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The House of Lords has decided (by a majority) that Sempra Metals Limited was entitled to compound interest from HM Revenue & Customs following its successful claim to compensation for having paid tax early.
Bill Dodwell, tax partner at Deloitte, comments: “Today’s decision is very welcome. Compound interest is the norm in the commercial world but English law has not yet fully adapted to that. The Law Lords have found a sensible commercial answer in the light of centuries of precedent. We shall look forward to seeing how this landmark judgement is applied in practice.”
The decision means similar claimants should also be entitled to compound interest, based on the rates of interest the government paid at the times in question. Whether the decision applies more widely than to the claimants in the same Group Litigation Order (class action) as Sempra remains to be seen. There were particular features of the European Court case which led to that litigation which may limit the scope of the decision. The main unusual feature was that in most cases the overpayment of tax had ceased, and Sempra was seeking compensation for the fact that it had been out of pocket for that period.
The House of Lords looked in great detail at the 200+ years of legal background to awards of interest in court cases. They concluded (by a majority) in this case that compound interest was due for the period for which the tax was overpaid. Earlier litigation had concluded that simple interest only was due from the date the overpayment had ceased to the date of payment. That answer was different, because statute says so. Statute law does not, however, cover the compensation for the period for which the tax was overpaid.
Ends
Notes to editors
This case is one of five test cases in the ACT group litigation, which result from the 2001 decision of the European Court of Justice (ECJ) in Metallgesellschaft (the previous name of Sempra Metals) and Hoechst (joined cases C-397/98 and C-410/98).
It concerns an apparently simple point, whether restitution by HM Revenue & Customs for tax paid by mistake should include simple interest or compound interest. Although the case relates to restitution in general, and will affect a broad range of applications including VAT claims, its origins are to be found in Hoechst, a direct tax case.
Having decided that ACT rules breached the EC Treaty, the ECJ stated that Hoechst should have an effective remedy for the financial loss suffered, and that the precise method for achieving this result would be for the national (i.e. UK) courts to decide. English law was unlikely to provide an effective remedy because of a historic unwillingness to award compound interest. It was in this context that Sempra Metals brought proceedings against the Inland Revenue (now part of HM Revenue & Customs).
Sempra relied upon an extract of the ECJ’s judgement in Hoechst, which stated that any recompense must be awarded so as to safeguard the Community rights in question. In particular, the ‘total exclusion of loss of profit as a head of damage’ would not be acceptable if the result would be to render the right to compensation non-existent, so if domestic law was unable to confer such a right, then a new right would need to be created.
In the High Court, Park, J. split the term for which reparation was due into the premature tax payment period (from the date of payment of ACT to the date of utilisation) and the post-utilisation period, awarding compound and simple interest respectively (from the date of utilisation to the date judgement is delivered). Interest for the premature tax payment period should attract compound interest, in line with the ECJ’s decision, as to more accurately reflect the economic reality. However simple interest only was due for the post-utilisation period as UK law only was then applicable and the statute (s35A Supreme Court Act 1981) provides for simple interest alone.
The Court of Appeal followed Park, J. and dismissed the appeal. The original order was varied only slightly, on a point of detail. HMRC appealed to the House of Lords.
Although this case arose from a dispute regarding a direct tax issue, the implications are potentially broader. Nevertheless, it is also important to note that this decision is confined to the law of restitution; existing rules prescribing interest rates (eg, those relating to the under- or overpayment of tax) remain unchanged. The practical effect is therefore likely to be limited to claims for restitution under EC law.
To date, there have been six Group Litigation Orders formed in order to challenge the compatibility of UK tax law with the freedoms guaranteed by the EC Treaty, namely:
- Cross border loss relief
- Thin capitalisation
- Controlled foreign companies and foreign sourced dividends
- Franked investment income
- ACT, group income elections and treaty tax credits (above)
- Foreign income dividends
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