Summary: In a landmark decision, the Supreme Court held in Littlewoods Limited v Commissioners for HMRC that Littlewoods is not entitled to compound interest on overpaid VAT. The Court found that s.78 and 80 VAT Act 1994 exclude common law restitution claims for compound interest and this was not contrary to EU law. The decision will disappoint the 5000 taxpayers who have compound interest claims stayed behind Littlewoods which now look bound to fail.
Between 1973 and 2004, Littlewoods Limited (“Littlewoods”) overpaid VAT to HMRC in respect of supplies made to their agents as commission paid in kind. HMRC conceded that the VAT was overpaid and repaid £205 million in accordance with section 80 VATA. They also paid interest of £268 million, calculated on a simple basis, as required by section 78 VATA. Littlewoods commenced proceedings in 2007, seeking additional interest calculated on a compound basis totalling £1.25 billion.
There were two questions before the Supreme Court:
a) Was Littlewoods’ claim for compound interest, being a common law claim for restitution, excluded by sections 78 and 80 VATA? Both the High Court and the Court of Appeal had determined that section 78 did exclude common law claims as a matter of domestic law. Littlewoods appealed on this issue.
b) If Littlewoods’ common law claim was excluded by sections 78 and 80 VATA, was such an exclusion contrary to EU law on the basis that the EU principle of effectiveness required reimbursement of interest on a compound basis? The High Court had made a referral to the Court of Justice of the EU (“CJEU”) on this issue, who stated that it was a matter for national law to determine the nature of the interest required to comply with the principles of effectiveness and equivalence. The High Court subsequently found (and the Court of Appeal upheld) that only an award of compound interest would satisfy Littlewoods’ right to an adequate indemnity under EU law. HMRC appealed on this point.
Was Littlewoods’ claim for compound interest excluded by sections 78 and 80 VATA 1994?
The Supreme Court unanimously dismissed Littlewoods’ appeal on the first question, agreeing with the lower courts that sections 78 and 80 VATA excluded any common law claims for restitution, including those relating to interest.
The Court noted that section 78 (which provides a statutory right to interest) does not have an equivalent provision to section 80(7), which excludes non-statutory remedies in respect of the repayment of the principal VAT. However, although there was no express exclusion of alternative remedies under section 78, those alternative remedies were excluded by implication.
Section 78(1) provides that HMRC shall pay interest “if and to the extent that they would not be liable to do so apart from this section”. The Court agreed that read literally, section 78(1) would appear to suggest that other rights to interest should be given priority over the rights provided by the section. However, the Court noted that if a common law claim were available to Littlewoods it would fatally compromise the statutory scheme created by Parliament. The Court held that a departure from literal construction is justified where it is necessary to have the effect which Parliament must have intended.
Did Littlewoods have a right to compound interest under EU law?
Having found that sections 78 and 80 excluded a common law right to compound interest, the Court had to decide whether Littlewoods were nevertheless entitled to compound interest on the basis that the statutory provisions breached EU law and should therefore be disapplied. Central to this analysis was the question of whether the CJEU had ruled that HMRC must reimburse in full the use value of money (i.e. compound interest).
On referral from the High Court, the CJEU had stated that it was for member states to lay down the conditions that determine the rate of interest and its method of calculation, although those conditions must comply with the EU principles of equivalence and effectiveness. The principle of effectiveness meant that the conditions must not be arranged in such a way as to make the exercise of rights conferred by the EU practically impossible. In this case, this meant that the national rules should not deprive the taxpayer of an “adequate indemnity” for their loss.
The Supreme Court allowed HMRC’s appeal on this issue. The judges interpreted the phrase “adequate indemnity” to have a broader meaning than “full reimbursement”, such that it gave member states a discretion as to how to provide reasonable redress. The Supreme Court looked at the practices of other member states, and noted that almost all of them provide only for simple interest on overpaid tax. The Court commented that had the CJEU wished to outlaw this practice, it would have used clearer words to this effect.
On the basis that it was for national courts to decide whether simple interest provided the taxpayer with an adequate indemnity, the Court concluded that, in the circumstances, it did. It noted that the interest already paid to Littlewoods exceeded the principal amount overpaid by more than 23%. To the judges’ minds, this could not realistically be regarded as having deprived Littlewoods of an adequate indemnity.
There are around 5,000 claims against HMRC for compound interest stayed behind Littlewoods. The total amount involved in relation to VAT claims is estimated by HMRC to be £17 billion. This decision will therefore be extremely disappointing to a large number of taxpayers.
However, the judgment is, perhaps, not surprising, given that it follows the similarly high-profile VAT repayment claim of Investment Trust Companies v Revenue and Customs Commissioners  UKSC 29, where the Supreme Court also found in favour of HMRC. The Court’s judgment in Littlewoods expressly references the need for certainty in respect of public expenditure and the need to protect public finances. This is reflective of a trend within the courts to honour, wherever possible, legislation intended to limit redress to the taxpayer.
Taxpayers with claims stayed behind Littlewoods at the Tribunal or High Court should now consider whether to take steps to have those claims withdrawn or dismissed, subject to resolving any outstanding claim in respect of repayment of the principal VAT amount.