The European Court of Justice (ECJ) has today issued its decision in a VAT case that has generated much interest. The case of Littlewoods Retail Limited and Others (Case C-591/10) concerns whether UK taxpayers can claim higher rates of compound interest on VAT reclaimed from HM Revenue & Customs (HMRC), rather than the simple interest ordinarily payable under the VAT Act.
HMRC had agreed that Littlewoods had overpaid around £200m of VAT in connection with commissions paid to its agents. This VAT, together with simple interest amounting to over £250m, had been repaid to the company. However, Littlewoods claimed that the interest should be calculated on a compound basis and that it was consequently entitled to around £1bn.
Although there is no specific UK statutory right to claim compound interest in circumstances where tax has been overpaid, an earlier landmark case confirmed that the UK courts do have jurisdiction to award compound interest (under common law) in respect of restitutionary claims arising from of a mistake of law. The ECJ therefore had to decide whether repaying the VAT, plus simple interest, is a sufficient remedy when a business has overpaid tax due to a breach of European law.
In reaching its decision, the Court said that the payment of compound interest on overpaid tax is not necessarily required by EU law. Whether or not it should be paid to a particular taxpayer depends on whether the existing remedies available in his country comply with EU principles. In other words, simple interest may be sufficient if it provides adequate compensation for not having access to the money paid in error, and there is not a more generous remedy available in relation to similar claims for other taxes in that country.
On the 'adequate compensation' point, the Court suggested that the rate of simple interest available under the UK legislation for overpaid VAT may be satisfactory, as it is linked to an average of bank base lending rates. That results in a rate that is not so low as to largely deprive the interest claim of substance. The interest is also payable from the date on which the overpayment was made. On the basis that the payment of simple interest to Littlewoods exceeded the principal tax sum, the amount paid to it is therefore likely to satisfy the 'adequacy test' and is consequently sufficient compensation.
As far as the 'more generous remedy' is concerned, the ECJ said that it was up to the national court in the UK to determine whether or not the rules in the VAT Act governing the payment of interest, are equivalent to those for similar claims for interest on infringements of domestic law. In that respect, if the payment of simple interest under UK VAT law is found to be less than that payable for similar domestic claims, the UK court would be required to interpret and apply the national rules in such a way that the interest payable for VAT purposes is in accordance with the more favourable rules applicable to the similar claims.
Commenting on the case, Lorraine Parkin, Head of Indirect Tax, Grant Thornton UK LLP, said:
"The ECJs decision means that Littlewoods, and other taxpayers with outstanding claims for compound interest, will have to hold their breath a little longer for the matter to be resolved – at least until the UK High Court makes a determination on whether other taxes provide more generous remedies.
"They can, however, take some encouragement from the fact that the ECJ has not completely dismissed the notion of compound interest and has referred the matter back to the UK court."
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