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HM Revenue and Customs Brief 9/15


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First published: 23 June 2015

This brief explains HM Revenue and Customs’ (HMRC) position following the Court of Appeal judgment in Littlewoods Retail Ltd and others handed down on 21 May 2015.

The Court of Appeal found against HMRC deciding that Littlewoods claim for additional interest succeeded in full.

Like the High Court’s earlier ruling this finding was based on the ‘exceptional’ circumstances specific to the Littlewoods claimants. It does not provide a clear basis that could be applied to other claimants or a formula for doing so.

No payments are due to other VAT compound interest claimants at this stage.


Littlewoods Retail Limited and others claimed a refund of overpaid VAT in respect of commissions on mail order sales. This VAT was repaid together with simple interest due under VAT Act 1994. They then argued that the interest already paid to them was inadequate and that they were entitled to compound interest both as a matter of EC law and also as a matter of English domestic law.

HMRC’s view is that there is no community law right or domestic law right to compound interest and that section 78 of VATA 1994 provides an exhaustive and adequate statutory scheme by which only simple interest is payable.

The High Court ordered a reference to the Court of Justice of the European Union (CJEU) for a decision as to whether community law required payment of compound interest. It was heard in the Grand Chamber of the CJEU on 22 November 2011.

The judgment of the European Court was delivered on 19 July 2012. The European Court ruled that there is no EU law right to compound interest but returned the matter to the UK courts to determine whether the UK’s interest provisions comply with general EU principles, by providing the claimants with an adequate indemnity.

High Court judgment

The High Court considered the implications of the CJEU judgment and, as well as considering the national rules for payment of interest, the Court considered the total amount due if simple interest was found not to be adequate.

The Court found compound interest to be due as claimed, taking into account the ‘exceptional’ circumstances of Littlewoods’ situation. The Court also held that that the current statutory provisions relating to VAT did provide an appropriate amount of interest in many cases.

Court of Appeal judgment

The appeal was heard in March 2015. The judgment was released on 21 May 2015. The Court of Appeal supported the conclusions of the High Court but were careful to emphasise that their ruling applies to the specific circumstances of the Littlewoods claimants.

The judgment did not provide a general methodology for calculating the amount of interest which would give ‘adequate indemnity’ to the claimants. The court maintained that statutory provisions will provide an adequate amount of interest in many cases, therefore it is not the case that compound interest will always be payable where there has been an overpayment of tax.

HMRC’s position

HMRC does not agree with the judgment and considers it to be at odds with the requirements of European law and how Parliament intended VAT law to work. Accordingly, this is not the end of the litigation as HMRC is seeking permission to appeal to the Supreme Court. It may, however, be a number of months before HMRC will know the outcome of its application for permission to appeal.

HMRC’s view is that this ruling does not provide a clear method for calculating the level of interest which provides adequate indemnity to claimants. The Court of Appeal followed similar reasoning to the High Court, ruling that the claimants had a right to adequate indemnity, and this was not met by the statutory interest already paid. This was based on the facts and circumstances of those claimants. The litigation is not yet final so, given the Court of Appeal did not change the High Court judgment, the position taken by HMRC is unchanged.

The Court of Appeal, like the High Court, ruled that in many cases the statutory interest paid would be adequate and no further payments would be due. For any other claimant to succeed, the details of their claim would have to be considered in similar detail in a separate court hearing.

The Court of Appeal provided no further guidance on how claims to compound interest made through the Tribunal appeals process should be treated. Nor did it alter the earlier finding of the upper Tribunal that compound interest is not available consequent to an appeal to the Tribunal.

Further, in relation to a number of other claims, there are other significant strands of litigation still to be resolved before these claims can be examined and concluded.

As HMRC is seeking leave to appeal to the Supreme Court, the availability of compound interest in any circumstances remains in dispute.

Claims for compound interest

In view of the above, HMRC will apply for any claims for compound interest already lodged (and new claims) with the High Court or County Court to continue to be stayed pending the final determination of the Littlewoods litigation.

HMRC position in relation to Tribunal appeals is unchanged, namely that these should continue to be stood over until there has been a final determination as to the availability of compound interest in the UK.

Any new requests for compound interest will continue to be refused.

HMRC will reconsider their position in the event that permission to appeal to the Supreme Court is not granted.

An update to this brief will be issued in due course.

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© Crown Copyright 2015.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2015-07-17 09:12:22 in Tax Articles

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