Speed Read

The High Court handed down its judgment in Littlewoods on 28 March 2014, holding that the taxpayer was entitled to compound interest on historic overpayments of VAT. The sums at stake are substantial - some £1.2bn of interest in this case alone - and HMRC are understood to be planning an appeal.

Background

The underlying issue in the case was the treatment of VAT overpayments which Littlewoods claimed it had been making since 1973 in relation to sales agent commissions. HMRC ultimately accepted Littlewoods’ argument and repaid £200m of VAT plus £270m of simple interest (computed at the applicable statutory rate).

Littlewoods asserted that simple interest was insufficient compensation for the loss suffered by reason of overpaying the VAT, and that it had an EU law right to adequate compensation. The Court of Justice of the European Union (CJEU) gave judgment on this question in July 2012, holding that under EU law Littlewoods was entitled to an ‘adequate indemnity’ for its loss.

High Court Judgment

The High Court held that the concept of ‘adequate indemnity’ requires payment of an amount of interest which is broadly commensurate with the loss suffered by the taxpayer of the ‘use value’ of the overpayment. The ‘use value’ is essentially the value in having use of a sum of money for a given period, and the High Court accepted that this should be computed as compound interest on the overpaid sums. As a matter of EU law, the High Court considered that the correct approach was to calculate this use value from Littlewoods’ perspective. This is in contrast to the usual position in restitutionary claims under English law, which calculate the amount to be repaid by reference to the benefit enjoyed by the recipient of the overpayment.

However, Littlewoods accepted, as a practical matter, that the valuation could be carried out by reference to the use value of the overpaid tax to the Government (i.e. applying Government borrowing rates). From this starting point, the court held that the correct approach to computation was to assess the objective use value of the overpayment to the Government (normally, the amount the Government would have paid to borrow an equivalent sum for the same period), and not the actual benefit enjoyed by the Government (if different).

The result of Littlewoods’ concession was a smaller overall claim, as the Government’s borrowing rate was accepted to be lower than Littlewoods’ for the relevant periods.

Comment

The decision is striking in several respects. The judgment of the CJEU conspicuously left open the possibility that simple interest could provide an adequate indemnity, and many commentators had expected the UK courts to adopt that position. However, the High Court held that compound interest had to be paid and allowed Littlewoods to pursue a common law claim reaching back to the 1970s - far beyond the 4 year statutory limitation period. It further held that, in principle, it is open to the taxpayer to claim compound interest based on the loss suffered by the taxpayer in being deprived of the use of the overpaid sums.

The High Court did not seem to be influenced by the fact that, in its view (dealing with other arguments advanced by HMRC), the underlying VAT may in fact have been due from Littlewoods after all. 

The judgment is undoubtedly helpful for other taxpayers who may have overpaid tax in breach of EU law. However, it is recognised both in the judgment and subsequent press reports that HMRC are virtually certain to appeal and, given the terms of the CJEU’s decision, there would seem to be scope for the higher courts to take a different view.