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Compound Interest on VAT Repayments: the CJEU says UK taxpayers must receive "adequate indemnity" for their loss

19 July 2012

The Court of Justice of the European Union (“CJEU”) has today released its decision in Littlewoods, an important case relating to compound interest on refunds of VAT paid in error.  There are a number of cases which are testing the application of compound (as opposed to simple) interest to VAT repayments and it is estimated that the extra interest could total in excess of £1bn.

The CJEU has said that all taxpayers have a right under European law to receive “adequate indemnity” for their loss arising from the VAT overpayments, and that the loss includes the overpaid VAT being unavailable for them to use.  However, the CJEU has not stated whether this means interest should be paid on a compound basis, and has left this for the domestic courts in the UK to decide.

David Raistrick, head of indirect taxes at Deloitte said: “The UK courts will make the ultimate decision on this matter, but the European Court has specified that taxpayers must receive “adequate indemnity” for their loss and that any UK law that prevents this must be disapplied.  We believe this is good news for taxpayers, although we expect the litigation on this issue to continue for a number of years.”

Ends

Note to editors

For further details on this important judgment, please contact indirect tax partner David Raistrick (draistrick@deloitte.co.uk) on 0113 292 1707 or Dispute Resolution Group director Oliver Jarratt (ojarratt@deloitte.co.uk) on 0121 695 5722.


Background and context to case

The Littlewoods case relates to catalogue-based home shopping. Littlewoods distributed catalogues and sold the goods shown in those catalogues through a network of agents. The agents earned commission on sales.

This commission was mistakenly treated for VAT purposes as payment for services provided by the agent to Littlewoods.  It should correctly have been treated as a discount against the goods.  This meant Littlewoods had overpaid VAT between 1973 and 2004, and so Littlewoods reclaimed that VAT from HMRC.  HMRC agreed to repay the VAT, leaving the question of how to calculate interest on the repayment.

HMRC’s view was that simple interest should be paid at a statutory rate (which, since 1998, has been 1% below the average base rate of leading banks).  

Taxpayers were then faced with the following difficulty.  VAT law did not make it clear whether the VAT Tribunal (which on 1 April 2009 became the Tax Tribunal) was the correct forum in which to seek compound interest.  Some taxpayers chose to appeal to the Tax Tribunal.  Others chose to seek redress by another route, namely by making a civil law claim against HMRC in the High Court.  Littlewoods chose the latter route, and in 2010 the High Court referred their case to the CJEU for guidance.  The CJEU’s decision today is the answer to the questions asked by the High Court.

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The information contained in this press release is correct at the time of going to press.

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