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UK Supreme Court Rules For HMRC In Landmark Littlewoods Case

by Jason Gorringe,, London

01 November 2017

HM Revenue and Customs (HMRC) has secured a major ruling from the UK's Supreme Court that it should not have to pay Littlewoods compound interest worth GBP1.25bn (USD1.66bn) 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."

Commenting on the ruling, Dominic Stuttaford, Head of Tax, Europe, Middle East, Asia, and Brazil at global law firm Norton Rose Fulbright, said: "In one of the largest tax disputes to go to court to-date, HMRC will unsurprisingly be pleased with today's outcome; it is not only the amount at stake in this particular instance but also the number of other EU-related claims for compound interest."

"The saving for the Exchequer will be enormous, estimated to be over GBP17bn for claims relating to VAT repayments standing behind this case. Notwithstanding that, if the judgment had gone against HMRC, the effect would have been diluted by the fact that the interest would have been subject to 45 percent tax."

TAGS: court | tax | value added tax (VAT) | interest | VAT legislation | law | United Kingdom | legislation | HM Revenue and Customs (HMRC) | HM Revenue and Customs (HMRC) | VAT case law | Tax

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