U.K. Tax Office Makes Last Pitch to Overturn $1.5B Tax Claim

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By Ali Qassim

The U.K. tax office is facing its last chance this week to overturn a ruling that could force it to pay some 1.2 billion pounds ($1.5 billion) to the home-shopping unit of Shop Direct Ltd.

Her Majesty’s Revenue and Customs will argue July 3-6 in front of the country’s top five judges that it shouldn’t be required to pay any further interest on value-added tax that it wrongly collected from Littlewoods Retail Ltd. for more than 30 years.

Statutory vs. Compound Interest

“The key issue in the Littlewood case is whether European Union law requires the payment of compound interest, where a taxpayer has overpaid VAT contrary to EU VAT legislation,” Bill Dodwell, a partner with Deloitte LLP in London, told Bloomberg BNA in a July 3 email.

The U.K.’s Value Added Tax Act 1994 “provides for simple interest where HMRC refunds VAT overpaid, he said, and the tax office has already repaid the principal sums of 204 million pounds that Littlewoods overpaid between 1973 and 2004, including the simple interest.

“However, the claimants”—Littlewoods and other retailers—in this long-standing dispute “argue that where VAT has been overpaid contrary to EU law—essentially because the Member State did not reflect EU law correctly in its own domestic law—then simple interest isn’t reasonable compensation for the overpayment,” he said.

The U.K.’s High Court ruled in favor of Littlewood in 2014 after it found the retailer was due compound interest—an addition of interest to the principal sum that was overpaid. Although HMRC challenged this decision, the tax office lost its appeal at the U.K. Court of Appeal a year later, leading to its final appeal to the Supreme Court.

Giles Salmond, a tax partner at London-based Eversheds Sutherland, told Bloomberg BNA in a July 3 email that “the fact that Littlewoods has won in the lower courts is helpful but the Supreme Court will look carefully at the arguments because there is so much at stake.”

Adequate Statutory Scheme

On the first day of the Supreme Court hearing, barrister Jonathan Swift from London-based chambers 11KBW, representing HMRC, argued that Section 78 of VATA 1994 provides an adequate statutory scheme by which only simple interest is payable.

He told the judges that that the amount of interest paid back by the tax authority “was consistent with the principle of effectiveness.”

“Basically, HMRC say that the statutory remedy provided in the VAT Act is an adequate remedy for unduly levied VAT,” Salmond said.

Asked about the broad line that HMRC would argue in court this week, a spokesman told Bloomberg BNA it would be reiterating the policy position it held since the Court of Appeal’s 2015 ruling which in HMRC’s view “does not provide a clear method for calculating the level of interest which provides adequate indemnity to claimants.”

Furthermore, HMRC “does not agree” with the Court of Appeal judgment in favor of Littlewoods “and considers it to be at odds with the requirements of European law and how Parliament intended VAT law to work,” he said, citing the 2015 Brief.

HMRC also pointed out that both the Court of Appeal and the High Court ruled in 2014 and 2015 respectively that in many cases the statutory interest paid would be adequate and no further payments would be due.

But in light of HMRC’s failure to overturn the two previous judgments, HMRC introduced in October 2015 a measure that would require any businesses liable for a restitution award from the tax office to pay a special rate of 45 percent corporation tax on the award instead of the normal rate of corporation tax rate,which is currently 19 percent.

“If the Supreme Court finds in favor of the claimants, the next step will be litigation over the corporation tax treatment of the compound interest payment,” Dodwell said. “The government changed the law to impose a special 45 percent charge, but this will be challenged in court by some of the recipients.”

Final Ruling by Year-End?

A final verdict by the U.K.’s Supreme Court on the landmark tax case is expected within four to six months, a spokesman for the court told Bloomberg BNA in a July 3 email.

A spokesman for Littlewoods declined to comment June 30 when asked sked to outline any new line it would take in this week’s hearing.

The retailer, which is owned by billionaire brothers David and Frederick Barclay, is represented by barrister Laurence Rabinowitz from London-based chambers One Essex Court.

To contact the reporter on this story: Ali Qassim in London at correspondents@bna.com To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

HMRC's Revenue and Customs Brief 9 (2015) is available at http://src.bna.com/qsj.

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