Ian Carpenter

Written by: Ian Carpenter

Ian Carpenter

Partner, Head of Indirect Tax

Treasury saves billions in landmark VAT ruling

Due to an error by HMRC in implementing UK VAT legislation, Littlewoods overpaid VAT between 1973 and 2004; HMRC repaid Littlewoods VAT of £205m, together with simple interest of £268m.

Littlewoods claimed however that simple interest was not ‘adequate indemnity’ for its loss of the use of the money it had overpaid as VAT, and claimed £1.25bn of interest, calculated on a compound basis. Littlewood’s claim was on the basis that the interest was due under the common law of restitution, either as restitution for a mistake of law, or as restitution of tax unlawfully demanded, and as such, interest had to be calculated on a compound basis to reflect the time value of monies overpaid.

Many other businesses which had overpaid VAT to HMRC as a mistake of law had also made compound interest claims. Therefore, if successful, the Treasury would have been exposed to claims for compound interest, estimated by some to be in the range of £10bn to £20bn. Perhaps in anticipation of losing this case, HMRC had already sought to limit the exposure by introducing a 45 per cent rate of corporation tax on such refunds.

In this long running dispute, reference had been made by a lower UK Courts to the Court of Justice of the European Union (CJEU). In its judgment, the CJEU determined that it was for the UK Courts to determine whether, in considering the principle of effectiveness, interest calculated on a simple or compound basis gave taxpayers an adequate indemnity for any loss incurred resulting from VAT overpaid in breach of EU law.

Although the Court of Appeal had been favourable towards Littlewoods claim, the Supreme Court's November 1 judgment has allowed HMRC's appeal, and dismissed Littlewoods cross-appeal, ruling that the CJEU’s judgment does not require the payment of compound interest in this case as, in the judgment of the Court, the payment of simple interest could not realistically be regarded as having deprived Littlewoods of an adequate indemnity.

What next?

This appears to be the end of the road for taxpayers that had claimed compound interest from HMRC. This will no doubt be a major disappointment to them and a major relief to the Treasury.

If you would like to discuss the impact on any claim made please contact Ian Carpenter.

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