The long-awaited Supreme Court judgment in Littlewoods Limited and others v HMRC  UKSC 70 has finally been handed down. The Supreme Court, overturning the previous judgment of the Court of Appeal, concluded that Littlewoods was only entitled to the payment of simple interest on historic overpayments of VAT, not the compound interest to which Littlewoods said EU law entitled it. Given the significant amounts at stake (£1.25bn in this case alone and an estimated £17bn including other similar VAT-related claims), it is perhaps not surprising that the Supreme Court has reached this decision. However, it will be disappointing news for the many taxpayers who had made compound interest claims and who have now reached the end of the road.
The underlying issue related to overpayments of VAT by Littlewoods on sales agent commissions during the period from 1973 to 2004. HMRC have repaid the principal sums of overpaid VAT together with simple interest at the applicable statutory rate.
Littlewoods asserted that simple interest was insufficient compensation for the loss suffered from their overpayments of VAT and that it had an EU law right to compound interest. Following the first decision of the High Court in 2010, a reference was made to the Court of Justice of the European Union (CJEU), which held that under EU law Littlewoods was entitled to an 'adequate indemnity' for its loss. The CJEU said that it was for national law to determine whether that required simple or compound interest, subject to ensuring an effective remedy was provided.
The High Court and subsequently the Court of Appeal both held that Littlewoods was entitled to compound interest. Having regard to the particular facts and circumstances of Littlewoods’ case, the Court of Appeal concluded that simple interest did not provide an 'adequate indemnity', but stressed that compound interest would not be required in every case.
The Supreme Court judgment
The Supreme Court considered two main issues. First, whether Littlewoods could claim compound interest as a matter of domestic law and, secondly, whether if that was not the case there was nonetheless an EU law right to compound interest.
Was there a domestic law right to compound interest?
Littlewoods’ argument was that the relevant UK legislation (sections 78 and 80 of the Value Added Tax Act 1994) did not provide an exclusive remedy as a matter of English law. In particular, they said that section 78 (the provision dealing with interest entitlement) specifically acknowledged that interest could be payable on other bases. Section 78 was, in Littlewoods’ view, a residual provision that provided an entitlement to interest where there would otherwise be none. As such, Littlewoods said, it was open to them to pursue common law restitutionary claims for compound interest. This argument was dismissed at the previous levels, and the Supreme Court agreed. Sections 78 and 80 displace the ability to bring common law claims for overpaid VAT or associated interest as a domestic law matter – if they did not, the various limitations they contain (some of which were specifically enacted to protect public finances against claims such as these) would be rendered pointless.
Was there an overriding EU law right to compound interest?
The Supreme Court overturned the Court of Appeal’s decision on this point, finding for HMRC. The High Court and Court of Appeal had been persuaded that the requirement stated by the CJEU that the taxpayer receive an ‘adequate indemnity’ meant compound interest was due. The Supreme Court disagreed. They had three key reasons for this:
- First, read in the context of the CJEU ruling as a whole, the Supreme Court thought that ‘adequate indemnity’ should be interpreted as meaning ‘reasonable redress’, not ‘full compensation’. In their view, the comment in the CJEU ruling about the fact that the statutory interest payable to Littlewoods exceeded the overpaid VAT by more than 23 per cent was a strong indication that the CJEU considered that simple interest met the requirement for reasonable redress.
- Secondly, the fact that there was a widespread Member State practice of not paying compound interest meant clear words would be needed if the CJEU thought compound interest was required. These were not present.
- Finally, the Supreme Court was not persuaded that it would be inconsistent with other CJEU case law to hold that only simple interest was required.
On that basis, the Supreme Court held that the High Court and Court of Appeal had read too much into the phrase ‘adequate indemnity’ and that only simple interest was due. No further reference to the CJEU was required.
Large numbers of taxpayers have made claims for compound interest on taxes levied contrary to EU law. As mentioned above, those related to overpaid VAT are estimated at £17bn. However, equivalent claims have also been made in relation to other taxes levied against EU law (the 1.5 per cent stamp tax charge being an obvious example) so the amounts at stake were potentially much higher.
Clearly, this will be a disappointing decision for those taxpayers. With the refusal to refer back to the CJEU, their claims now seem to be at an end. However, given the potential impact on public finances, the decision was not completely unexpected: the bigger surprise had perhaps been the taxpayer successes in the lower courts.
There are obvious question marks about whether the CJEU ruling was really clear enough that no further reference to the CJEU was required. The contradictory decisions in the lower courts might suggest otherwise. The Supreme Court judgment also glosses over how this case fits with Sempra Metals Ltd v Inland Revenue Commissioners and another  UKHL 34 (a case concerning taxes levied prematurely, rather than taxes that should never have been due at all). The Supreme Court decision implies that the right to interest in each case was the same, but that seems difficult to reconcile with statements in Sempra that the taxpayer was entitled to a sum equal to the interest which would have been generated by the advance payments.
Ultimately, however, the lack of clarity in the CJEU judgment in Littlewoods left the Supreme Court with the leeway they needed to find in favour of HMRC. And it is understandable that – especially with Brexit looming – the Supreme Court had no desire to prolong matters with a further trip to the CJEU.