Tribunal finds against taxpayer in the compound interest VAT cases

The Tribunal has found against the taxpayer in claims for compound interest on VAT repayment claims. What does this mean for those affected and what action should be taken now?

What is the decision?
The Compound Interest Project (CIP) case concerned the amount of interest payable on repayments of VAT overpaid in prior periods. This case is therefore very relevant to any taxpayer who has overdeclared or underclaimed VAT as a result of an 'official error'. It will be of particular interest to taxpayers who submitted claims prior to the so called 'Fleming deadline' on 31 March 2009 as such claims are not subject to the normal three/four year time limit.

Normally taxpayers are limited to claiming simple interest, i.e. interest is calculated on the amount of overpayment only, but this case was seeking to compound that interest by calculating interest on interest earned year by year as well as on the capital.

The Upper Tier of the Tribunal has found against the taxpayer on the substantial point of principle, holding that UK domestic legislation cannot be read in a manner that allows for the award of compound interest.

The Tribunal also held that the appeals lodged by the test claimants, all of whom were motor dealers, were 'out of time' under Tribunal rules.

The CIP decision appears to reinforce the judgment passed by the High Court earlier this year when a Group Litigation Order involving another group of motor dealers (the 'VIC GLO') was heard. In the case of VIC GLO it was established that the appropriate remedy for taxpayers seeking compound interest was a High Court claim for 'restitution'.

Following the VIC GLO judgment, the features required to secure a successful 'restitution' claim look to be:

• an overpayment of tax arising from a breach of 'directly effective community rights', and
• a claim issued within 6 years of the relevant 'mistake' (or when the claimant could reasonably have discovered this).

The time limit point is very important, and is the principal reason why taxpayers should consider initiating their own High Court action at this stage in preference to waiting for the final resolution of this litigation.

It is worth remembering, however, that this litigation is still ongoing and further twists are possible. Taxpayers wishing to 'protect' their position to the maximum extent should pursue both restitution (High Court) and Tribunal claims.

What action should be taken by those affected?
We expect that the CIP judgment will be appealed to the Court Of Appeal, where it is likely to be heard together with the VIC GLO appeal. This is currently scheduled for January 2010, although a deferral now looks likely.

This is a sensitive issue as HMRC currently estimates that the Fleming claims submitted up to 31 March will cost the public purse approximately £8.5billion. The costs of paying out 'compound interest' on top could be a multiple of this figure.

Mike Sheppard, VAT partner at Grant Thornton says: "While today's CIP judgment is a reversal for the taxpayer, this is by no means the end of the story. For taxpayers who have received (or expect to receive) repayments of VAT under the earlier 'Fleming' judgment, today's decision highlights the importance of initiating High Court action to pursue compound interest, rather than relying on a direct claim to HMRC or the Tribunal. The relevant time limits for initiating High Court action will vary depending on the nature of the overpayment. Businesses affected would therefore be advised to review their position without delay."

Contact us if you would like further advice on any of the above