Catalogue company only entitled to simple interest on overpaid VAT, European legal adviser says

Advocate General Verica Trstenjak said that HM Revenue and Customs (HMRC) was entitled to only add simple interest to repayments of VAT paid by a catalogue shopping company. The interest was due after HMRC had breached EU law by charging VAT on commission. The company, Littlewoods, had argued that the overpaid tax should be subject to compound interest.

In an opinion advising ECJ judges, the Advocate General said that reimbursement with simple interest was compatible with EU law as it provided “adequate compensation” for the loss of the use of the money and because “no more generous remedy” was available in relation to overpayments of other taxes.

The Advocate General said that the type of interest added to the repayment was a question “to be determined by the Member States” providing that a taxpayer would not be treated differently elsewhere in the EU.

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, meaning from that moment on the interest that has been added also earns interest. UK law currently only awards interest on a simple basis.

This means that taxpayers will be unlikely to receive any additional payment beyond whatever simple interest they have already received if the ECJ follows the Advocate General's opinion.

Advocates General provide opinions to assist judges in the most hotly disputed ECJ cases. They are not binding, but are followed in the majority of cases.

Businesses have been able to seek repayment of VAT overpayments made between when VAT was introduced in the UK in 1973 and 4 December 1996. Because of a 2002 ECJ decision involving retailer Marks and Spencer, companies had thought they were no longer entitled to claim the repayment.

Where HMRC had agreed to pay the VAT it took the view that this should be done at the statutory rate - which has been 1% below the average base rate of the leading banks since 1998.

Littlewoods had argued it was entitled to a further £1 billion, according to the opinion, due to “the benefit [HMRC] received through the use of the principal amounts of tax overpaid”. The company claimed that being paid compound interest on the VAT repayments would have been a more effective measure of their loss. Restricting the claim to simple interest, as provided for under UK law, would go against the company’s right under EU law to seek an effective remedy, it said.

Tax law expert Ian Hyde of Pinsent Masons, the law firm behind Out-Law.com, said that the Advocate General’s opinion had been a “surprising” one. “However, there is not much that anybody contesting a VAT repayment can do at this stage but wait to see what the ECJ’s final opinion will be,” he said.

“This is a significant case for a lot of taxpayers with large sums of money at stake - in some cases, sums that can exceed the amount of tax being repaid due to the length of time some of these disputes have been running,” he said.