No compound interest on VAT refunds

The Upper Tribunal, one of the new tribunals set up under recent tax appeals reforms, has ruled that HM Revenue & Customs will not be obliged to pay compound interest on its VAT repayments to taxpayers, a ruling that will be open to appeal. Although the Upper Tribunal acknowledged that taxpayers were entitled to compound interest because of EU law, it ruled that UK VAT statute couldn't be accounted for as part of it. Instead, taxpayers will have to recover compound interest from HMRC by making a separate claim. Current claims for compound interest are estimated to be in excess of around £1bn. Tony McClenaghan, a senior indirect tax partner at Deloitte who has been acting for one of the lead cases in the Upper Tribunal, said the outcome at this stage was unsurprising. 'It results in an odd and unsatisfactory position - a taxpayer can receive simple interest under UK statute, but then has to litigate separately under a different regime to increase the amount to compound interested, which it is entitled to as a matter of Community law.' Hannah Dobson, VAT director at Smith & Williamson, said more claims and cases of legal action could be brought 'as businesses do their utmost to recoup their loss relating to interest on their VAT repayments'. 'Although the taxpayers have lost at this stage, an appeal is highly likely,' added McClenaghan.
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