The end of the road for compound interest on the late repayment of UK tax?

The Khan Partnership LLP Tax team considers the decision in Littlewoods Retail Limited and Others v The Commissioners for Her Majesty’s Revenue and Customs [2017]UKSC 70 and its impact on compound interest on the late payment of UK tax.

The end of the road for compound interest on the late repayment of UK tax?

The Khan Partnership LLP Tax team considers the decision in Littlewoods Retail Limited and Others v The Commissioners for Her Majesty’s Revenue and Customs [2017]UKSC 70 and its impact on compound interest on the late payment of UK tax.

In Autumn 2017 the English Court finally ended the decade long Littlewoods litigation seeking compound interested on overpaid tax.

Littlewoods Retail Limited (“Littlewoods”) historically made a claim to Her Majesty’s Revenue and Customs (“HMRC”) for the repayment of overpaid Value Add Tax, over a period of approximately 40 years. HMRC repaid £205 million in accordance with its statutory obligations under section 80 of the Value Added Tax Act 1994. In accordance with section 78 of the VAT Act, HMRC also paid interest on the amount repaid. The interest was calculated on a simple basis, as section 78 required, and totalled £268 million.

Littlewoods then made a further claim for additional interest, calculated on a compound basis, on the grounds that such interest was due under the common law. Compound interest is the addition of interest to the principal sum, so that interest in the next period is earned on the principal sum plus previously accumulated interest.

Littlewoods brought their claim on two grounds:

  1. That HMRC was under a liability to make restitution on the basis that they were unjustly enriched by overpayments of tax  made by Littlewoods under a mistake of law and, compound interest is due at common law as restitution of the use value of the money mistakenly paid, applying the principle established in Sempra Metals Ltd v Inland Revenue Comrs [2007] UKHL 34; and

 

  1. Second, it was argued that HMRC are in any event liable to make restitution on the basis that they were unjustly enriched by payments of undue tax, applying the principle established in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70.

As a result of Littlewoods claim, approximately 5,000 other claims were submitted to the Tax Tribunals for compound interest in connection with VAT, were stayed pending the resolution of Littlewoods’ claim by the Supreme Court, including several clients  of  The Khan Partnership LLP seeking further interest in respect of incorrectly disallowed VAT input tax credits. A finding in favour of Littlewoods had the attractive potential of entitling our clients to make an application for interest to be calculated on a compound basis, resulting in a much higher award of interest.

Judgment

In its Judgment issued in November 2017, the Supreme Court however concluded that, as a matter of statutory construction, the common law claims were excluded by section 78 of the VAT Act. Additionally,  that the United Kingdom had justifiably treated the award of simple interest as an appropriate remedy for being held out of monies over time, including where a taxpayer’s tax has been unduly levied.

Littlewoods recovered overpaid tax and interest on that amount. In these circumstances, it was however held that the payment of interest could not be regarded as having deprived Littlewoods of “an adequate indemnity”, and European Union law did not require payment of compound interest in order to offer a tax payer an “adequate indemnity”

Should you require any further information or advice, please contact The Khan Partnership LLP Tax team on 0207 612 2530 or info@thekhanpartnership.com.