The Court of Appeal has upheld the taxpayer’s victory in Littlewoods Limited v HMRC1.
The underlying facts of the case are not especially relevant save that the taxpayer had been required, and had paid, VAT which was later found not to be due. That VAT was recovered, together with statutory simple interest. The issue was the extent to which the taxpayer’s right to recover interest on claims for the repayment of wrongly levied VAT was limited to simple interest, as specified under sections 78-80 VATA 1994, or whether EU law required something else.
The question was referred to the Court of Justice of the European Union2 (CJEU). However, the judgment which emerged was not without nuance and the central issue before MrJustice Henderson when the matter returned to the UK was what the CJEU had meant when it said that national rules for the calculation of interest “should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT” . Henderson J (in another case3) described this as “somewhat Delphic guidance”, it is therefore unsurprising that when he came to hear the case, both parties claimed victory.
In the High Court4, Henderson J recognised that the key to the problem lay in a proper understanding of the nature and content of the right to interest under EU law. Having reviewed the CJEU’s decision and its subsequent application in British Sugar5 and Irimie6, he concluded that the right under EU law to the payment of interest on recovery of unlawfully levied tax was now firmly entrenched in the jurisprudence of the CJEU. That right could not be considered ancillary to a claim for the repayment of tax. Rather, the case law cited demonstrated that interest, as a component of a claim, ranked equally in EU law, with the right to the repayment of the tax itself.
The judge concluded that an “adequate indemnity” must require payment of an amount of interest which is “broadly commensurate with the loss of the use value of the overpaid money in the hands of the taxpayer”, running from the date of payment until the date of repayment. He went on to find that the only way to provide Littlewoods with adequate compensation for the lost use value of its money would be by an award of compound interest.
Court of Appeal decision
HMRC sought to challenge Henderson J’s judgment on appeal but the Court of Appeal dismissed HMRC’s arguments and upheld the judge’s reasoning in its entirety concluding “we are not persuaded that Henderson J fell into any error on any of the issues which we have been asked to decide”.
This represents a significant victory for the taxpayer, not only in this case, but in the many cases which are stood behind it. That said, it is important to recognise that this decision does not go so far as to find that all taxpayers with EU law claims will be entitled to compound interest as a matter of course. The Court of Appeal, like Henderson J before it, emphasised that the question of what will amount to an adequate indemnity must be answered by reference to the particular facts of a case. As Lady Justice Arden put it ““adequate indemnity” is not a rigid straitjacket, and certainly does not go as far as to require compound interest in every case”.
What this means in practice is that there may be cases where simple interest alone will equate to the loss suffered by a claimant and satisfy the “adequate indemnity” test. This may be the case where, for example, a claim for the recovery of overpaid tax is made within a few years of the date of payment and where the difference between simple and compound interest over that period is relatively minor. Ultimately, it will come down to a question of analysis based on the particular facts of the case.
It is likely that HMRC will seek to appeal the Court of Appeal’s judgment, however, it is by no means certain that its request for permission will be granted as HMRC has now lost on two occasions. The Court of Appeal will hear submissions on permission to appeal on 4 June 2015.
The CJEU decision can be read here.
The High Court decision can be read here.
The Court of Appeal decision can be read here.