Court confirms taxpayer entitled to compound interest on VAT refund

Mon 22 Jun 2015

The Court of Appeal has delivered its judgement in the latest round of hugely protracted litigation on a taxpayer’s entitlement to compensation for VAT that it accounted for under a legislative provision that did not comply with the EU directive. 

HMRC has already refunded the £204m of illegally imposed VAT and paid interest in accordance with the VAT Act of £268m.  However, HMRC had argued that, under section 78 of the 1994 Value Added Tax Act (VATA), only simple interest was due. Littlewoods were claiming that HMRC should pay interest to fully compensate them for being deprived of the use of this money that was illegal collected.  It is accepted that if they have this right they should be paid compound interest.  The difference between the interest already paid by HMRC and the amount Littlewoods claimed they were due is over £1bn (explanation of this astonishing difference is that the period for which the tax was collected was 1973 to 2004, interest rates for the earlier part of the period were in double figures, and the power of compounding over an extended period).

The litigation had already involved two visits to the High Court and a trip to the CJEU.  The Court of Appeal decision in Littlewoods v HMRC is a resounding victory for the taxpayer with the CA decision being in full agreement with last year’s High Court judgement.

Littlewoods is the lead case for a number of other companies seeking compensatory interest on repayments of illegally collected tax.  With the huge amount at stake, it’s inevitable that HMRC will seek permission to take the case to the Supreme Court (‘SC’).  The CA upheld the HC decision in full making it an uphill struggle for HMRC to convince the SC they should give time to hear the case.  However there is no finality until such time the SC either refuse leave to appeal or, decide the case themselves.

The CA decided that the entitlement to interest under the VAT Act did not provide the taxpayer with EU rights as explained in a much quoted leading case (San Giorgio).  That being so, the domestic provisions are dis-applied.  This, despite the provision in VAT Act explicitly stating that the taxpayer’s sole entitlement to compensation for being deprived of the money was under that particular domestic legislative provision.

For taxpayers to be entitled to compensatory interest under this Littlewoods principle the tax must have been imposed by a provision that is found to have no basis in law (which in the case of VAT is usually because it conflicts with the EU directive) or where the law, albeit not in itself ultra vires, was applied by HMRC in a manner that was contrary to EU law.  In this case, s78 was disapplied because it did not provide an adequate remedy for the taxpayer due to the length of time the taxpayer had been denied the use of the money.  However, the Court of Appeal pointed out that compound interest will not always be the appropriate remedy and our suspicion is that if the Supreme Court uphold this decision, that it will be restricted to Fleming claims.

For more information please contact Vincent.mccullagh@mazars.co.uk