The Court of Appeal has upheld the High Court's decision in Littlewoods Ltd and others v HMRC  EWCA Civ 515 that the taxpayer was entitled to interest on a compound basis on the overpayment of VAT.
Between 1973 and 2004, Littlewoods overpaid more than £200 million in VAT to HMRC. The sum was later repaid along with simple interest. Littlewoods disagreed with HMRC's decision to repay the sum with only simple interest and argued that compound interest (amounting to £1.2 billion) was due as a matter of law.
Simple interest vs. compound interest
Section 78 VAT Act 1994 confirms that HMRC shall pay interest in cases of official error leading to taxpayers accounting for too much VAT in an applicable period. The interest is calculated on a simple interest basis.
However, the Court of Justice of the European Union (CJEU) confirmed in Littlewoods (Case C-591/10) that a taxpayer is entitled to the repayment of tax that is collected in breach of EU law, in addition to interest. It also held that the form the interest takes (i.e. simple, compound or otherwise) is for the national courts to decide. However, the national rules for calculating interest must not deprive the taxpayer of an “adequate indemnity” for the loss arising through the undue payment of VAT.
The Court of Appeal (upholding the High Court's decision) confirmed that section 78 was contrary to EU law as it does not provide an “adequate indemnity” and so must be disapplied. A payment of interest should reflect the loss of the taxpayer's "use value" of the overpayment. The court accepted that this should be calculated on a compound interest basis.
The correct route to make compound interest claims
The court confirmed that the only method to bring claims in restitution is via the High Court (not the Tax Tribunal).
Chances of success
HMRC have sought permission to appeal the decision to the Supreme Court. However, there remains a good chance of success for the taxpayer.
Applicable time limits
Claims can therefore be made on any overpayment discovered, rather than made, within six years of discovery of the 'mistake' (that is, a relevant CJEU decision confirming the overpayment of VAT due to the incorrect application of the law by HMRC).
Although the Court held that simple interest could not be considered "an adequate indemnity", it also confirmed that compound interest would not be suitable in every case of overpaid tax. HMRC have unsurprisingly tried to cling onto this in issuing Revenue & Customs Brief 9/2015 and have stated that although they do not agree with the decision, it was "based on the ‘exceptional’ circumstances specific to the Littlewoods claimants."
Taxpayers' accounts need to be reviewed immediately to consider whether any claims are possible and their potential value, so that a claim can be made within the applicable time limit. Where a claim has been made to the Tax Tribunal it should be reviewed and if still within time, a claim lodged at the High Court.
Any claims would be made alongside an application to "stay" the matter behind the final outcome of the Littlewoods litigation (whether it be the Supreme Court decision or otherwise).