HMRC says no to paying compound interest after Littlewoods VAT case


HMRC has made clear that it intends to continue to challenge the recent legal ruling that it should pay compound interest on refunds of VAT overpayments, and has also stated that the ‘exceptional’ circumstances of the case involving retailer Littlewoods mean there is as yet no agreement or formula which is applicable to any other claimants

At the end of last month, the Court of Appeal found against HMRC [Littlewoods Ltd and others and the Commissioners for Her Majesty’s Revenue and Customs, [2015] EWCA Civ 515, on appeal from [2014] EWHC 4302 (Ch)].

The latest decision from the Court of Appeal confirms that of the High Court last year. The matter has also previously been considered by the High Court at an earlier hearing and by the European Court of Justice, which also found in Littlewood’s favour.

It relates to tax charged in breach of EU law on commission and paid by the retailer between 1973 and 2004. HMRC argued that, under section 78 of the 1994 Value Added Tax Act (VATA), only simple interest was due.

Littlewoods originally brought its claim that HMRC should pay compound interest, rather than simple interest, on the amount that it had overpaid in 2007.

HMRC has already refunded the £204m overpayment, along with simple interest of over £268m. The payment of compound, rather than simple, interest would allow Littlewoods to recover a further £1.2 bn.

In a policy paper released after the latest decision, HMRC says that it ‘does not agree with the judgment and considers it to be at odds with the requirements of European law and how parliament intended VAT law to work. Accordingly, this is not the end of the litigation as HMRC is seeking permission to appeal to the Supreme Court.’

In the meantime, HMRC says the ruling ‘does not provide a clear method for calculating the level of interest which provides adequate indemnity to claimants’, and says its own position has not changed and the availability of compound interest in any circumstances remains in dispute.

The Court of Appeal judge stated: ‘We would emphasise that the conclusions which we have reached are those which apply in the circumstances of this case. As we have endeavoured to emphasise ... “adequate indemnity” is not a rigid straitjacket, and certainly does not go as far as to require compound interest in every case.’

On this basis, HMRC is now arguing that the Court of Appeal provided no further guidance on how claims to compound interest made through the tribunal appeals process should be treated. Nor did it alter the earlier finding of the Upper Tribunal that compound interest is not available consequent to an appeal to the tribunal.

A large number of other taxpayers have similar compound interest claims pending, with ‘significant’ amounts at stake, according to Jake Landman, senior associate at law firm Pinsent Masons.

‘Littlewoods is proceeding on the premise, agreed between Littlewoods and HMRC, that entitlement to compound interest is given effect in the High Court rather than the Tax Tribunal. Pinsent Masons represents four of the five lead appellants in the lead case concerning whether compound interest should be given effect in the Tax Tribunal, known as the compound interest project (CIP),’ Landman said.

‘The Court of Appeal was careful to emphasise here that compound interest may not be required in every case. Perhaps the court was alluding here to situations where the difference between simple interest and compound interest is not significant. However, this still needs to be tested,’ Landman pointed out.

HMRC’s policy paper states that for any other claimant to succeed, the details of their claim would have to be considered in similar detail in a separate court hearing. It also says that ‘in relation to a number of other claims, there are other significant strands of litigation still to be resolved before these claims can be examined and concluded’.

For now, HMRC says it will apply for any claims for compound interest already lodged (and new claims) with the High Court or County Court to continue to be stayed pending the final determination of the Littlewoods litigation.

HMRC also says its position in relation to tribunal appeals is unchanged, namely that these should continue to be stood over until there has been a final determination as to the availability of compound interest in the UK.

As a result, any new requests for compound interest will continue to be refused, and HMRC says it will only reconsider its position in the event that permission to appeal to the Supreme Court is not granted. A decision on this is likely to be some months away.

HMRC’s policy paper is here

The Court of Appeal ruling is here

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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