UCL EUROPEAN INSTITUTE
Restitution of overpaid tax – The shifting role of the Court of Justice of the
European Union
Summary
UCL EUROPEAN INSTITUTE
POLICY BRIEFING – JUNE 2014
AUTHOR
Alma Mozetic
UCL Laws
alma.mozetic.10@ucl.ac.uk
SERIES EDITOR:
Dr Uta Staiger
Deputy Director
UCL European Institute
u.staiger@ucl.ac.uk +44(0)20 7679 8737
This policy briefing discusses key issues regarding the recovery
of overpaid tax and the role of the Court of Justice of the
European Union (CJEU). It considers the right to recovery of
unlawfully levied tax in EU law, the role of national courts, and
the consequences of the shift of competency from national courts
to the CJEU that has taken place in the last decade. It concludes
that whilst this move is positive in some respects, it also entails an
important transfer of responsibility to the CJEU which must be
properly discharged. There are a number of ambiguities, relating to
the rules on causation, defences, and calculation of interest, which
require further clarification. These matters are very technical but
billions of pounds worth of liability turns on their proper analysis.
The right to the recovery of tax levied
contrary to EU law
The right to restitution of tax levied contrary to EU law exists as
a matter of EU law. It aims to neutralise the economic burden on
the taxpayer through indirect enforcement of the taxpayer’s rights
derived from European law (San Giorgio, Danfoss). The procedural
rules governing the refund of unlawful tax are determined by
national courts, subject to a dual requirement of equivalence
(domestic rules must not be less favourable than rules governing
similar domestic actions) and effectiveness (they must not render
‘virtually impossible or excessively difficult’ the exercise of EU
rights). National courts have discretion, under the principle
of national procedural autonomy, to formulate precise rules of
recovery, including whether the order sought is restitutionary
(directing the defendant tax authority to return its gain) or
compensatory (directing the defendant tax authority to make good
the claimant’s loss) (Elliott, Häcker and Mitchell, 2013: 15).
KEY CONCLUSIONS
• There has been a shift in the approach of the CJEU with regard to
the recovery of unlawfully levied tax. This has revealed a number of
complexities which require further resolution.
• It is important to ensure consistency between national courts in their
approach to causes of action and defences.
• There are significant complexities over the payment of interest,
including the definitions of ‘loss’ and ‘adequate indemnity’.
• There is a tension between the principle of effectiveness and
legitimate expectations which could give rise to a discrepancy between
EU and national law.
In English common law, unlawfully levied tax may comprise EU
tax that was not payable, such as VAT, or a member state tax that
violates the EU Treaty. A cause of action can be brought on the
grounds of mistake (where a taxpayer makes a mistake of law
which causes him to believe that the tax was payable when it was
in fact not) or under the Woolwich principle (where tax was levied
without Parliamentary authority, contrary to Article 4 Bill of Rights
1689). However, these types of claim are not universally available.
For example, a customer with doubts about whether VAT is due
on a transaction cannot rely on ‘mistake’ as such mistake would
likely not be causative. Further, only direct taxpayers can bring a
Woolwich cause of action, meaning that an indirect taxpayer, such
as a customer who bears the economic burden of the imposed
tax, cannot bring a claim on this basis. These complex situations
therefore necessitate either a removal of restrictions on existing
remedies, or a creation of a new national remedy in the UK.
Shifting responsibility: from a ‘noninterventionist’ to an ‘EU cause of action’
model
Over the past ten years, the CJEU has shifted its approach from
non-interventionist (whereby EU law conferred a right to an action
which was further defined at the national level) to an EU cause of
action model (whereby the CJEU assumes a greater role in defining
all elements of the cause of action). This shift of competency,
which can be observed in cases such as Metallgesellschaft and Rewe
Zentralfinanz, gave rise to a tension. Should the applicant bring a
claim for state liability for damages for breach of EU law, which
requires proof of a sufficiently serious breach? Or can the applicant
bring a strict liability claim in unjust enrichment, which may be
easier to establish? The European Court indicated that the latter
may be necessary in order to provide an effective remedy (FII,
Littlewoods). The requirement of effective remedy is now given
precedence over the non-interventionist approach. The CJEU
has further clarified that procedural autonomy which exists at a
national level does not confer real autonomy on member states
but merely a margin of discretion, which is in turn limited by the
principles of effectiveness and equivalence (Littlewoods).
This shift in the CJEU’s authority, whereby it assumes greater
control over the cause of action, provides clarity of precedent. Some
previous case law can now be reconceptualised as involving claims
in unjust enrichment, for instance Hans Just and Courage. However,
recent case law suggests that this significant shift of responsibility
to the CJEU is not being properly discharged and that a number of
key issues require further resolution.
Key issues
person who actually bears the indirect tax; or
• Refuse restitution to the indirect taxpayer so long as it has an
effective remedy against the middle man (who passed on the tax) –
in this case, the passing on defence is not available (Danfoss).
It follows that passing on may not really be a defence but mat
rather be a means of identifying the correct claimant. If so, the onus
of invoking the passing on exception need not necessarily fall on
the defendant alone.
Change of position
The change of position defence is available where the ‘position
of the defendant has so changed that it would be inequitable’ to
require him to make restitution. Notwithstanding some earlier
indications to the contrary, it is now clear that the change of
position is not a defence available to HMRC (Lady & Kid,
Littlewoods). Nor will HMRC be allowed to argue that returning
the tax would result in fiscal chaos because restitution of large sums
would cause great inconvenience.
Subjective devaluation
The principle of subjective devaluation allows the courts to assess
the value of the benefit to the defendant by reference to his or her
personal value system, rather than the market. As member states
differ in their classification of causes of action, it may be that one
state characterises subjective devaluation as an argument going
to the quantification of liability while another state considers it
as a defence. Accordingly, the prohibition on defences other than
passing on may lead to an anomaly whereby one member state
benefits from subjective devaluation whilst another does not. This
anomaly could be resolved through:
• CJEU explaining the rationale for its prohibition on defences;
or
• EU effecting a Europe-wide uniform system of tax restitution
through a Regulation.
Interest
Causation
It is now clear that interest must be repaid alongside the principal sum
The case of FII suggests that sums are only recoverable if they are
the ‘direct’ or ‘inevitable’ consequence of the unlawful charge.
As a result, any expenses that arise out of attempts to mitigate
loss are not recoverable. This approach may have the undesirable
consequence of giving applicants a perverse incentive not to
mitigate their losses. It would be helpful if the CJEU provided
clearer guidance to English courts.
Defences
The ‘passing on’ defence
A passing on exception describes the argument that a claimant who
pays the unlawful tax is not entitled to restitution if it manages
to offset its loss by increasing the prices it charges to customers.
Traditionally, this was the only defence available to a claim for
return of an unlawfully levied charge (Lady & Kid). However, it was
only available where the unlawful legislation itself required passing
on (Accor).
The passing on defence is typically understood as a substantive
defence. Perhaps a better understanding is that passing on provides
a means to neutralise the tax burden. It gives procedural choice
to the member state to determine how to effect restitution to the
taxpayer who has ultimately borne the economic burden:
• Refuse restitution to the direct taxpayer (the middle man) on the
basis of passing on so long as a national remedy is available to the
Traditionally, the CJEU did not prescribe any response to the
unlawful levy of tax: as long as the principal sum was repaid, it was
irrelevant whether the remedy was compensatory or restitutionary.
The failure to make provisions for the recovery of interest (the user
value of the tax) violated the San Giorgio principle, which required
a reversal of the economic burden on the taxpayer. It is now clear
that member states must make restitution for all sums relating
directly to the unlawful tax, including the interest. The repayment
of interest moreover ranks equal to the right of repayment of the
principal sum (Irimie).
The amount of interest recoverable is still uncertain: simple or
compound?
A separate question is whether member states retain autonomy
to assess the amount of interest. The rules for interest awards,
including the rate and method of calculation, are for member states
to formulate, subject to the principle that national rules should
not deprive the taxpayer of ‘an adequate indemnity for the loss
occasioned through the undue payment of VAT’ (Littlewoods). It
remains unclear whether ‘adequate indemnity’ requires compound
or only simple interest. Henderson J’s judgment in Littlewoods will
provide further guidance.