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Mistaken £450,000 VAT Payment Triggers Construction Industry Dispute

construction scaffolding 1024x683 1

construction scaffolding 1024x683 1

The vexed distinction between building works that qualify for VAT zero-rating and those that do not can be puzzling even for construction industry professionals. A case on point focused on the tricky legal consequences of almost £450,000 in VAT having been paid to HM Revenue and Customs (HMRC) by mistake.

A building contractor which carried out a substantial construction project claimed 20 per cent VAT on the works and billed its employer accordingly. They later agreed, however, that the works were in fact zero-rated and that £449,454 had therefore been mistakenly invoiced to and paid by the employer. HMRC subsequently reimbursed that sum to the contractor by way of an accounting credit.

The employer launched proceedings against the contractor with a view to recovering the VAT it had paid in error. The contractor accepted that it was liable to repay the money. However, it characterised the matter as a simple claim for repayment of a debt and, on that basis, asserted that it was entitled to set off against its liability sums that it alleged were owed to it by the employer.

Ruling on the case, the High Court noted that the contractor had given HMRC a clear undertaking that it would pass on any VAT rebate it received to its customer, the employer, without any deduction for any purpose. It would be unconscionable for the contractor to retain any part of the rebate, which was intended for the sole benefit of the employer, who had carried the burden of mistakenly paying VAT.

The Court declared that the contractor held the rebate on constructive trust for the employer. It directed that the trust be wound up and that the balance of the trust property be transferred to the employer. Insofar as the contractor had used the rebate to fund its general business activities, it had acted in breach of trust. As trustee, it was therefore liable to make up any shortfall in the trust fund.

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