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Andrew Judkins and Susie Brain, Norton Rose Fulbright, London
Andrew Judkins is an Associate and Susie Brain is a Senior Knowledge Lawyer at global law firm Norton Rose Fulbright, London
The U.K. Supreme Court, overturning decisions of the High Court and Court of Appeal, has unanimously held that the retailer Littlewoods is not entitled to compound interest on overpaid value added tax (“VAT”).
Littlewoods, a retailer, mistakenly made overpayments of VAT on commission paid to catalog sales agents between 1973 and 2004. Littlewoods made claims for repayment under the statutory regime for recovery of overpaid VAT in the Value Added Tax Act 1994 (“VATA”). Between 2005 and 2008, HM Revenue and Customs (“HMRC”) repaid the principal amount overpaid of 205 million pounds (approx. $271 million) together with interest of 268 million pounds. The interest was calculated on a simple basis in accordance with section 78 VATA.
As more than 40 years had passed since the first overpayment, the issue of whether compound interest was also payable made an enormous difference to the value of the claim. In 2007, Littlewoods issued a claim in the High Court seeking recovery of compound interest on the basis of restitution, a common law claim. Littlewoods argued that HMRC had been unjustly enriched by the overpayments and was liable to make restitution for the time value of money. The claim was valued at 1.25 billion pounds.
At the time of the Supreme Court hearing, HMRC was facing a further 5,000 claims for compound interest in connection with VAT or other taxes. The total amount claimed in relation to VAT alone was estimated by HMRC at 17 billion pounds, making this decision of great significance to the U.K. government.
The Supreme Court considered two key issues:
On the first issue, the Supreme Court found, as had the lower courts, that Littlewoods' claim was excluded by the provisions in the VATA as a matter of English law.
There was no express provision in the VATA excluding common law claims. However, the key factor for the Court on this first issue was that Parliament, in bringing in the statutory provisions, would not have intended them to have been capable of circumvention by the making of a concurrent common law claim. The Court noted that the statutory regime at sections 78 and 80 VATA imposes a number of limitations on HMRC's liability which would be made ineffective if the taxpayer could simply recover compound interest by a common law claim. The fact that sections 78 and 80 VATA did not contain an express exclusion was explained by the fact that the type of claim made by Littlewoods (relying on the 2007 Sempra Metals case) was not contemplated at the time Parliament enacted the legislation in 1994.
The second issue, whether EU law required the payment of compound interest, is where the Supreme Court's decision diverges from that of the lower courts. In a judgment released in July 2012, the Court of Justice of the European Union (“CJEU”) held that under EU law, the taxpayer was entitled to an “adequate indemnity” for its loss sustained by the overpayment of tax. However, the CJEU did not explain whether “adequate indemnity” actually required payment of compound interest. The High Court and Court of Appeal found that it did. Here the Supreme Court disagreed with the lower courts' finding that this did not require “full reimbursement” to compensate for the non-availability of funds: the lower courts had formed too narrow a view of what might constitute “an adequate remedy.”
The Court set out three reasons for this conclusion.
The Supreme Court also concluded that a second reference to the CJEU was not necessary.
The practical effect of the Supreme Court's decision is that claims for compound interest on overpaid VAT will effectively be precluded, resulting in a substantial saving for the U.K. government.
In terms of its wider application, Littlewoods represents a step back from Sempra Metals, where the House of Lords recognized that in commercial terms, the value of money is measured on a compound basis and found that compound interest was a remedy available to the taxpayer. However, in Littlewoods the Supreme Court did not overrule Sempra Metals, but rather confirmed it was unavailable on overpayments of VAT. It remains to be seen whether all avenues available to the taxpayer to recover compound interest on overpaid taxes have been closed. The position is likely to be clearer in 2018, when the Supreme Court will hear the Prudential case (the test case in long-running litigation concerning the taxation of portfolio dividends), which is expected to address compound interest under English law.
Andrew Judkins is an Associate and Susie Brain is Senior Knowledge Lawyer at global law firm Norton Rose Fulbright, London. The authors may be contacted at: firstname.lastname@example.org; email@example.com
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