Taxpayers are not entitled to compound interest on reimbursements of wrongly charged VAT if rules allowing only for simple interest meet the principles of effectiveness and equivalence. This is the effect of the Advocate-General's opinion in the long-running case of Littlewoods Retail Ltd v HMRC.
Littlewoods concerned VAT which had been charged on third party commissions in breach of EU law, and which was subsequently reimbursed to the taxpayer by the UK tax authorities (HMRC) with simple interest. Littlewoods claimed that national legislation that only allowed simple interest to be paid on the reimbursed sums and excluded any other remedy inadequately compensated the taxpayer for its loss and therefore contravened the EU principle of effectiveness. The UK High Court referred this issue to the CJEU.
The Advocate-General opined that, where VAT is levied on a taxpayer in breach of EU law, the principle of effectiveness requires the relevant tax authority to repay the sums in question to the taxpayer with interest. However, the A-G considered that it is up to each member state to establish whether that interest should be simple or compound interest, and to determine the interest rate and date from which the interest should be calculated. In doing so, the member state must comply with the EU law principles of effectiveness and equivalence.
The principle of effectiveness requires that the interest paid to the taxpayer must not be so low as to deprive the interest claim of any substance. The A-G considered that this requirement was met in Littlewoods, as the amount of interest recovered by the taxpayer exceeded the amount of VAT reimbursed to it.
The principle of equivalence requires that rules governing the payment of interest on tax reimbursements must be no less favourable in the case of VAT than for similar taxes levied in breach of national law. The A-G recommended that it should be up to the national (in this case, UK) court to determine which taxes should be considered 'similar' to VAT in this context. These would include other indirect taxes, but the question of whether certain direct taxes are also similar to VAT in this respect must be determined by the national court by reference to the particular characteristics of those taxes, with a further reference to the CJEU if necessary. The A-G stressed, however, that member states need not extend their most favourable rules on interest recovery to VAT reimbursements - they need only ensure that the rules governing VAT reimbursements are not the least favourable among similar claims.
Looking forward: the CJEU decision
Commentators have forecast that a CJEU decision which follows the A-G opinion would put an end to taxpayers' hopes of obtaining compound interest on reimbursed VAT, as the normal remedy in the UK where taxes are levied in breach of national law is a claim for repayment with simple interest. However, it may be some years before Littlewoods is finally resolved, particularly if the UK High Court decides to make a further reference to the CJEU on the topic of equivalence.