UK Court awards taxpayer compound interest on refund of overpaid VAT

Claiming refunds of overpaid GST is a controversial issue in Australia. However, it pales in comparison to the UK, where VAT refund claims are being made going all the way back to 1973. The battle ground has now expanded, with the Chancery Court awarding compound interest, which the claimant contends is the staggering sum of approximately 1.2 billion pounds.

It all started with the decision of the House of Lords in Fleming (t/a Bodycraft) v HMRC [2008] 1 WLR 195 which involved a claim for a refund of VAT as far back as 1973, the date the VAT was introduced in the UK. The House of Lords ruled that UK legislation providing for a retrospective limitation on claiming VAT refunds, which did not include a transitional regime to allow taxpayers with accrued rights to bring proceedings, breached the EU principles of effectiveness and legal expectation.  As a result of the decision, legislation was introduced to ensure that repayments would be subject to a four-year cap, but traders had a period to submit refund claims for periods as far back as 1973 (known as “Fleming Claims”).

To rub salt into the wound, earlier this week the Chancery Court handed down its decision in Littlewoods Retail Ltd v HM Revenue & Customs [2014] EWHC 868 where the Court found that in addition to the refund of VAT paid from 1973 to 2004 and the payment of simple interest on those amounts, the claimant was entitled to a further amount on account of compound interest from the dates of the payment until 31 October 2013.

The case is also noteworthy because at the first hearing of the matter and upon the initial reference of questions to the European Court of Justice, the Revenue expressly admitted that the claimant had overpaid VAT because of a mistake of law. The Revenue sought to withdraw that admission before the Chancery Court because of a subsequent decision of the ECJ in another matter. That the Revenue would seek to make such a contention appears to reflect the gravity of the issues (and sums) in dispute.

The decision is very lengthy, running to some 450 paragraphs. But the salient points appear to be as follows:

  • it was not open to the Revenue to re-open the underlying tax issues, because to do so would be an abuse of process;
  • European law entitles the claimants the receive an adequate indemnity for the loss occasioned to them by the overpayment of VAT – that indemnity required the payment of an amount of interest which is broadly commensurate with the loss of use of value of the overpaid tax, running from the dates of payment of the tax until the dates when the loss of use value is fully restored to them;
  • as a matter of English law, the correct approach to quantification of the claims is to ascertain the objective use value of the overpaid tax, which is properly reflected in an award of compound interest.

The case will be of interest to restitution lawyers as well as tax lawyers, given that the fundamental basis of the claim lay in restitution. The decision may only be of academic issue to refunds of GST in Australia as our legal system does not have the overlay of EU law and the rights of claimants to recover GST under the common law (including rights of restitution) appear to have been replaced by the statutory regime in the Taxation Administration Act. So much appears to have been confirmed by the very recent decision of the High Court in Thiess v Collector of Customs [2014] HCA 12 which was discussed in my post published yesterday.

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