HMRC has won a landmark case after the Supreme Court overturned an earlier decision of the Court of Appeal. The issue at hand concerned historic overpayments of VAT by Littlewoods (a catalogue sales business) between 1973 and 2004. In 2004, HMRC accepted that the VAT had been overpaid and repaid £205m plus a further £268m interest calculated using the simple interest basis.
Littlewoods argued that the interest should have been calculated on a compound basis and that a further £1.25bn was due. Littlewoods claimed that only the payment of compound interest could properly recompense the company for the loss of the money over the previous decades. The amount claimed was considerable as Littlewoods compounded the interest as far back as 1973 without applying any limitation period.
The Supreme Court considered two main issues. Firstly, whether Littlewoods could claim compound interest as a matter of domestic law and, secondly, if such a claim is not allowed and whether this is contrary to EU law. In the first issue, the Supreme Court agreed with the lower court and ruled against Littlewoods. On the second issue, the lower court found that denying compound interest was contrary to EU law. The Supreme Court allowed HMRC's appeal on this issue and accordingly, Littlewoods lost their compound interest claim.
The Supreme Court judgement concluded that:
'The resultant payment of interest cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity, in the sense in which that expression should be interpreted.'
A large number of other taxpayers had made similar compound interest claims that were effectively stood over until a final determination had been reached regarding the Littlewoods litigation. We are told that the total amount of VAT claims resting on this case was in the region of £17bn.
Given the amounts involved, a ruling in favour of Littlewoods by the Supreme Court would have had very serious implications for the Exchequer. The blow would have been somewhat softened by the special 45% rate of corporation tax that was introduced in October 2015, on any interest HMRC is required to pay to taxpayers who overpaid tax under 'a mistake of law'. However, there is no doubt that HMRC will be very pleased with this decision and many taxpayers will be sorely disappointed. The Barclays brothers (who own Littlewoods) confirmed that this ruling would 'draw a line under this case'.