The concept of passing on was expressed in these terms, at paragraph 23:

"It is accordingly for the national courts to determine, in the light of the facts in each case, whether the burden of the charge has been transferred in whole or in part by the trader to other persons and, if so, whether reimbursement to the trader would amount to unjust enrichment."

9. The European Court of Justice considered the topic of the unjust enrichment defence again in Michaïlidis (Joined Cases C-441 and 442/98), 21 September 2000, from which the judge quoted in his judgment.
10. The most recent case in the European Court of Justice on this subject is Weber's Wine World Handels-GmbH (Case C-147/01), [2005] All ER (EC) 224. The opinion of Advocate-General Jacobs in that case includes the following instructive passage, at paragraphs 46 to 49:

"46. In particular, in a case such as the present a Member State need not reimburse a trader where it is established that the burden of the charge paid by him has been passed on in its entirety to some other person and that the trader would be unjustly enriched by reimbursement; if in the same circumstances the burden has been passed on in part, only the amount not passed on must be reimbursed. A trader who has paid a tax but has in fact passed on the whole burden of it to his customers, without himself suffering any concomitant loss, will clearly be unjustly enriched if he then obtains reimbursement of that tax because it is found to have been unlawful. A national rule precluding unjust enrichment in those circumstances is thus compatible with Community law.

47. However, even where the burden of the charge has been passed on in whole or in part, repayment to the trader of the relevant amount does not necessarily entail his unjust enrichment.

48. For example, the trader may choose to curtail any increase in his retail prices and maintain his volume of sales by limiting his profit margin to absorb all or part of the tax. Or else, having decided not to take that course but to increase his prices by the exact amount of the tax, he may find that his profits drop because he is making fewer sales. And he may even choose to absorb part of the tax himself yet still find a drop in sales. In all such cases which are plausible in a situation of keen competition between traders he will have suffered an economic loss as a result of the imposition of an unlawful tax, so that it cannot be said either that he has passed on (all) the burden of that tax to third parties or that he would be unjustly enriched if (an appropriate proportion of) the tax were reimbursed to him.

49. Community law thus does not allow a Member State to resist claims for reimbursement simply where the burden of a tax has been passed on; it must also be established that unjust enrichment would ensue."

11. As this case is the most recent statement of the position I will also quote paragraphs 93 to 102 of the judgment of the Court.

"93. The Court has consistently held that individuals are entitled to obtain repayment of charges levied in a Member State in breach of Community provisions. That right is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the Court. The Member State in question is therefore required, in principle, to repay charges levied in breach of Community law (see, in particular, Comateb, paragraph 20; Metallgesellschaft and Others [2001] ECR I-1727, paragraph 84; and Marks & Spencer, paragraph 30).

94. According to the case-law, there is only one exception to that obligation to make repayment. A Member State may resist repayment to the trader of a charge levied though not due only where it is established by the national authorities that the charge has been borne in its entirety by someone other than the taxable person and that reimbursement of the charge would constitute unjust enrichment of the latter. It follows that, if the burden of the charge has been passed on only in part, the national authorities are required to repay the amount not passed on (see to that effect, in particular, Comateb, paragraphs 27 and 28).

95. As that exception is a restriction on a subjective right derived from the Community legal order, it must be interpreted restrictively, taking account in particular of the fact that passing on a charge to the consumer does not necessarily neutralise the economic effects of the tax on the taxable person.

96. Thus, at paragraph 17 of Bianco and Girard, cited above, the Court held, in particular, that even though indirect taxes are designed in national law to be passed on to the final consumer and in commerce are normally passed on in whole or in part, it cannot be generally assumed that the charge is actually passed on in every case. The actual passing on of such taxes, either in whole or in part, depends on various factors in each commercial transaction which distinguish it from other transactions in other contexts. Consequently, the question whether an indirect tax has or has not been passed on in each case is a question of fact to be determined by the national court, which is free to assess the evidence adduced before it.

97. The Court stated at paragraph 20 of Bianco and Girard that it is quite probable, depending on the nature of the market, that the charge has been passed on. However, the numerous factors which determine commercial strategy vary from one case to another so that it is virtually impossible to determine how they each affect the passing on of the charge.

98. The Court has also held that, even where it is established that the burden of the charge levied though not due has been passed on in whole or in part to third parties, repayment to the trader of the amount thus passed on does not necessarily entail his unjust enrichment (see Comateb, paragraph 29, and Joined Cases C-441/98 and C-442/98 Michaïlidis [2000] ECR I-7145, paragraph 34).

99. Even where the charge is wholly incorporated in the price, the taxable person may suffer as a result of a fall in the volume of his sales (see Comateb and Others, paragraph 30, and Michaïlidis, paragraph 35).

100. Accordingly, the existence and the degree of unjust enrichment which repayment of a charge which was levied though not due from the aspect of Community law entails for a taxable person can be established only following an economic analysis in which all the relevant circumstances are taken into account.

101. Consequently, Community law precludes a Member State from refusing to repay to a trader a charge levied in breach of Community law on the sole ground that the charge was included in that trader's retail selling price and thus passed on to third parties, which necessarily means that repayment of the charge would entail unjust enrichment of the trader.

102. It must therefore be concluded on this point that the rules of Community law on the recovery of sums levied but not due are to be interpreted as meaning that they preclude national rules which refuse - a point which falls to be determined by the national court - repayment of a charge incompatible with Community law on the sole ground that the charge was passed on to third parties, without requiring that the degree of unjust enrichment that repayment of the charge would entail for the trader be established."

12. From the cases mentioned above, and others relied on in argument before us, the propositions most relevant to this case seem to me to be these:

i) A taxpayer who has paid tax which was not due has a primary right to be repaid the amount of that tax.

ii) Community law permits a Member State, by way of exception, to limit the right of repayment if the whole burden of the tax has been borne by someone other than the taxpayer, and the repayment would constitute unjust enrichment of the latter. If part of the burden has been borne by the taxpayer, that part is repayable.

iii) The burden of proof lies on the Member State, and no presumptions are to be applied, including any assumption that because the tax has been included in the price, it has been borne by the customer.

How is the unjust enrichment defence to be proved and tested?

13. It is common ground that the burden of proof is on HMRC. There is a debate about what it is that HMRC has to prove. Clearly it has to prove that the burden of the tax was passed on to customers in whole or in part and, if the latter, to what extent. Another question may also arise, if the taxpayer's business may have been adversely affected, for example by a reduction in its sales. In the present case, however, the Respondent does not base its case in answer to the unjust enrichment defence on that, but on the proposition that it would have charged the same rates for its services even if it had been treated as exempt, so that the burden of the tax for which it had to account was pure loss. As evidence in support of this, it relies above all on the fact that, when it was treated as exempt, it did continue charging at the same rate. I agree with the judge who said, at paragraph 38, that this contention amounts to saying that the Respondent did not pass on the burden of the tax.
14. In Customs & Excise Commissioners v National Westminster Bank [2003] EWHC Ch 1822, Jacob J (as he then was) said at paragraph 38 that the key question was "what in the light of all the known facts would have been the financial position of [the claimant] if the undue tax had not been imposed?" The Respondent puts forward the answer that it would have charged the same amount to its customers, and would have been better off by the amount that it did in fact have to account for to the Customs & Excise and should not have done. HMRC, on the other hand, says that the Respondent would have charged 15%, or 15% plus just enough to cover its irrecoverable input tax, and therefore has lost nothing. Mr Mantle, on behalf of HMRC, said in his skeleton argument that the question which had to be answered was: what would the claimant have charged during the claim period if its supplies had not been treated as taxable? I agree that this is part of the necessary enquiry. Having answered it, the Tribunal has then to consider Jacob J's question, as to what the claimant's financial position would have been in the hypothetical situation. This may involve assessing what the claimant's sales would have been in the hypothetical case, but that question does not arise in the present instance. If the comparison shows that the claimant would have been better off if the supplies had not been treated as taxable, then there is no defence (or only a partial defence, depending on the figures) to the repayment claim on the basis of unjust enrichment.
15. Mr Mantle also submitted that the assessment of the hypothetical comparative situation must be made on the basis of all available evidence of any relevance and probative value. I agree. There is no scope for assumptions, either way, or for rules as to the weight of one type of evidence as distinct from another. The only relevant rule is that the burden of proof is on HMRC. In particular, it does not necessarily follow from the fact that a price is expressed as £X plus VAT, or £Y including VAT, that if VAT had not had to be charged, the price would have been £X, or £Y less the amount of the VAT.
16. At paragraph 100 in its judgment in Weber's Wine World the European Court of Justice said that an economic analysis was necessary before the conclusion could be reached that the burden of the tax had been passed on to any and if so what extent, so that an unjust enrichment defence should succeed. In his judgment at paragraph 28 the judge considered this passage. He said that an economic analysis did not have to be carried out in every case. It must depend on the facts of the particular case, and the nature of the contentions on either side, as to whether the questions arising can or cannot be answered without such an analysis, but the parties must be entitled to adduce evidence based on an analysis of this kind. I agree with those observations. The Court also pointed out at paragraph 97 of the same judgment the variety of factors relevant to issues such as pricing in a commercial context which can affect the issue of whether a particular burden is passed on or not. Those may require some degree of economic analysis; they are almost certain to require some investigation by way of admissible evidence. This was conspicuous by its absence from the present case.
17. Occasionally it is possible to make a real and direct comparison between the price charged for a supply which is subject to standard rate VAT and that applying to a supply which is not, for example because it is zero-rated. This used to be possible as regards "Duty free" shops at airports, when sales to passengers who were about to fly to another Member State of the Community were zero-rated, and were therefore cheaper than the sale of the same goods by the same trader elsewhere in the same Member State. Another everyday example, resulting from the decision of the European Court of Justice in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] ECR I-2395, is available in sandwich bars and like establishments where, if food and drink are bought for consumption on the premises, VAT has to be charged because it is regarded as part of a supply of services akin to those of a restaurant, whereas if the goods are to be consumed elsewhere the sale is zero-rated, as a supply of goods in a food shop. Thus one can compare a price of £1.89 for a latte subject to VAT with £1.69 for the same product free of VAT for consumption off the premises, or £3.25 as against £2.75 for a sandwich. The difference will rarely amount to exactly 17.5% of the lower price, and the exact price charged is no doubt decided by reference to other considerations as well as the need to account for VAT on sales for consumption on the premises. The trader may choose to inform customers of its obligation to charge VAT in order to explain the differential in pricing.
18. The VAT regime for personal exports to other Member States has changed, and "duty free" shops are no longer free from the obligation to account for VAT on sales to passengers bound for another Member State. Instead they provide a different illustration of a point relevant to "passing on", inasmuch as they often charge prices lower than the same undertaking would charge elsewhere, in order to attract the customer who has time to spare while waiting for his or her flight. They charge VAT, in the sense that the transaction is one in relation to which they have to account for VAT to HMRC. But they absorb it, or part of it, in the price charged to customers, and thereby, they can fairly claim, they bear all or part of the burden of VAT. Another example sometimes occurs after an increase in excise duties imposed in the Budget, which may have immediate effect. Sellers of alcoholic drinks affected by the increase sometimes hold their prices level for a period thereafter. They must in fact account to HMRC for the increased excise duty and for the correspondingly increased VAT, but by not raising their prices they absorb the increase rather than passing it on to the customer.
19. As already mentioned, a repayment claim is now limited to sums wrongly paid in the past three years. In this case, the claim related to the whole three year period. In theory it need not have been for the whole period at once. There could be a series of claims, quarter by quarter, or for more than one quarter at a time, entitlement to each being determined separately. It is not necessary to consider what would be the position in such a case. In the present case, as I suppose to be normal, the single claim related to all payments made during the whole of the available period. It follows that the hypothetical situation which has to be assessed for comparison purposes is that which would have obtained during the three year period. It is possible that the evidence might permit an inference that the claimant's financial position would have been different in different parts of that period. The judge's allowing the Respondent's appeal outright for one year and remitting it for the other years reflects this possibility. What the enquiry does not relate to, at any rate directly, is what the hypothetical position would have been before the claim period. I agree with Mr Mantle that evidence which is, in its nature, relevant and probative may arise from before, or during, or after the claim period. In the instant case, it is possible that the answer to the question might differ according to whether the hypothetical comparison were carried out in relation to the whole period of the Respondent's trading, or only in relation to the claim period. I will address that after referring to the facts of the case.

The facts

20. It is therefore convenient at this stage to summarise the facts as to the Respondent's business, in the course of which I will refer to the terms of the forms of contract which the Respondent used from 1997 onwards, and to the way in which its charges were formulated.
21. The Respondent's customers are individuals who are unable to repay unsecured debts in accordance with their obligations. The service provided by the Respondent consists, first, of negotiating with the individual's creditors an agreed plan of repayments which the customer can afford and, secondly, a management service of collecting monthly payments from the customer for distribution among his creditors on terms agreed with them. For the initial service the client pays a single flat-rate fee, consisting of the whole of the first monthly payment. For the management service, the fee is calculated as a percentage of each monthly aggregate amount, rounded to the nearest whole pound. The first sum paid by the client, therefore, went in full to the Respondent. Thereafter, monthly payments collected by the Respondent from the client were paid as to a given percentage to the Respondent, and as to the balance to the client's creditors.
22. There was evidence that, on average, a client who reached an agreement with creditors through the Respondent would continue to make payments in accordance with that agreement for 22 months, though the agreements were expressed to last for 10 years. As regards each customer, the basis of the Respondent's charges was fixed for the duration of the agreement. Though a new rate of charge could be set for future customers, this could not affect what was due under current agreements. Moreover, sums received during any given year will have arisen under contracts some of which were entered into during that year but others which dated back to the previous or earlier years.
23. From the start of its business until after the Customs & Excise accepted the exempt status of the Respondent's business, the monthly payment was subject to a minimum of £29. The percentage payable by way of monthly management charge was 17.625%, which is equal to 15% plus VAT at 17.5%, but this was expressed differently at different times; moreover it was rounded to the nearest pound. Shortly before the hearing by the Tribunal, the Customs & Excise conceded the Respondent's claim to repayment so far as the initial payment was concerned.
24. The Respondent started its debt management service in 1997, after its share capital had been acquired by Mr T O'Neil. Soon afterwards Mr Cochrane joined the company, taking a 40% shareholding and becoming responsible for finance and administrative matters. He gave evidence before the Tribunal. Mr O'Neill knew nothing of debt management business at the outset, and decided to start by following the practices of GP, then the leader in the field, even to the extent of plagiarising its terms and conditions of business, as well as following its example as regards the pattern and rate of charging.
25. The plagiarised form of GP's charging clause for management fees, used by the Respondent from 1997 until late 1999, took the following form:

"6.1. Unless we agree otherwise with you we will take from each monthly payment under the Monthly Payment Plan a fee equal to 15% of the periodic payment under the Monthly Payment Plan. This figure is subject to a minimum fee of £25 per month and does not include VAT, which we have to charge by law. (At present this total sum amounts to 17.625%)."

26. This form of contract was only produced at the hearing, and showed that the Respondent's previously maintained position, that its terms of business had then showed a charge of 17.625%, with no reference to VAT, had been false.
27. At some time very late in 1999, the Respondent introduced a new form of contract containing the following sub clause relating to management charges:

"6. How you pay us.

6a. Unless we agree otherwise, we will deduct, from payments we issue to your creditors, a fee equal to 17.625% of the monthly payment you make to us under the monthly payment plan. However, we have a minimum fee of £29. The actual amount of our fee is shown in the monthly payment plan."

28. Under this form of contract, when a new client took up the Respondent's services, the Respondent dispatched a document called "Credit Commitment and Financial Statement Details" to him and to his creditors. In the section dealing with credit commitments, the Respondent's management fee was shown as "15% + VAT".
29. Mr Kirkland, an officer of the Customs & Excise, paid a control visit to the Respondent in January 2000. He was shown a sample Monthly Payment Plan. This showed the management fee to be 15 per cent plus VAT. Mr Kirkland's Visit Report confirmed that the Respondent was charging its clients 15 per cent plus VAT for management services.
30. Early in 2001 the Office of Fair Trading ("the OFT") wrote to the Respondent following complaints about the manner in which it presented its charges and pointed out that under the Unfair Terms in Consumer Contracts Regulations 1999 "unfair terms are not binding on consumers". The OFT indicated that it would not take court action against the Respondent if it were to withdraw or amend its terms and conditions to include, inter alia, in a prominent position on the front page of its contract a statement of its fees and show how they were made up. The OFT would not accept terms which included no reference to VAT; it required all references to fees to have added "plus VAT". In the event, in a contract introduced early in 2001, the Respondent answered the question, "How much do your services cost?", as follows:

"You will pay us an initial fee and then a monthly management fee.

The initial fee is an amount equal to a single payment under your monthly payment plan as at the time you sign these terms of business. This payment includes VAT …

The monthly management fee is equal to 17.625% (including VAT), rounded to the nearest pound, of each monthly payment you make under the monthly payment plan. However, you will have to pay us at least our minimum monthly fee of £29 (including VAT). We collect the monthly fee when we pay your creditors."

31. Before the Tribunal some evidence was given that the Respondent did at various times consider charging a lower management fee. In 1999 advice was sought on behalf of the Respondent about a possible new business to be carried on by a subsidiary which, it was contended, would be exempt for VAT purposes. The draft terms of business submitted in this connection would have specified a rate of charge of 17.5%. The claim for exemption was rejected, the subsidiary never traded, and 17.5% was never charged by the Respondent.
32. In October 2002 the Respondent produced a discussion document entitled "Subject: reduce our management fee", which was on the agenda of a board meeting in November. Maybe as a result of this consideration, a discussion paper prepared by the Respondent in December 2002 proposed different terms of business under which the customer's debts would be written off if he either made 72 monthly payments, or paid off 90% of the total debt. In return for creditors agreeing to this, the Respondent stated that it would be willing to reduce the monthly management fee to 10% "from the existing 15%". The paper was intended to be put to creditors but it is not clear whether it ever was. It was not implemented.
33. In fact the Respondent always charged the same rate, whether one regards it as 15% plus VAT, or as 17.625%. It still charges this rate. Oddly, for a time during 1999 the Customs & Excise accepted that GP's services were exempt, before changing its mind. During that period, it seems that GP charged its clients 15%, though I cannot see from the papers before us that this was covered in formal evidence, and whether that was all that GP charged is therefore uncertain. The Respondent did not know about this treatment of GP at the time. Since the business became exempt, GP has changed its basis of pricing, so as to charge 15% but also an additional fee (£8 per month "bank account fee") which complicates the price comparison.
34. Because the Respondent was registered for VAT and not treated as exempt, it was able to recover its input tax. In 2000, the Respondent incurred very substantial expenditure on advertising, so much so that its input tax exceeded its output tax on at least one quarter and it therefore received a repayment of tax from the Customs & Excise. For the first three quarters of 2000, on output tax exceeding £1.4 million, the net tax accounted for by the Respondent was about £135,000.

The Tribunal's decision

35. In the light of this the Tribunal held, at paragraph 31:

"Mr Cochrane gave as another reason B&E would never have reduced its management fees from 17.625 per cent to 15 per cent the fact that it would have found itself making losses. I accept that it was most unlikely that it would have done so had its fees in the disclosure period been exempt from VAT, for its irrecoverable input tax would then have been a charge on profits and may well have resulted in losses. But in the period with which I am concerned, its services were throughout treated as fully taxable, so that different considerations apply. As B&E's voluntary disclosure shows, during the first year of the disclosure period, input tax and output tax were little different, due mainly, I infer from the whole of the evidence, to B&E having spent very large sums in advertising its services, and on other items that contributed to its very rapid expansion. In the year to 30 June 2001 B&E increased its turnover from approximately £6 million to over £21 million, and overtook GP as market leader. In the last two years of the disclosure period output tax was considerably in excess of input tax, again I infer from the whole of the evidence, because B&E continued to obtain advantage from earlier expenditure on advertising etc and thus had to spend little, if anything, on further expansion in the latter part of the disclosure period."

36. The Tribunal held that the Respondent charged 15% plus VAT throughout the period from 1997 until 2003, despite the change in the contract terms in late 1999. It accepted the Respondent's point that it charged 17.625% as soon as it was recognised as exempt. In relation to that point, it said this, at paragraph 30:

"But I am unable to accept that B&E necessarily would have continued to charge at 17.625 per cent irrespective of an adverse effect on its business of a change in rate by a major competitor, being told by creditors that its charges were too high and had to be reduced, or being faced either with the possible consequences of the OFT re-opening its case on the presentation of its charges, or with a client claiming its contract terms to be unfair. (Those consequences, I remind myself, include unfair terms not binding on consumers). I find that B&E now has by far the largest share of the debt management market and maintains its dominant position despite the fact that certain of its smaller competitors have reduced their rates slightly below the 17.625 per cent rate."

37. The Tribunal's conclusion is set out at paragraphs 52 to 60. The question of passing on is dealt with in paragraphs 54 and 55:

"54. I first turn to consider whether B&E passed on the tax to its clients. It is quite plain from my findings of fact that the VAT B&E charged under the terms and conditions of the contract in use from 1996 to late 1999 was passed on to its clients. Likewise in the contract in use from 2001 to 2003 the VAT was passed on.

55. That leaves the contract in use from late 1999 until early 2001. Although I earlier found that the charging clause relating to management fees was simply an alternative way of B&E expressing the fact that it charged 15 per cent plus VAT, it does not necessarily mean that the VAT was passed on to its clients. However, as I have also found that introduction of the new clause meant that B&E continued to charge its client tax, it appears to me logically to follow that it did pass on the tax."

38. As to the submission that the Respondent would have been able to charge the same rate even if it had not had to account for VAT, the Tribunal said this, at paragraphs 57 and 58:

"57. … In my judgment, in a free market B&E's management charges would not have reached 17.625%. At the outset it simply copied GP's operation. In 1999, it rephrased its contracts but, as I earlier found, that did not represent a change in price, nor did it mean that its clients did not pay VAT.

58. It is quite plain from the evidence, and I find, that by 1999 B&E was intent on expanding at as rapid a rate as possible, and determined to replace GP as market leader. Against that background I agree with Mr Mantle that it is inconceivable that B&E would not have competed on price with GP if it had known that GP was charging exempt management fees of 15%. All the evidence points to B&E having kept the rate of its management charges under continual review in the disclosure period, if necessary with a view to their being reduced to compete with GP and other debt management agencies."

39. The Tribunal concluded at paragraph 60 as follows:

"In my judgment, B&E passed on the whole burden of VAT to its clients and itself suffered no concomitant loss; it would not have charged management fees of 17.625 per cent in the disclosure period had its services been exempt from VAT. It follows that it would be unjustly enriched if I were to allow its appeal."

40. Thus, the Tribunal's decision that the tax was passed on is expressed in paragraphs 54 and 55, on the basis that the price was expressed as X plus VAT, or as Y including VAT, under the first and third forms of contract, and that the second contract which said the charge was 17.625% was no more than a different way of expressing the same thing, and that it follows that the tax was passed on. It seems to me that this is an example of applying just such a presumption as the cases show is prohibited in this area.
41. However, the Tribunal did not stop there, but went on to paragraphs 57 and 58. What it said there is relevant to what the position would have been otherwise. Correctly, this should have been addressed before the Tribunal came to a conclusion about passing on or no, but the confusing presentation of the Tribunal's conclusion can be overlooked if the substance of the reasoning is justified.
42. In paragraphs 57 and 58, and related passages in the decision, the Tribunal made several points. The first is that the Respondent merely copied GP's pricing along with its other business processes. Another is that by 1999 the Respondent was intent on expansion and overtaking GP, and would have competed in price if it had known that GP was charging 15% on an exempt basis (as it seems to have done briefly during that year). Going back to paragraph 30, it said that the Respondent would not have continued to charge 17.625% irrespective of any adverse effect on its business of price competition by a significant rival, or pressure from creditors, or from the OFT. In paragraph 31, in relation to the point that input tax needed to be covered, this is accepted in principle, but the Tribunal ignored it in practice on the basis that in fact the input tax was recovered. The Tribunal seems thus to have ignored the need to examine what would have been the financial position of the taxpayer if the wrongly levied tax had not been charged, but rather to have looked at the actual position. It was therefore not making the right comparison.
43. Insofar as it relied on the Respondent having followed GP, the Tribunal ignored the need to consider what GP would have done in the hypothetical situation of no charge to VAT, and in particular the need to do so on the basis of evidence, rather than speculation. To say that, because GP charged 15% plus VAT in 1996, and (it seems) 15% when it was treated as exempt in 1999, and then 15% plus a monthly £8 in 2003 when it was again exempt, and because the Respondent copied GP's pricing in 1997, therefore one can infer that, if VAT had not been charged, GP would have charged a flat 15% in 1997 and therefore the Respondent would have done the same, seems to me to assume the answer to the question which should have been posed in terms, and answered by reference to evidence, namely what GP's pricing would have been in 1997 if it had been correctly treated as exempt. HMRC did not call any evidence from GP, perhaps because, as we were told, GP had also made a claim for the repayment of VAT. Nor did it call any other evidence, expert or otherwise, about this particular market, and conditions in it at any relevant time, from which the Tribunal could draw inferences as to what GP, the Respondent or anyone else would have done if VAT had not had to be charged and accounted for, at some given time.
44. Thus, the Tribunal did not at any point make a finding, on the assumption that debt management services had been treated as exempt in 1997, as to what GP would have charged for its services. It might have been 15%, or it might have been more, especially taking into account the need to absorb the input tax on goods and services supplied to it. It is not altogether surprising that it made no finding about this, because there was no evidence on which it could readily base such a finding.
45. The Tribunal seems to have proceeded on the assumption that GP would have been charging 15% at that time, if exempt from VAT, and that the Respondent would therefore have copied that price, as it did GP's actual price and its other terms of business. The latter is a reasonable conclusion, but the former is an assumption for which the justification seems to be absent. If, therefore, the question has to be addressed at the start of the Respondent's business, there is no reliable basis for a conclusion that the price would have been at any particular level below the actual 17.625%.
46. In particular the Tribunal wrongly ignored the question of how the price would have been affected by the need to cover the input tax on purchases which could not be recovered by set-off against output tax. It misdirected itself on this in such a way as to ignore the need for a hypothetical comparison.
47. The Tribunal was influenced by its observation that the Respondent did keep its prices under review. That is certainly a relevant point, and one prompted by the Respondent's evidence, rejected by the Tribunal, that its management had decided that it would never charge less than 17.625%. The Tribunal did not believe Mr Cochrane's evidence on this, and that is fully justified by the documents. However, to prove that Mr Cochrane's assertion was untrue was not sufficient for HMRC. Since the burden of proof was on HMRC, the Tribunal's disbelief of Mr Cochrane opened the way for a finding that the Respondent would or might have charged less than 17.625% but was of no assistance at all as to what it would in fact have charged if its services had been treated as exempt during the claim period. That depended on other evidence. Mr Cochrane was not asked questions about this.

The judge's judgment

48. In his judgment, Warren J reviewed the proceedings before the Tribunal and its decision, and summarised the rather elaborate submissions which had been addressed to him, as well as the decisions of the European Court of Justice and of English courts about unjust enrichment. In the course of his analysis and discussion of the Tribunal's decision, he observed, rightly, that it relied heavily on the formula used in the first and third forms of contract as showing passing on of the tax. He commented, also fairly as it seems to me, on the fallacy in the Tribunal's comment that because under the second form of contract the Respondent continued to charge its clients tax, it followed logically that it did pass on the tax. As he said, at paragraph 89, "it is a question of fact in all cases."
49. At paragraphs 85 and 86, discussing the period before 2000, he said this:

"85. In 1999, for a period, some at least of Gregory Pennington's services were treated as exempt; it charged clients 15%. That is some evidence that Gregory Pennington had been passing on the VAT to its clients prior to the period just referred to. Certainly, in the absence of any other evidence, the Tribunal would have been entitled to draw an inference to that effect.

86. Mr Mantle submits that this is sufficient material which would have entitled the Tribunal to reach the conclusion that B&E was passing on the charge too. I agree with that so far as concerns the period in 1999 during which Gregory Pennington charged 15% without the addition of VAT. Up to that time, Gregory Pennington remained a considerably larger player in the market than B&E. B&E had set its charges by reference to Gregory Pennington's charges and, it might properly be inferred, Gregory Pennington was passing on the charge. The inference could properly be drawn that B&E too was passing on the charge or, if this is something different, that it, too, would have charged 15% (or possibly 15% plus an amount to recoup irrecoverable input tax) and not 17.625% in cases not subject to the flat rate charge of £25 plus VAT."

50. In relation to the claim period, however, he said at paragraph 90 that:

"it is difficult, if not impossible, to apply the analysis which I have identified in relation to the period from 1996 to late 1999 as offering possible support for the conclusion that there was passing on in this later period. This is because there is no evidence to support an inference that Gregory Pennington was itself passing on VAT in that period still less a finding of fact that it actually did so. The Tribunal has not drawn the inference that, because it charged only 15% in 1999, that it would have done so in 2001 and for my part I doubt that it could properly have done so."

51. He also pointed out that by 2001 the Respondent was the market leader, with a far greater share of the market than GP, and there was no reason to suppose that the Respondent would follow whatever GP did, even if it did keep under review the prices charged in the market, and would have considered changing its own price if it thought that commercial circumstances required that to be done.
52. The judge contrasted the submissions on either side, observing that Mr Mantle for HMRC invited him to start in 1999, or even in 1997, to make a hypothetical comparison as at either of those dates, and to draw an inference as to the position as it would have been during the claim period by working forward in time, whereas Mr Cordara Q.C. for the Respondent took his stand in 2003 and argued back from what in fact happened when exempt status was conceded. The judge noted that the Tribunal's reasoning is somewhat sparse, and that it is not easy to see which submissions it accepted. But he considered that its decision was based on an adoption of Mr Mantle's approach of working forward from before the claim period, whereas he considered that this approach was not correct. His reason for that preference can be seen from his paragraph 96, as follows:

"Of course, there has to be an element of hypothesis in order to see what might have happened if the tax which is reclaimed had not been charged in the first place; but it would not be right, I consider, to extend the hypothesis further than is necessary. It could not, I think, be said that, once B&E actually commenced charging 17.625% without having to account for VAT that it was somehow being enriched on the basis that, if the correct VAT treatment had been applied all along, its fees would have remained at some lower level. Similarly, I do not think that B&E can be said to be obtaining unjust enrichment when it seeks to recover the tax which it has paid in respect of an accounting period when, taking the facts as they actually were at the beginning of that period, it is established on the evidence that it would have charged a VAT-free fee of 17.625%."

53. He therefore rejected Mr Mantle's approach because it involved more hypothesis than is reasonably necessary, with an examination of what would have happened if debt management services had been treated as exempt from before the Respondent undertook this business, so that it would have been taking an exempt GP as its model, rather than a standard-rated GP, and then taking the hypothesis on year by year as necessary to see what would have been the Respondent's pricing policy in that event from 2000 onwards.
54. In relation to Mr Mantle's approach he also pointed out that the Tribunal had not made a finding as to the level of the Respondent's hypothetical charges. He said, as it seems to me rather mildly, that "it would have been far better if the Tribunal had made some finding" on this point.
55. Then at paragraph 105 he said this:

"In the light of the above discussion, my conclusion is that the Tribunal's decision that the whole VAT (whether it intended to mean the gross amount or the net amount) was passed on cannot stand. The Tribunal applied, in my judgment, an incorrect approach to the questions it had to answer as I have explained in paragraphs 94 to 99 above. In particular, the result of adopting that wrong approach was that it failed to give any, or any proper, weight to the fact that B&E adopted a fee of 17.625% when the exempt status of its supplies was established. That was a very powerful piece of evidence. The reasons which the Tribunal gave, insofar as they can be ascertained from the Decision, for rejecting that evidence as a conclusive indicator of what B&E would have done earlier in the disclosure period do not, in my view, stand up to scrutiny for the later parts of the disclosure period at least from the beginning of 2002."

56. That last comment led on to his decision that the significance of what happened in 2003 was of far greater significance for the year immediately beforehand than it was for the first two years of the claim period. As to that he explained the distinction in paragraph 107, as follows:

"In relation to the period between late 1999 and the beginning of 2002, the position is unclear. It is for the Tribunal to judge, as a matter of fact, whether the inference (assuming that such an inference is, in fact, drawn) that B&E would have charged only 15% (so that VAT was passed on in 1999) is one which should continue to be drawn and, if so, for how long bearing in mind in particular (a) that by 2002 it would, in my judgment, be impossible properly to find (on the evidence at present recorded in the Decision or available from the documents before the Tribunal) that B&E would not have charged 17.625% if its supplies had been treated as exempt and (b) that B&E was attempting to obtain exempt status for its supplies, something it must have had an economic reason for doing (although it is for the Tribunal to decide what weight to give to that). The Tribunal will need also to determine, if it is satisfied that there was passing on at all, whether the fee which B&E would have charged in the disclosure period (or different parts of the disclosure period) if its supplies had been treated as exempt would have resulted in only part of the VAT being passed on (eg if the hypothetical charge included an amount in respect of input tax which exceeded the actual input tax for the relevant part of the period)."

57. He then went on to reject certain other arguments addressed to him by Mr Cordara, and eventually allowed the appeal, by allowing the claim for repayment for 2002 but remitting the claim for reconsideration by the Tribunal in respect of 2000 and 2001. Neither party is content with that conclusion, both arguing that each of the three years should be treated in the same way.

Discussion

58. Mr Mantle criticised the judge for saying that the Tribunal had regarded the terms of the contracts as conclusive in favour of passing on, and also for himself falling into the same kind of error as he regarded the Tribunal as having made, by regarding the Respondent's maintenance of its price at 17.625% in 2003 as conclusive against it. It seems to me that neither of those criticisms is justified. It is plain from paragraphs 54 and 55 of the Tribunal's decision that it was strongly influenced by the price formula used in the first and third contracts. But, as I said at paragraphs [40] and [41] above, on a fair reading of the Tribunal's decision it did not act on the basis of the formula alone. The difficulty is in identifying on what other factual basis it did proceed.
59. So far as the judge's own reasoning is concerned, he did regard the Respondent's decision to continue charging 17.625% in 2003 as an important fact, as to which he was plainly right. It does not seem to me that he regarded it as in any sense conclusive, but there was only so much other relevant material on which the Tribunal had been able to proceed, and therefore not much to be weighed in the balance together with this clear fact.
60. In the course of Mr Mantle's submissions he placed great weight on the importance of the proposition that questions arising on an unjust enrichment defence need to be decided on the basis of all available evidence of any relevance and probative value. There is no doubt that this is correct. It does not seem to me that the judge disagreed with that, or that he failed to apply that principle correctly.
61. Remembering that the burden of proof is on HMRC, and that, for present purposes, that requires proof that the Respondent did pass on either the whole, or at least part (and if so what part), of the burden of the tax to its customers, it seems to me salutary to consider what had been proved for this purpose.

i) The Respondent had started its debt management business by copying GP's charging policy, with a monthly management fee of 15% plus VAT. If that kind of business had been treated as exempt at the time, GP would not have been charging 15% plus VAT, but there was no evidence as to what it would have been charging. (The judge's paragraph 86 is relevant to this, and I will return to it.)

ii) The Respondent's pricing formula under its second form of contract, introduced late in 1999, made no reference to VAT: the price quoted was 17.625%. Nevertheless a number of documents of the Respondent (some internal, but others going to customers or creditors or both) referred to the price as being 15% plus VAT, despite the change in price formula. The Tribunal said (paragraph 59) that the Respondent represented to both clients and their creditors that its monthly charges were 15% plus VAT, not 17.625%.

iii) In 1999 GP was, for a time, treated as exempt, whereas the Respondent was not. During that time, it seems that GP charged 15%. The Respondent was not aware of this at the time. The Customs & Excise reverted to treating GP as standard-rated within the year. During that time the Respondent's business was growing rapidly and beginning to overtake that of GP.

iv) In 2000, especially in the first three quarters, the Respondent incurred very heavy expenditure for the purposes of promoting and expanding its business, so that its input tax was very high.

v) From the outset of its business, input tax was a significant factor, such that, even apart from the unusually heavy spending in 2000, if the Respondent had been exempt from VAT and had had therefore to carry the cost of its input tax as overheads, it would have needed to reflect that in its pricing policy.

vi) By the end of 2000 the Respondent's business had overtaken that of GP and it became the market leader with a very high share of the market. It continued to keep its pricing policy under review.

vii) In 2001 the Respondent introduced a new form of contract, under pressure from the OFT, which stated the monthly management fee as 17.625% (including VAT).

viii) Once its services were accepted as being exempt, the Respondent charged 17.625%, whereas some of its competitors charged a somewhat lower rate (though GP's rate is not capable of easy comparison due to its different structure). The Respondent has by far the largest share of the market.

ix) The Tribunal said (at paragraph 30) that the Respondent would not necessarily have continued to charge 17.625% irrespective of an adverse effect on its business due to a change in rate by a major competitor, or pressure from creditors or from the OFT. None of these things happened and its rate is still the same.

x) The Tribunal accepted (in paragraph 31) that the Respondent would not have reduced its charging rate from 17.625% to 15% if it had been treated as exempt, because of the need to cover the cost of the (in that event) irrecoverable input tax on its overheads.

xi) It held (paragraph 57) that in a free market (which I take to mean a market in which the services were correctly treated as exempt from VAT) the Respondent's management charges "would not have reached" 17.625%, but did not say what level they would have reached.

xii) It also held (paragraph 58) that it would have competed on price with GP if it had known in 1999 that GP was being treated as exempt and was charging 15%, because it was intent on expanding as fast as possible and was determined to replace GP as market leader.

xiii) All of these matters led the Tribunal to find, in paragraph 60, that the Respondent "would not have charged management fees of 17.625%" in the claim period if its services had been exempt. It did not make a finding as to what rate the Respondent would have charged in that situation.

62. Mr Mantle accepted that the Respondent would have charged more than 15%, because of the need to cover the input tax on its purchases. He submitted that the Respondent would have charged just enough to cover that additional cost, and that, because the Respondent had recovered its input tax during the claim period, it mattered not whether the Respondent's charge would have been 15% or what was called the "equilibrium price", namely just sufficient to give the Respondent 15% and the cost of the input tax. It seems to me that the point cannot be dealt with as simply as that. The Respondent would have had to have taken a view, at whatever time it had to decide the rate of its monthly management charge, as to how much it needed to charge, over the life of the relevant agreements, to cover the cost of its overheads including input tax. It could not tell exactly what those overheads would amount to during the term of the agreements. No doubt, by the end of 1999, it had decided to incur very substantial expenditure on advertising, but that could not be reflected in a change to the charge payable except under new agreements. It is likely, therefore, that the Respondent's pricing decision, no doubt conditioned by a number of commercial factors including the price charged by competitors, would have been relatively inexact as regards a match between the amount recovered and the input tax element in the cost of overheads. It therefore does not seem to me to be possible to conclude that the Respondent would, if exempt from VAT, have charged exactly so much more than 15% as enabled it to cover precisely the additional cost of having to bear the input tax. It would have charged either more or less than that, and the ratio may have differed in different VAT periods, according to the particular level of overheads incurred. During the claim period (for which, unlike the earlier years, figures are available in the court's papers) the ratio of input tax to output tax in successive VAT quarters ranged from just over 100% in the second quarter of 2000, and over 80% in two other quarters of that year, down to 19%, with ratios of in the 60's, 40's and 20's in between, and with some quarters showing a higher proportion than earlier quarters. This factor, therefore, does not enable the Tribunal to refrain from deciding what the Respondent's monthly management fee would have been, having accepted that it would have been more than 15% (paragraph 31).
63. The same, of course, would have been true of GP if it had had to decide in or before 1996 what its monthly management charge should be if its services had been correctly recognised as exempt for VAT purposes. Its eventual decision, in 2003, to reduce its monthly management charge to 15% but to introduce a bank account management fee of £8 per month, does not suggest that it can necessarily be inferred that, had it never had to account for VAT, it would have charged only a monthly charge of 15%.
64. At paragraphs 85 and 86 of his judgment (quoted at paragraph [49] above) the judge considered the inference that could be drawn from GP having charged 15% in 1999 during the brief period when it was treated as exempt. He considered that this material allowed an inference that GP was passing on the VAT to their customers. I agree with that, in the absence of any other information about GP's pricing policy which could enable this information to be assessed in a wider context.
65. He also said that the further inference could be drawn, based no doubt on the Respondent's policy of copying GP, that the Respondent was also passing on the tax, and that, if it had been treated as exempt, it would have charged 15%, or possibly 15% plus an amount to recoup irrecoverable input tax, rather than 17.625%. For reasons explained in paragraph [62] above, it does not seem to me that the formula of 15% plus enough to recoup input tax is sufficient to deal with this point. The Tribunal accepted that the Respondent would not have reduced its monthly charge to 15%, because of the input tax issue. In 1999 the Respondent was either embarking on, or at least about to embark on, substantial expenditure giving rise to very heavy input tax. Whatever inference might have been possible without this knowledge, it seems to me that, knowing that the Respondent was incurring or about to incur this expenditure, it is not a legitimate inference that it would have reduced its charging rate to 15% at that time if it had been treated as exempt. A finding that it would have done so would be inconsistent with the Tribunal's finding in the second sentence of paragraph 31. It seems to me, therefore, that this is not a permissible inference as to what the Respondent would have done in 1999.
66. As regards what the Tribunal said at paragraph 58, the fact is that the Respondent did not know that GP was charging 15% in 1999, and that it went on charging 17.625% itself, with no apparent adverse effect on the growth of its business. During 1999 the Respondent tried to get the Customs & Excise to reverse its refusal to accept that debt management services were exempt, with no success. It seems to me that, if the Respondent had discovered that the Customs & Excise were treating GP as exempt, the first result would have been that it would have sought the same treatment for itself. Unless it secured that, no question of a reduction in its monthly charge would have arisen. If the inconsistency of the Customs & Excise's treatment of two traders in the same business had been drawn to its attention, it seems to me most likely that the exempt treatment of GP would have been brought to an end even sooner than it was.
67. If, then, the inference most favourable to HMRC from GP's having charged 15% in 1999 as to what the Respondent would have done if it had then been treated as exempt is that it would have reduced its charge to 15% plus an amount intended to allow for the recovery of its input tax, that leaves open the question, which HMRC have not attempted to answer at any stage in this case, what would that charge have been. Only if that question is asked and answered can Jacob J's question (see paragraph [14] above) itself be answered. Accordingly I do not entirely agree with the judge in his paragraph 86. It is possible that some of the VAT was being passed on, but one cannot tell whether it was, and if so as to how much of it, without knowing what the Respondent's charge would have been, and "15% plus input tax" is not an available response.
68. As the judge said at paragraph 100, the Respondent ran the case on the basis that it would have charged 17.625%, and it did not have an alternative position that it would or might have charged some other rate between 15% and 17.625%. It does not seem to me that this stance relieved HMRC of the need to put forward an intermediate case as to what the Respondent's charge would have been, in case it were unable to make good a case that the rate would have been 15%.
69. In my judgment, that was a fundamental defect in HMRC's case, and more so than the judge thought it. I agree with him (his paragraph 105) that the Tribunal's conclusion that the whole of the tax was passed on cannot stand. He said that, as regards the first two years of the claim period, there was material on which the Tribunal may, having asked itself the right question, have been able to draw an inference that all, or possibly part, of the tax had been passed on. In saying this he proceeded from his premise that, for reasons given in his paragraph 86, the Tribunal could reasonably have inferred that the Respondent would have charged only 15% in 1999 if its supplies had then been treated as exempt. For reasons given in paragraph [67] above, I do not agree with that. It may have been possible to infer that the Respondent would have charged less than 17.625% but more than 15%, in order to endeavour to cover its input tax, but the Tribunal would then have needed to come to a conclusion as to what that level of charge would have been. It had no material on which to come to a conclusion on that, above all because no evidence had been adduced relevant to this issue, and no questions were addressed to Mr Cochrane on the point. I therefore disagree with the judge in his conclusion that it was or could remain open to the Tribunal to find that all of the burden of the tax was passed on, because that would be inconsistent with the Tribunal's paragraph 31, or that part of it was passed on, because it would have been unable to draw any proper inference as to how much that part would have been.
70. For that reason, while I agree that the Tribunal's finding that the whole of the tax was passed on must be set aside, I do not agree with him that the case should be remitted to the Tribunal for it to reconsider the matter. In my judgment the defence of unjust enrichment to the repayment claim cannot be made out in full or in part, and HMRC should not be allowed another opportunity to seek to persuade the Tribunal that the defence was made out in part. It could not do so without additional evidence being adduced, and I see no reason for that to be allowed.
71. It is not therefore necessary to decide which of the parties is right on the question which arose in debate, whether the hypothetical comparison which has to be made in order to assess an unjust enrichment defence is limited to the claim period, or should start earlier, in this case at the outset of the Respondent's trading. Before the time limit imposed on repayment claims under the Finance Act 1997, it would or might have been necessary to apply the hypothetical question, as best one could, to the entire period during which tax was wrongly paid, because the repayment claim could have gone back so far. Because the maximum claim period is now 3 years, Mr Cordara submitted on behalf of the Respondent that the facts as they were immediately before the beginning of the period had to be taken as a given, and the hypothesis had to be applied as at the beginning of the period, by reference to the actual position immediately beforehand. If that were the correct approach, the starting point would have been that the Respondent was in fact charging 17.625% at the end of the 1999, was incurring or about to incur such large expenditure that it needed all or most of its output tax in order to recover the input tax, and was competing very successfully with GP despite the latter having charged no more than 15% to new clients for part of 1999. I find it difficult to suppose that an inference could be drawn, from that factual starting point, that if the Respondent had, from the beginning of 2000, been treated as exempt, it would have reduced its charge from 17.625% at all. In that context the Respondent's actual decision, once it achieved exempt status in 2003, not to reduce its charge would be powerful supporting evidence.
72. Mr Mantle's submission was not only that evidence from before the claim period was relevant (which is not in doubt) but also that the hypothetical comparison had to be made for the period before the claim period, as far back as necessary on the facts to achieve a proper comparison.
73. It seems to me that there is, at the least, a good deal of force in Mr Cordara's submission that the comparison has to be made for the claim period and only for that period. Since the repayment claim is limited to three years, it should not be necessary or relevant to consider what the position would have been before the beginning of that period. Probably this is not a point on which a dogmatic answer should be given, even if it arose for decision. If the Respondent's trading had commenced only a matter of weeks before the beginning of the claim period, it might be unrealistic to proceed as if the position achieved by the last day before the period was established and could not be reconsidered by way of hypothetical comparison, but in the present case, the Respondent having been trading successfully by then for three years, my inclination would be to regard it as wrong to carry the hypothetical comparison back to 1996 or 1997, so as notionally to rewrite the whole of the Respondent's trading history, and then to enquire what its financial position would have been during the claim period on that assumption.
74. I do not decide the case on that basis, however, and even if it were legitimate to go back to 1997, the material before the Tribunal did not, in my judgment, permit an inference as to what part (if any) of the tax was passed on to customers.
75. For the reasons given earlier in this judgment I would dismiss the appeal by HMRC, and allow the Respondent's cross-appeal against the judge's order remitting to the Tribunal the consideration of the position for the years 2000 and 2001.

Lord Justice Gage

76. I agree.

Lord Justice May

77. I also agree.