Out-Law News 3 min. read

Court of Appeal upholds Littlewoods' right to compound interest on overpaid tax


UK catalogue company Littlewoods is entitled to compound interest on a £204 million refund of a VAT overpayment, the Court of Appeal has confirmed.

The decision confirms that of the High Court last year, and relates to tax charged in breach of EU law on commission and paid by the retailer between 1973 and 2004. HM Revenue and Customs (HMRC) had argued that, under section 78 of the 1994 Value Added Tax Act (VATA), only simple interest was due.

A large number of other taxpayers have similar compound interest claims pending, with "significant" amounts at stake, said tax expert Jake Landman of Pinsent Masons, the law firm behind Out-Law.com. For this reason, HMRC is likely to try to appeal to the Supreme Court, he said.

"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," he said. "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)," he 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," he said.

Simple interest is calculated only on the original or 'principal' amount, or on that portion of the principal amount that remains unpaid. Compound interest arises when interest is added to the principal amount, with the effect that the interest that has been added also earns interest from the moment it is added to the principal.

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 billion from HMRC.

In the first trial on the claim in 2010, the High Court judge referred the matter to the Court of Justice of the European Union (CJEU). In 2012, the CJEU ruled that a person who has overpaid VAT which was collected contrary to EU law is entitled to the reimbursement of that tax and to the payment of interest. However, it was "for national law to determine, in compliance with the principles of effectiveness and equivalence", what sort of interest should be awarded. National rules on the calculation of interest due "should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT", the CJEU said.

The Court of Appeal first found that UK law does not permit "restitution" claims for overpaid VAT, limiting Littlewoods' claim under VATA to the principal sum and interest alone. However, it then had to decide whether preventing Littlewoods from bringing the restitution claim to which it was entitled by virtue of HMRC's error would "violate" the EU law "principle of effectiveness" by denying the company of the "adequate indemnity" required by the CJEU.

"We consider that it is now tolerably clear that EU law requires national law to reimburse the losses occasioned by the unavailability of money as a result of tax being levied unlawfully," Lady Justice Arden said, giving judgment on behalf of the Court of Appeal. "The use of the word 'reimbursement' … is, in our judgment, of great importance."

"[The CJEU's judgment does] no more than [point] out that it is for the national court to decide on a way of working out the award – the method of calculation. Simple interest at an appropriate rate may well be a satisfactory way of arriving at an adequate indemnity in many cases, with higher rates being necessary for longer periods. The difference between simply and compound interest, moreover, only starts to emerge once several years are involved, particularly where rates are low. It is for the national court to do the arithmetic," she said.

The Court of Appeal would "prefer" not to go so far as to suggest that compound interest should be paid over simple interest in all cases, she said. Rather, the decision in this case was in line with the test that "the court has consistently spelled out, namely that the taxpayer is entitled to reimbursement of the losses constituted by the unavailability of sums of money as a result of tax being levied".

"We would emphasise that the conclusions which we have reached are those which apply in the circumstances of this case," she said. "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. Nevertheless, in the circumstances of this particular case, and having regard to the extent of Littlewoods' claim, we hold that section 78 VATA 1994 deprives Littlewoods of an adequate indemnity for the loss occasioned through the undue payment of VAT."

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.