Compound Interest
Frequently Asked Questions
June 2014
Introduction
The compound interest issue for VAT has been live for several years. The recent judgment by the High
Court in Littlewoods has served as a timely reminder to businesses that they should ensure that their
positions are appropriately protected to allow them to benefit from favourable judgments on the issue.
This note acts as an aide memoire to businesses considering the issue, but it is not an exhaustive analysis of
all the points at stake.
When is interest payable by HMRC?
The UK VAT Act, s78, sets out that HMRC will pay interest in cases
of official error leading to taxpayers accounting for too much VAT
in the period. This may either be accounting for too much output
tax or claiming too little input tax.
The interest is calculated using a formula which leads to the award
of simple interest. The taxpayer must actively claim the interest
from HMRC.
What has happened to bring compound interest into
the debate?
Pinsent Masons (as McGrigors) commenced two test cases
concerning EU law entitlement to compound interest a number
of years ago. One of these cases namely the VAT Interest Cars
group Litigation (also known as FJ Chalke & AC Barnes v HMRC)
was unsuccessful before the Court of Appeal on time limit
grounds. The other case is the Compound Interest Project “the
CIP” (also known as John Wilkins (Motor Engineers) Ltd v HMRC).
The Court of Appeal has determined the time limit issues in the
test claimants’ favour in the CIP but still needs to consider the EU
law entitlement issue.
Meanwhile Littlewoods, the catalogue company, made a claim to
HMRC for overpaid output tax. Additionally it claimed compound
interest on the amounts. The principal amount of the claim was
initially agreed, but HMRC rejected the claim for compound
interest. Littlewoods appealed that rejection and, in 2010, the High
Court referred the question of interest to the Court of Justice of
the European Union (“CJEU”).
What did the CJEU rule regarding compound interest?
A taxpayer is entitled to reimbursement of tax that is collected
contrary to EU law and also to the payment of interest. It held that
the question of whether that interest is compound, simple or some
other form is for the national courts to decide. Specifically, it
advised that the national rules for calculating interest must not
deprive the taxpayer of an “adequate indemnity” for the loss arising
through the undue payment of VAT.
The judgment of High Court – April 2014
In applying the judgment of the CJEU, the High Court ruled that
the right of the taxpayer to receive an “adequate indemnity”
requires that a rate of interest analogous to the use value of the
money in the hands of the government is awarded.
The Court held that s78 and s80 of the UK VAT Act do not provide
“adequate indemnity” required under EU law. Therefore the
relevant sections must be dis-applied and instead the taxpayer
finds an appropriate remedy via claims based in restitution.
It should be noted that the High Court arrived at this finding based
upon an agreed position between the parties that a claim in
restitution is the appropriate manner in which to provide a
remedy for the taxpayer. This point is not beyond doubt, however,
and there are stayed cases at the Court of Appeal based upon
an approach that s78 and s80 may be construed in the
appropriate manner and so the remedy is based on statute
rather than restitution.
What has been HMRC’s response?
Given the sums at stake, it is no surprise that HMRC applied for
leave to appeal to the Court Appeal. Leave has been granted and
HMRC has indicated that it is appealing the judgment.
In the interim existing claims for compound interest will be stayed
pending the outcome of HMRC’s appeal. New claims on similar
grounds should also be stayed pending the outcome of the appeal.
What should businesses do now?
If compound interest claims have been made either at the High
Court or the Tribunal, businesses should confirm that these
are appropriately stayed pending the outcome of the
Littlewoods appeal.
If such claims have not yet been made, businesses should consider
whether there is scope to do so. Essentially, such situations are most
likely to arise where businesses have been accounting for VAT in
accordance with HMRC’s erroneous interpretation of EU law. Claims
should be made, where appropriate, to prevent considerable value
falling out of time by operation of the time limits mentioned below.
Such errors could either be where taxpayers have charged an
amount of output tax on goods and services which was not due; or
where taxpayers have not claimed an amount of input tax to which
they were entitled.
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Compound Interest
Frequently Asked Questions
June 2014
How are compound interest claims made?
The Littlewoods judgment proceeded on the basis that claims in
restitution via the High Court are the only appropriate manner in
which to bring such a claim.
However, as noted above, our view (and that of a number of other
observers) is that it is possible to bring such claims on a statutory
basis via the Tax Tribunal.
To prevent having a claim fail on the basis that it is brought in the
wrong forum, it would be prudent to make the claim both via the
High Court and the Tribunal.
Are there any time limits in which compound interest claims
must be brought?
High Court
On the basis of this common ground in Littlewoods, the High Court
looked at 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 mistakebased 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 High Court claims within six years of the
decision of the CJEU on which their repayment of VAT was based.
Tax Tribunal
Taxpayers should make a claim for compound interest to HMRC
within three (increased to four with effect from 1 April 2009) years
of the repayment of their VAT and then appeal HMRC’s rejection to
the Tribunal within 30 days.
What to do now?
The Pinsent Masons Tax Team has extensive experience in
identifying, submitting and managing such claims.
To discuss your potential opportunity, contact one of the team members below:
Darren Mellor-Clark
Partner
Litigation & Compliance, Tax
London
T: +44 (0)20 7054 2743
E: darren.mellor-clark@pinsentmasons.com
Stuart Walsh
Partner
Litigation & Compliance, Tax
London
T: +44 (0)20 7054 2797
M: +44 (0)7872 808717
E: stuart.walsh@pinsentmasons.com
Jake Landman
Associate
Litigation & Compliance, Tax
London
T: +44 (0)20 7054 2572
E: jake.landman@pinsentmasons.com
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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