Littlewoods Limited and others v Commissioners for Her Majesty’s Revenue and Customs [2017] UKSC 70

The UK Supreme Court recently reversed the Court of Appeal decision in this long running case holding that compound interest was not due to Littlewoods on a £205 million overpayment of VAT.

Unlike the High Court and the Court of Appeal judgments which found that excluding compound interest breached EU law, the Supreme Court held there to be no such breach on the basis that ‘adequate indemnity’ does not require full reimbursement of the loss associated with the overpayment and that ‘reasonable redress’ is sufficient to meet the EU Law requirement.

Background

A taxpayer can claim a refund of VAT by making a section 80 VATA 1994 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 (section 78 VATA 1994). However, HMRC only pay simple interest (although section 78 does not actually specify that it is simple interest).

Littlewoods overpaid VAT to HMRC between 1973 and 2004. Between 2005 and 2008, HMRC repaid the principal sum of £205 million, together with simple interest of £268 million.

Littlewoods argued that simple interest was not enough in the circumstances and sought compound interest (which would include the interest on the principle sum and the interest on the lost interest).

In these proceedings, Littlewoods claimed they were due additional interest, calculated on a compound basis as £1.25 billion, 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 “Woolwich” claim).

In 2012, the Court of Justice of the European Union (“CJEU”) had referred the matter back to the UK saying that it is for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum must bear simple interest, compound interest or any other type of interest.

Following a largely positive outcome before the High Court and a victory at the Court of Appeal, HMRC was given leave to appeal the case to the Supreme Court on the basis that denying Littlewoods compound interest was in violation of EU law. Littlewoods also appealed against the decision of both the High Court and the Court of Appeal that their common law claim was excluded by virtue of sections 78 and 80 VATA 1994.

Decision

The two issues for the Supreme Court were:

1. Whether Littlewoods’ common law claims are excluded by sections 78 and 80 of VATA 1994 as a matter of English law, and without reference to EU law.

The lower courts found that Littlewoods’ common law claims were barred by the 1994 Act. Littlewoods appealed on this issue.

2. If Littlewoods’ claims for compound interest are excluded by sections 78 and 80 of VATA 1994 Act, whether that exclusion is contrary to EU law, in light of the CJEU’s judgment in Case C-591/10 Littlewoods.

The lower courts found that denying compound interest was contrary to EU law. HMRC appealed on this issue. Other issues were raised, but these would only need to be decided if Littlewoods were successful on either of the first two issues.

The Supreme Court unanimously dismissed Littlewoods’ cross-appeal on the first issue, and allowed HMRC’s appeal on the second issue.

The first issue: whether the common law claims are excluded by VATA 1994

Section 78 of the 1994 Act impliedly excludes the claims made by Littlewoods, as a matter of English law, for several reasons.

First, the scheme created by section 78 is inconsistent with the availability of concurrent common law claims to interest. The right to interest in section 78 is subject to certain limitations. These limitations would be defeated and rendered effectively pointless if it were possible for the taxpayer to bring a common law claim.

Second, section 78 states that the liability to pay interest under that section applies “if and to the extent that [the Commissioners] would not be liable to do so apart from this section”. On a literal meaning, this would permit a common law claim for interest to be made outside section 78.

At the time section 78 was enacted, however, the type of common law claim made by Littlewoods in the present case had not yet been recognised in law, and was thus not contemplated by Parliament when it enacted the legislation. It cannot have been Parliament’s intention that a common law claim would be permitted in any case where an amount was paid under section 80, as this would render section 78 a dead letter, and would fatally compromise the statutory scheme.

The second issue: whether EU law requires the payment of compound interest

The CJEU judgment does not require reimbursement of the losses constituted by the unavailability of money. The CJEU has given member state courts a discretion to provide reasonable redress in the form of interest in addition to the principal sum. The lower courts in this case read too much into the phrase “adequate indemnity” in the CJEU judgment.

The Supreme Court put forward three reasons supporting this view. First, when read as a whole, the CJEU’s judgment, which directly addresses the issue in this case, is clear. The judgment can be analysed in the following three parts:

1. there is a general entitlement to interest on tax levied in breach of EU law;
2. it is for member states to determine whether the interest rate is simple or compound, subject to the principle of effectiveness which requires that the calculation of that interest should amount to reasonable redress or an “adequate indemnity” for the taxpayer’s loss; and
3. the suggestion that interest which is over 125% of the principal sum might be such reasonable redress.

Second, there is a widespread practice among EU member states of awarding taxpayers simple interest on the recovery of taxes which were unduly paid. If the CJEU were seeking to outlaw that practice, one would have expected clear words to that effect.

Third, the prior and subsequent case law of the CJEU 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.

In summary, the payment of interest in this case cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity. The other issues raised in the appeal did not therefore arise for decision.

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

The full judgement of the Supreme Court is available to read on www.bailli.org.

Whilst the Littlewoods case was very clearly determined on the basis of its own facts (in particular the size and value of the overpayment and the related interest payment already made), HMRC have now issued a briefing on how it will be applying the judgment going forward.

HMRC are viewing the decision as a precedent case in determining the interest treatment in scenarios where taxpayers achieve a refund. The Supreme Court judgement stated that 5,000 similar claims relating to VAT are stayed pending as a result of this ruling.