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HMRC battles Littlewoods over compound interest on VAT repayments

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19th May 2010
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HMRC has provisionally won a High Court VAT battle against Littlewoods over interest on a £200m repayment.

The retailer argued that the amounts repaid by HMRC should be calculated using compound interest rather than simple interest. It’s estimated that the extra interest could total in excess of £2bn for UK taxpayers.

The Court has provisionally ruled strongly in favour of HMRC but has referred the case to the European Court of Justice (ECJ). There will be a further hearing of the High Court in July. 

Littlewoods claims that it overpaid VAT from 1973 until October 2004 and the capital amount of these overpayments were repaid with simple rather than compound interest.

According to a Financial Times report, the Treasury has set aside £5bn to deal with claims for VAT refunds that stem from a government breach of EU law more than a decade ago. The Littlewoods case is reported to be one of a few thousand similar claims launched in the High Court.

“The suggested reference to the European Court of Justice is a long-awaited development in the various compound interest cases,” said David Raistrick, senior indirect tax partner at Deloitte.

“While we would not expect the ECJ to give its ruling before late 2011 or even 2012, it should help to shed valuable light on this highly important area of tax law, in which, as the High Court has acknowledged, there are very large sums at stake for taxpayers. Deloitte’s view remains unchanged, namely that a right to compound interest does exist in principle,” he added.

"The chancellor will breathe a little easier following the latest High Court ruling in “VAT Compound Interest” litigation. HMRC is currently repaying businesses several billion pounds in VAT wrongly demanded dating back to 1973. In many cases they accept they have to pay a similar amount in simple interest, but if compound interest is added on top that figure could treble,” commented Jason Collins, a partner at McGrigors. 

"The High Court has effectively sought to pre-judge the outcome of the appeal to the Court of Appeal in the Compound Interest Project and the decision should be seen in that context," said Collins. 

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