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Littlewoods VAT battle rages on

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20th Jul 2012
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The European Court of Justice has referred a long-running battle between Littlewoods and HMRC over VAT interest repayments back to the UK’s High Court.

The owners, Sir David Barclay and Sir Frederick Barclay, are suing HMRC for failing to add compound interest when it refunded the retail group excess VAT payments going back more than 30 years.

Littlewoods received £204.7m in overpaid VAT with simple interest of £268.2m but is claiming a further £1bn in compound interest - where interest added to the original amount also earns interest.

The Barclay brothers say this reflects the true compounded time value of the overpayments, claiming that the Crown has had the benefit for what is in effect a "huge interest free loan”.

The ECJ ruled that it is for national law to determine whether the principal sum must bear simple interest or compound interest.

It was hoped that the ECJ decision would be a landmark ruling on whether taxpayers could reclaim not only repayment of VAT but also the compound interest on that sum. However Lorraine Parkin, head of indirect tax at Grant Thornton, said taxpayers can take some encouragement from the fact that the ECJ "had not completely dismissed the notion of compound interest and referred the matter back to the UK court.”

Jason Collins, head of tax at Pinsent Masons, told AccountingWEB that the ECJ had “neatly ducked” having to answer the question themselves by referring it back to the UK court.

“They’ve tried to make this an entirely domestic matter so it doesn’t open the floodgates around Europe.

“But they did give a guiding principle that this is an indemnity principle and the domestic courts have to make sure they give an adequate indemnity for the loss by implication of the overpayment. I think this is where the real battle ground is now and the game’s not over.”

“The big question is going to be whether this indemnity principle affects taxpayers – the issue about what is adequate interest, it’s actually about the rates of tax as well. HMRC takes the base rate and lops between one and one and a half per cent off it, and if you underpay tax HMRC take the base rate and add between two and a half and three per cent. They clearly make a nice margin and if they were a financial broker that would be a very attractive business.”

On a separate issue, HMRC has said it will issue guidance after the European courts ruled that discretionary managers must collect VAT on their services.

The ECJ ruled Deutsche Bank was not exempt from charging VAT on its services, in a battle between the bank and Finanzamt Frankfurt am Main.

An HMRC spokesperson said: “We are currently reviewing the details of the judgment to determine whether it has any implications for the current UK VAT treatment of investment management services, and will issue further guidance shortly.”

However experts have warned that the ruling was not good news for the consumer who is going to end up paying more for their services.

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Replies (7)

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chips_at_mattersey
By Les Howard
20th Jul 2012 16:42

Compounding the Problem!

The Treasury's main concern is not the legal argument, but the potential cost to the public purse. If Littlewoods are successful, many other claims will be submitted. The sums will be into billions.

The same has to be said for the take-away food case, due to be heard at the Upper Tier Tribunal next week. The cost of the Treasury will also be measured in billions if the taxpayer is successful.

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Replying to bboy201:
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By jonbryce
22nd Jul 2012 23:33

On the other hand, they could charge compound interest on late payment of tax, based on the same principle, and that would make them a lot more money than they stand to lose.

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Replying to bboy201:
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By mikewhit
23rd Jul 2012 12:47

We're all in this ...

"The cost of the Treasury will also be measured in billions if the taxpayer is successful."

Didn't you mean to say "... if the hard-working taxpayer is successful."

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By justsotax
23rd Jul 2012 10:23

@jon...

yep you can't help feeling that with the boot on the other foot and an effectively 'interest free' loan by hmrc to all the numerous companies who fail to pay corp tax/paye etc on time then i am not sure they will be so eager to argue that compound interest should be charged.

 

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By philfromleeds
23rd Jul 2012 13:00

Breadline

I think the government should send them to bed without any jam and bread tonight

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By rayhelmke
23rd Jul 2012 15:01

need the funds

littlewood clearly need some funds...

sooner littlewoods goes under the better imo

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By Vinoo
23rd Jul 2012 20:43

Interest

Littlewood received £268.2m interest on overpaid VAT. My understandinf is that HMRC would not pay any "interest" on overpaid VAT but it would be "Ex-Gratia" payment and so the compund element is not applicable.

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