Overpaid VAT Refunds? HMRC may deny refunds

The VAT Refund That Isn’t Guaranteed

Reclaiming overpaid VAT might seem straightforward—if you’ve charged tax in error, surely you ask HMRC for it back? Unfortunately, that’s not always how it works. HMRC has a powerful tool in its arsenal called the “unjust enrichment” defence, which it can use to refuse repayment.

This defence hinges on a simple but crucial question: Did you actually bear the cost of that VAT, or did your customers? If HMRC believes your customers paid the tax and you’re now trying to keep the refund for yourself, they can legally block your claim.

For many businesses, this comes as an unpleasant surprise. But understanding how unjust enrichment works—and preparing the right evidence—can make the difference between winning and losing a VAT refund case.

What Does “Unjust Enrichment” Mean in VAT Law?

In tax terms, unjust enrichment happens when:

1. You charge VAT by mistake.
2. The customer pays that VAT on top of the base price.
3. You pass that VAT to HMRC.
4. You later claim it back without reimbursing the customer.

If HMRC refunds you in this situation, you’d effectively get a windfall profit—money you never lost—because your customer already covered the tax.

HMRC’s Legal Position

HMRC is allowed to reject VAT refund claims if repayment would put you in a better financial position than if you’d never made the mistake. In other words, the refund should restore your finances to where they would have been, not give you an unexpected bonus.

The law is clear: HMRC must prove unjust enrichment applies. But in reality, businesses often find themselves having to demonstrate that it doesn’t. This means collecting detailed evidence to show who truly bore the cost.

The Core Question: Who Paid the VAT in Practice?

The key to any unjust enrichment dispute is identifying who really carried the VAT burden—your business or your customers.

Indicators You Passed the Cost On:

• Prices increased when VAT was added.
• Prices didn’t decrease when VAT was removed.

Indicators You Absorbed the Cost:

• Prices stayed the same despite adding VAT.
• Profit margins dropped during the VAT period.
• Competitive pressures meant you couldn’t raise prices.

If you absorbed the cost, HMRC should not be able to refuse your claim.

Practical Example: Dance School VAT Error

Imagine a dance school mistakenly registers for VAT and charges 20% on classes.

• Scenario 1 – Cost Passed On: Lessons were £50 before VAT and rose to £60 after registration. Here, students clearly paid the VAT, and HMRC could claim unjust enrichment unless the school refunded them.
• Scenario 2 – Cost Absorbed: Lessons stayed at £50 after registration. The school paid VAT out of that £50, reducing its profit. In this case, HMRC would struggle to prove unjust enrichment.

This example shows why detailed pricing history is vital evidence.

Evidence That Can Make or Break Your Case

To defend your claim, you need to prove you absorbed the cost or that you’ve refunded your customers. Strong evidence includes:

1. Pricing Records: Show that prices didn’t increase when VAT was added.
2. Profit Margin Analysis: Demonstrate reduced margins during the period you charged VAT in error.
3. Market Data: Provide competitor pricing to prove you couldn’t raise prices.
4. Customer Refund Proof: If customers paid the VAT, evidence that you reimbursed them will neutralise HMRC’s argument.
5. Invoices & Contracts: Show the agreed pricing terms during the relevant period.

The Claim Process and Time Limits

VAT refund claims normally must be made within four years from the end of the relevant VAT period. While that’s a decent window, waiting too long makes it harder to gather the necessary evidence.

When making your claim, be prepared for HMRC to request detailed supporting documents—and possibly challenge your position.

How HMRC Builds an Unjust Enrichment Case

When HMRC examines a claim, they look for signs that:

• VAT was shown as a separate line on invoices.
• Prices increased when VAT began.
• No refunds were issued to customers.

If they find this pattern, they may reject your claim unless you can present counter-evidence.

Strategies to Overcome the Defence

If HMRC raises unjust enrichment, consider the following steps:

1. Challenge Their Evidence: Remind HMRC that the legal burden is on them to prove you’d be unjustly enriched.
2. Submit Strong Counter-Evidence: Provide pricing and margin data to show you absorbed the cost.
3. Consider Customer Repayments: Refunding customers can remove HMRC’s objection entirely.
4. Negotiate: Sometimes HMRC will agree to a partial repayment if evidence shows a mix of absorbed and passed-on costs.
5. Use ADR or Tribunal: If the dispute escalates, Alternative Dispute Resolution or a tax tribunal may be the next step.

Common Pitfalls Businesses Face

• Assuming HMRC Will Automatically Pay: Even if you clearly overpaid, they can refuse on enrichment grounds.
• Not Keeping Detailed Records: Without proof, your claim is weak.
• Overlooking the Customer Factor: If your customers paid the VAT, they may need to be refunded first.
• Waiting Too Long to Claim: Delays make it harder to produce strong evidence.

Best Practices for Protecting Your VAT Position

1. Regularly Review VAT Treatment: Avoid mistakes by double-checking whether your supplies are taxable, exempt, or zero-rated.
2. Keep Comprehensive Records: Archive all pricing and margin data for at least six years.
3. Document Market Conditions: Keep evidence of competitive pressures that limit pricing changes.
4. Have a Refund Plan Ready: If you discover overpaid VAT, decide quickly whether customer refunds are practical.
5. Seek Professional Advice: A VAT specialist can strengthen your claim and handle disputes with HMRC.

Preparation Is Your Best Defence

The unjust enrichment defence exists to stop businesses from benefiting unfairly from VAT refunds. But it also means that genuine claimants can lose out if they can’t prove their case. If you’ve overpaid VAT, act quickly, gather strong evidence, and understand exactly how HMRC might challenge your claim. With the right preparation, you can maximise your chances of keeping the money you’re entitled to—without falling into the unjust enrichment trap.