In Littlewoods Ltd v HMRC [2017] UKSC 70, the Supreme Court has concluded that Littlewoods was not entitled to compound interest on refunds of VAT which it had wrongly paid.

Background

The case will be familiar to many readers. Between 1974 and 2000, Littlewoods over accounted for VAT on the payment of commissions to catalogue sales agents. It submitted repayment claims to HMRC under section 80, VATA 1994. Between 2005 and 2008, HMRC repaid £205m, together with simple interest, under section 78, VATA 1994, in the sum of £268m.

In 2007, Littlewoods commenced proceedings seeking additional interest, calculated on a compound basis.

The claims were made on the following grounds:

1. restitution of the ‘use value’ of the money mistakenly paid was due at common law (applying the principle established in Sempra Metals Ltd v IRC [2007] UKHL 34); and

2. HMRC was obliged to make restitution on the basis that it had been unjustly enriched (applying the principle established in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70).

Littlewoods contended that its common law claims were not excluded by sections 78 and 80, VATA 1994, as a matter of statutory construction. In any event, it argued that it had a right under EU law to compound interest on any tax that had been levied contrary to EU law.

The proceedings have taken over 10 years, during which time the matter has been considered by the High Court, the CJEU, the Court of Appeal and most recently the Supreme Court.

There were two issues for consideration by the Supreme Court. The first was whether sections 78 and 80 excluded common law compound interest claims under English law and the second issue was whether, if the common law claim was excluded, was that incompatible with EU law.

Supreme Court’s judgment

The Supreme Court dismissed the claim.

With regard to the first issue, the Supreme Court concluded that Parliament’s intention was to create a complete regime through sections 78 and 80, and a specific right to interest on the repayment of VAT, subject to certain limitations. In the view of the Supreme Court, relying on the common law, as Littlewoods sought to do, would circumvent section 78 and render it effectively meaningless and that could not have been Parliament’s intention.

On the second issue, the Supreme Court observed that the CJEU had not expressly stated that compound interest must be awarded, merely that interest in some form was required. It was at the discretion of the member state to determine the method of calculation, subject to the EU principles of equivalence and effectiveness. The Supreme Court further noted that the award of simple interest is widespread practice among EU member states and it was of the view that, if the CJEU had been seeking to prohibit such an approach, it would have stated this clearly in its 2012 judgment. 

In reaching its conclusion, the Supreme Court was influenced by the fact the CJEU had specifically referred to the amount of interest received by Littlewoods and that this was more than 123% of the overpaid VAT. In the view of the Supreme Court, this was an indication that the CJEU considered interest paid on a simple basis to be reasonable redress.

Comment

This is a disappointing judgment for the large number of other taxpayers whose claims for compound interest were stayed behind Littlewoods. It is likely that those taxpayers whose claims related to overpaid VAT will decide to discontinue their claims. With regard to claims relating to the overpayment of other taxes, the relevant statutory provisions will need to be carefully considered in order to determine whether compound interest may be claimed.

A copy of the judgment can be found here.