The route for reclaiming overpayments of VAT and interest is under the statutory regime of the VAT Act and at the discretion of the Tribunal (Sections 80, 78 and 84(8) respectively). Henderson J, following the Court of Appeal decision in Monroe, held that for claims based on domestic UK law the statutory regime was exhaustive and excluded common law remedies in restitution in the High Court. This means that interest can be awarded only by way of the provisions set out in Section 78 or by the Tribunal, which generally means simple interest. Whilst there have been cases where the Tribunal has awarded compound interest, the decisions are few and far between and sometimes overturned on appeal.
However, Henderson J went on to hold that, for claims based on Community law, the exclusion of High Court restitutionary claims was overriden by the Community law requirement of an effective remedy. Community law required that taxpayers be fully reimbursed with compound interest for breaches of Community Law.
The judgment follows and amplifies the decision in Sempra, where the House of Lords held that compound interest was payable on ACT repayment claims following the Hoechst judgment. The judgment makes it clear that the entitlement to compound interest is generally available under Community law and not just in the restricted circumstances of the Sempra claim.
The basic time limits for submitting restitutionary claims is 6 years from the date the cause of action accrued, generally the date of the overpayment. However if the overpayment is made under a mistake, this period does not start until the mistake is discovered or could be reasonably discovered with due diligence. In the DMG and FII GLO cases the mistake was held not to be discovered until at least the date of the relevant ECJ judgment that had found the tax to be unlawfully levied.
That approach would not help the test claimants in the VIC GLO who had issued their claims in 2007 well outside 6 years from the dates of the relevant ECJ judgments (1996 and 97). They argued therefore that the mistake was not just as to the liability for the tax but that until the Marks and Spencer case in 2002 (rendering the 3 year cap unlawful) they were also mistaken as to the time period in which they could bring claims. They also argued that they were mistaken in not claiming compound interest until the Sempra case found it was available in 2007. Their claims were within 6 years of those dates.
The Court concluded however that a claim for compound interest on its own cannot be a free standing claim independent of the claim for the overpaid tax itself with simple interest. It has therefore found that, as the mistake as to the time period for claiming compound interest did not cause overpayments of VAT, nor did the mistake as to the availability of compound interest, they are not relevant. The only relevant mistake that VAT was due was discovered following the ECJ’s judgments in 1996 and 97. The claims were therefore out of time..
Implications for both VAT and Direct Tax Claims
We do not know yet whether the Claimants will appeal. It is arguable that the time limit should be overridden in circumstances where the Claimants were not aware until the date of Henderson J’s judgment that they had a remedy in restitution.
If the Claimants do appeal then a crossappeal by the Revenue on the compound interest point seems inevitable. The fact that it was upheld as a Community law entitlement is bad news for the Revenue because it means it cannot be reversed by Parliament.
The judgment confirms advice we have previously given that claims for compound interest are not standalone claims but should be combined with claims for restitution of the overpayment (or time value if the tax has already been repaid). Where we have already made claims for clients, they have been made on that basis.
Clients considering making new claims should bear in mind that, as the law stands, they must be brought within 6 years of the discovery of the mistake which led to the overpayment of tax, e.g. discovery of the ECJ judgment finding the UK rules unlawful. Clients may wish to review recent developments which have given rise to VAT repayments in the light of the judgment.
Claimants making High Court claims should also consider making parallel statutory claims to cover the eventuality that higher courts uphold the requirement for compound interest claim but insist relief be obtained through the statutory route under Autologic principles. In this way they can be fully protected.
For existing or new claims that are within time there may be the possibility of seeking an interim payment at this stage.
For direct tax claims based on EU law the judgment is helpful because it establishes that entitlement to compound interest arises from EU law and that the right relates not merely to the calculation of the Hoechst time value component of claims but to claims for interest on overpaid tax in general.