The Supreme Court has unanimously rejected a taxpayer's claim for compound interest on overpaid VAT in Littlewoods Ltd and others v HMRC [2017] UKSC 70. The case alone was worth £1.2 billion to Littlewoods but worth potentially over £17 billion to the Exchequer when considering the five thousand cases stayed pending its outcome.
Background
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 was due.
Simple interest vs. compound interest
Section 78 of the 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.
Littlewoods argued that HMRC was unjustly enriched by payments made under a mistake of law and made a common law claim for restitution of the use value of monies mistakenly paid.
Claims excluded by statute?
The first issue for the Supreme Court was whether the claims were excluded by section 78 and 80 of the VAT Act 1994. The Supreme Court held that the section 78 excluded the right to compound interest as the right to interest was subject to limitations. Such limitations would be effectively pointless if taxpayers could circumvent them by bringing common law claims. More importantly, it was held that a literal interpretation of a statute can be ignored if it does not conform to Parliament's intention. Otherwise this would undermine the statutory scheme.
The second issue was whether such exclusion was contrary to EU law. The Supreme Court clarified how the lower courts gave too much emphasis to the phrase that the taxpayer must be given an "adequate indemnity" (as per the CJEU judgment in Littlewoods C-591/10). There was a general entitlement to interest on tax levied in breach of EU law, but it was for member states to determine whether the interest rate should be simple or compound, subject to the principle of effectiveness. The exclusion was therefore not contrary to EU law.
Littlewoods had already received interest which was 125% of the principal sum and this was considered reasonable redress; it was held that this therefore did not deprive it of an adequate indemnity. Whether that can also be said for all of those with cases stood behind Littlewoods remains to be seen.
For the vast majority, it is very unlikely that the simple interest recovered would be as high as the amount Littlewoods recovered. This would suggest that compound interest could be the only way to be granted an adequate indemnity. Given the potential amounts involved, this is something that all tax managers should investigate.