Lords Ruling Allows Taxpayers To Claim Compound Interest From HMRC

by Robin Pilgrim, LawAndTax-News.com, London

26 July 2007

The UK's highest law court, the House of Lords, has decided that taxpayers are entitled to claim compound interest from HM Revenue and Customs following one company's successful compensation claim for having paid tax early.

The decision in the Sempra Metals case means similar claimants should also be entitled to compound interest, based on the rates of interest the government paid at the times in question.

The Lords ruling has been welcomed by tax advisors, including Bill Dodwell, tax partner at Deloitte, who commented that: "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."

This case was one of five test cases in the advanced corporation tax (ACT) group litigation which resulted from the 2001 decision of the European Court of Justice (ECJ) in Metallgesellschaft (the previous name of Sempra Metals) and Hoechst. It concerns an apparently simple point, whether restitution by HMRC 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 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.

However, according to Deloitte, 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.

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