Page 1

This article was first published on LexisPSL Tax on 9 April 2014. Click here for a free trial of LexisPSL.

Simple or compound interest--what does Littlewoods' 1.2bn award teach us?

09/04/2014 Tax analysis: Jake Landman of the tax team at Pinsent Masons, discusses the 1.2bn award to Littlewoods in a dispute with HMRC about the interest on overpaid tax.

Original news
Littlewoods Retail Ltd and others v Revenue and Customs Commissioners [2014] EWHC 868 (Ch)

What is the background to this case?

Between 1973 and 2004 the UK required certain companies in the Littlewoods group to account for VAT in a way which was contrary to EU law (the underlying VAT issue). HMRC subsequently repaid most of the overpaid VAT to Littlewoods with simple interest thereon--pursuant to the Value Added Tax Act 1994, s 78. This case considered whether Littlewoods are in fact entitled to more than simple interest and instead should be paid at a compound rate (the entitlement issue).

What did the court decide?

HMRC asked the High Court to revisit the underlying VAT issue in addition to considering the entitlement issue. The judge however concluded that HMRC were not permitted to re-open the underlying VAT issue applying principles such as estoppel and abuse of process. Turning to the entitlement issue guidance was given by the Court of Justice of the European Union (CJEU) on this point in the previous case back in July 2012, C-591/10 Littlewoods Retail Ltd and others v Revenue and Customs Commissioners [2012] All ER (D) 267 (Jul). By way of recap the CJEU ruled that the refund of VAT with simple interest thereon is sufficient under EU law provided there are not similar domestic interest claims which provide only for compound interest (the equivalence point). In addition simple interest must amount to an adequate indemnity for the loss occasioned through the undue payment of VAT (the effectiveness point). Regarding the effectiveness point the term 'adequate indemnity' is irregular language for the CJEU and consequently uncertainty existed as to its meaning. HMRC highlighted the fact that the paragraph of the CJEU judgment immediately following reference to 'adequate indemnity' referred to the payment of interest made to Littlewoods exceeding the principal sum 'by more than 23%'. HMRC argued that this was an indication of what the CJEU regarded as adequate in the Littlewoods case. HMRC also suggested that if the CJEU had concluded compound interest was required then it would have expressly stated this. The High Court was not persuaded by HMRC's submissions however. The judge decided that, reading the July 2012 CJEU decision in the context of prior and subsequent CJEU decisions, adequate indemnity required an amount of interest which is broadly commensurate with the loss suffered by the taxpayer of the

Page 2

use value of the overpaid tax. Compound interest is therefore generally required under EU law where taxpayers have overpaid VAT in breach of EU rules. The High Court also rejected HMRC's attempt to rely on a change of position defence on the basis that EU law does not recognise this.

On what basis should compound interest be calculated? Could this change in future cases?
The judge found that EU law requires that Littlewoods should be entitled to recover the lost use value to it of the overpaid VAT. This is arguably the commercial rate of interest over the period compounded. Rather than claiming a commercial rate Littlewoods was content to receive the government's borrowing rate however. Other taxpayers might not make this concession in future cases. HMRC argued that the payment to Littlewoods should be reduced by the additional corporation tax which Littlewoods would have had to pay if the overpayments of VAT had never been made. The judge said that no account should be taken of the additional corporation tax however. It is important to note that quantum and the correct basis for calculation is likely to be explored further in both the Littlewoods case and others. There is not yet therefore a settled basis for calculation.

Given that the decision conflicts with HMRC's view that simple interest, not compound interest, is payable on refunds of VAT, we should presumably expect an appeal?
HMRC have indicated to the press they will be appealing the Littlewoods judgment and therefore it is unlikely to be the final word on the entitlement issue. The judge in Littlewoods commented that he had found the entitlement issue difficult with some aspects of the guidance given previously by the CJEU being hard to reconcile. HMRC are likely to focus on this in the event the Court of Appeal and/or the Supreme Court revisit the entitlement issue in the Littlewoods case or in John Wilkins (Motor Engineers) Ltd and Others v HMRC [2010] EWCA Civ 923, [2011] 1 All ER 339 (known as the compound interest project). Pinsent Masons represent four of the five lead appellants in the CIP. The fifth appellant is separately represented.

Should businesses be making claims for compound interest in the meantime, and if so in what circumstances?
The Littlewoods case is proceeding on the premise, agreed between Littlewoods and HMRC, that entitlement to compound interest is given effect in the High Court not in the Tax Tribunal (the remedy issue). On the basis of this common ground the High Court looked at whether the statutory scheme should be read/overridden to allow one or both of two types of restitutionary claim--namely 'Woolwich restitution' and 'mistake-based restitution'. HMRC argued that only a 'Woolwich claim' should be allowed, and therefore any entitlement would be restricted to tax overpaid in the six years prior to the issuing of court proceedings. The judge in Littlewoods rejected this approach however and ruled that mistake-based restitution claims could be made on any overpayment discovered, rather than made, within six years of discovery of the mistake. Such a 'mistake' would include a decision of the CJEU (formerly the ECJ) confirming that a taxpayer had overpaid VAT as a result of HMRC's incorrect application of the law. This is positive for taxpayers who have made or intend to make High Court claims within six years of the decision of the CJEU on which their repayment of VAT was based. The Court of Appeal has not yet ruled on the remedy issue in the compound interest project litigation. It is possible that the Court of Appeal will conclude that entitlement to compound interest is given effect in the Tax Tribunal as well as (or instead of) the High Court. This is key for taxpayers who do not have an 'in time' High Court claim but did make (or intend to make) a claim for compound interest to HMRC within three years (increased to four with effect from 1 April 2009) of the repayment of their VAT and then appealed HMRC's rejection to the tribunal within 30 days.

Page 3

Does this decision have wider implications for the way HMRC calculates interest on repayments of overpaid tax?
Although the judgment concerns VAT, it arguably has read across to other taxes overpaid in breach of EU law. Interviewed by Dave Thorley. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.