Supreme Court says no to compound interest in Littlewoods VAT case

Nov 13, 2017

The Supreme Court has recently released its judgment in the long running Littlewoods VAT case. Littlewoods were seeking compound interest on overpaid VAT. The Supreme Court held that compound interest is not due, based on the particular facts of the case.

The case examined what constitutes ‘adequate reimbursement’ for the taxpayer loss that arises when unlawfully demanded VAT, which has been collected in breach of EU law, has been overpaid to HMRC.

The taxpayer can claim a refund of this VAT by making a section 80 claim. If the taxpayer also makes a claim for interest on the principal sum overpaid, HMRC are obliged to pay it in cases where HMRC have made an official error (s78 VATA 1994) - but HMRC only pay simple interest (although s78 does not actually specify that it is simple interest).  Littlewoods argued that simple interest was not enough in the circumstances.

Following a largely positive outcome before the High Court and a victory at the Court of Appeal, the case was appealed to the Supreme Court who found against the taxpayer thus ending their ‘Compound Interest’ challenge.

When the hearing was adjourned in July, the Supreme Court agreed with the High Court and the Court of Appeal that the statutory regime set out in sections 78 and 80 VATA 1994 is an exclusive remedy.  Therefore the common law right to a restitution claim is excluded under English Law. This is in line with the recent finding of the Supreme Court in Investment Trust Companies (in Liquidation) and others [2017] UKSC 29.

However, unlike the High Court and the Court of Appeal which determined the effects of such exclusion breached under EU law, the Supreme Court determined there to be no such breach.

The Supreme Court reached this conclusion by determining that ‘adequate indemnity’ does not require the full reimbursement of the loss associated with the overpayment and that ‘reasonable redress’ is sufficient to meet the EU Law requirement.

The Court further concluded that the amount of simple interest which the taxpayer already received pursuant to section 78 (circa £268 million), being in excess of the amount overpaid (circa £204 million), is sufficient to amount to ‘reasonable redress’.