Out-Law News 4 min. read

Littlewoods loses long running tax repayment compound interest claim


Littlewoods, the catalogue company, is not entitled to compound interest in relation to repayments of overpaid VAT dating back to 1973, the Supreme Court has decided , overruling the Court of Appeal's previous decision.

Jake Landman, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com, said that although the decision is final in relation to Littlewoods' VAT claim, the Supreme Court may have "left the door open" in relation to restitutionary claims relating to other taxes.

Littlewoods overpaid VAT between 1973 and 2004. Between 2005 and 2008, HM Revenue & Customs (HMRC) repaid overpaid VAT of £205m, together with simple interest of £268m. Littlewoods claimed it was entitled in addition to compound interest of £1.25bn.

Simple interest is calculated only on the original or 'principal' amount. 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 claimed HMRC was unjustly enriched by the overpayments of VAT and compound interest was due to Littlewoods under the common law of restitution, either as restitution for a mistake of law, or as restitution of tax unlawfully demanded. Littlewoods claimed that UK VAT legislation did not prevent its claim for compound interest under the law of restitution and that, if it did, this was contrary to EU law. 

Section 78 of the Value Added Tax Act 1994 sets out when HMRC must pay interest and states that the liability to pay interest under that section applies “if and to the extent that [the Commissioners] would not be liable to do so apart from this section”. Littlewoods argued that this should be read as permitting a common law claim for interest purely as a matter of UK common law and without reference to EU law.

Giving the judgment of the Supreme Court, Lord Reed and Lord Hodge said that section 78 VATA should not be read as permitting a common law claim for interest to be made outside section 78 as "Parliament cannot have intended the special regime in section 78 to be capable of circumvention in that way."

In 2015 the Court of Appeal also decided that section 78 prevented Littlewoods' claim for restitution, but said that this was contrary to EU law as it did not grant Littlewoods "adequate indemnity".

When the High Court first considered Littlewoods' claim in 2010, it 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 Supreme Court said the phrase "an adequate indemnity" in the CJEU judgment "bears a broader meaning than that which Henderson J and the Court of Appeal favoured, and suggests that the CJEU has given member state courts a discretion to provide reasonable redress in the form of interest in addition to the mandatory repayment of any wrongly levied tax, interest and penalties".

"In summary, we interpret the CJEU’s judgment as (i) requiring the repayment of tax with interest, without specifying the form of that interest (ii) stating that the principle of effectiveness requires that the calculation of that interest, together with the repayment of the principal sum, should amount to reasonable redress for the taxpayer’s loss, and (iii) suggesting that the referring court might consider that interest which is over 125% of the amount of the principal sum might be such reasonable redress," the Supreme Court said.

"Consistently with a widespread practice among member states of the EU, the United Kingdom has treated the award of simple interest as an appropriate remedy for being held out of money over time whether the claimant is HMRC, when a taxpayer fails to pay his tax in a timely manner, or the claimant is the taxpayer, when tax has been unduly levied," the Court said

"Littlewoods have already recovered overpaid tax, and interest on that amount, going back several decades. The size of that recovery reflects a combination of circumstances which could not have occurred in most of the other EU member states: the retroactive nature of a major development of the common law by the courts, so as to allow for the first time the recovery of money paid under a mistake in law, and the inability of the legislature to respond to that development, under EU law, by retroactively altering the law of limitation so as to protect public finances. The resultant payment of interest cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity, in the sense in which that expression should be interpreted," Lords Reed and Hodge said in their judgment.

"In limited circumstances, outside of VAT, claimants have previously made common law restitutionary claims in connection with other taxes wrongly paid. Where the tax in question is not impacted by an exclusionary regime (such as section 78 and 80) the Supreme Court does appear to have left the door open," tax disputes expert Jake Landman said.

"At para 37 of the judgment the Supreme Court did expressly acknowledge that where you do not have an exclusionary regime a claim did lie in UK common law as previously recognised in the Sempra Supreme Court judgment," Landman said.

Last year the Supreme Court confirmed that Shop Direct, which is part of the Littlewoods group of companies had to pay corporation tax on a £125 million repayment of VAT overpaid by companies in the group that no longer trade.

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