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HMRC Releases Tax Guidance After Littlewoods Case Win

by Jason Gorringe,, London

11 December 2017

On December 8, 2017, HM Revenue and Customs released a brief setting out its response to the landmark ruling in its favor in the challenge brought by Littlewoods on the payment of compound interest on historic tax overpayments.

A ruling in favor of Littlewoods could have had a devastating impact on UK coffers, since it would have opened the floodgates for other taxpayers to claim entitlement to compound interest also.

Littlewoods overpaid value-added tax (VAT) to HMRC between 1973 and 2004. Between 2005 and 2008, HMRC repaid the principal sum of GBP205m, together with simple interest of GBP268m.

In bringing legal action, Littlewoods sought additional interest, calculated on a compound basis as GBP1.25bn, on the ground that such interest is due under the common law of restitution, either as restitution for a mistake of law, or as restitution of tax unlawfully demanded (a so-called "Woolwich" claim).

The Supreme Court's November 1 judgment dealt with two separate issues.

First, it considered whether Littlewoods' common law claims are excluded by sections 78 and 80 of the Value Added Tax Act 1994 as a matter of English law, and without reference to EU law. The lower court had ruled they were barred by the Act and Littlewoods appealed on this issue. The Supreme Court likewise ruled against Littlewoods.

Second, the Supreme Court considered whether such exclusion is contrary to EU law, in light of the European Court of Justice's judgment in Littlewoods (Case C-591/10). The lower courts had found that denying compound interest was contrary to EU law. The Supreme Court allowed HMRC's appeal on this issue.

On the ECJ's ruling in Littlewoods (Case C-591/10), the Supreme Court said the ECJ's judgment does not require reimbursement of the losses constituted by the unavailability of money. It said the ruling provides member state courts a discretion to provide reasonable redress in the form of interest in addition to the principal sum. However, the Supreme Court ruled that the lower courts read too much into the phrase "adequate indemnity" in the ECJ judgment. It noted, among other things, that there is a widespread practice among EU member states of awarding taxpayers simple interest on the recovery of taxes that were unduly paid. It said: "If the ECJ had sought to outlaw that practice, one would have expected clear words to that effect."

It highlighted that "the prior and subsequent case law of the ECJ is consistent with the principle that there is an EU right to interest, but that the rate and method of calculation of interest are matters for the member states." The Court concluded: "In summary, the payment of interest in this case cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity."

In "Revenue and Customs Brief 5 (2017): final judgment in Littlewoods," the tax agency explains the background leading to the Supreme Court judgment and HM Revenue and Customs's position that statutory interest paid to claimants is adequate and it isn't necessary for compound interest to be paid.

TAGS: court | tax | value added tax (VAT) | interest | law | United Kingdom | Europe | Tax

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