Compound Interest Ruled Out On UK 'Fleming' VAT Claims

by Jason Gorringe, Tax-News.com, London

17 September 2009

The UK's Upper Tribunal, Tax and Treasury Chamber on September 15 delivered its judgment in joined cases commonly referred to as the Compound Interest Project (CIP).

The case concerned the amount of interest payable on "Fleming" VAT claims. Fleming VAT claims originate from a Court of Appeal ruling in February 2006, which ruled that Bodycraft, a motor trader who dealt mostly in second-hand Aston Martins, could retrospectively claim for overpaid VAT imposed in the mid-1990s.

Finding against the taxpayer in this recent case, however, the Tribunal held that UK domestic legislation cannot be read in a manner that allows for the award of compound interest where VAT has been overpaid in prior periods. The case centers on attempts by a large group of motor dealerships to secure an additional "compound interest" repayment in relation to VAT overpaid historically.

"Whilst today's CIP judgment is a reversal for the taxpayer, this is by no means the end of the story," said Mike Sheppard, VAT partner at Grant Thornton. "For taxpayers who have received (or expect to receive) repayments of VAT under the earlier Fleming judgment, today's decision highlights the importance of initiating High Court action to pursue compound interest, rather than relying on a direct claim to HMRC or the VAT Tribunal."

"HMRC currently estimates that the Fleming claims submitted up to March 31 will cost the public purse approximately GBP8.5bn. The costs of paying out ‘compound interest’ on top could be a multiple of this figure," said Sheppard.

"The relevant time limits for initiating High Court action will vary depending on the nature of the overpayment. Businesses affected would therefore be advised to review their position without delay," Sheppard concluded.

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