In Littlewoods and othersv HMRC [2017] UKSC 70 (1 November 2017), the Supreme Court (reversing the decision of the Court of Appeal), found that Littlewoods was not entitled to compound interest on the repayment of VAT wrongly paid.
Littlewoods distributed catalogues to customers and sold goods shown in the catalogues. It employed agents, who it paid a commission in cash or in kind: commission was paid in cash at the rate of 10%; or paid in kind in the form of goods supplied by Littlewoods at 12.5%. Between 1973 and 2004, it accounted for VAT on supplies made to its agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, i.e. by 2.5%. However, the taxable amount of the supplies was actually reduced by the entire 12.5%, which constituted the agents’ commission. Littlewoods submitted a repayment claim under VATA 1994 s 80; and between 2005 and 2008, HMRC repaid £205m, as well as simple interest under s 78, amounting to £268m.
The issue was whether Littlewoods was also entitled to compound interest under common law, totalling £1.25bn, following the CJEU’s decision in the case (C-591/10).
The first question was whether the Court of Appeal had been correct to hold that Littlewoods’ claims were excluded by VATA 1994 ss 78 and 80, regardless of EU law. Littlewoods argued that s 78 provides a statutory right to interest, which is of a residual character, and leaves common law claims unaffected. Like the lower courts before it, the Supreme Court found that s 78 is inconsistent with the availability of concurrent common law claims to interest, and must therefore be interpreted as impliedly excluding such claims.
The CJEU had endorsed a general entitlement to interest, but had left it to member states to determine whether compound interest should be paid to provide an ‘adequate indemnity’. The second question was therefore whether HMRC should reimburse in full the use value of the money, which over an exceptionally long period of time Littlewoods had paid by mistake. The Supreme Court found that there was no requirement in the CJEU’s jurisprudence that the value which the member state, by the award of interest, places on the use of money, should make good in full the loss which a taxpayer has suffered by being kept out of his money. It added that, consistently with a widespread practice among member states of the EU, the UK had treated the award of simple interest as an appropriate remedy for being held out of money over time, whether the claimant was HMRC or a taxpayer.
Why it matters: The Supreme Court commented that the Court of Appeal had erred ‘in reading too much into the phrase “an adequate indemnity” and failed to give sufficient weight to its context in the relevant passage of the CJEU’s judgment’. It concluded: ‘The resultant payment of (simple) interest cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity, in the sense in which that expression should be interpreted.’ This decision may be the last step in a long judicial saga, since the Supreme Court stated that no further reference to the CJEU was needed. In the wake of this decision, claims for compound interest by other taxpayers seem likely to fail.
In Littlewoods and othersv HMRC [2017] UKSC 70 (1 November 2017), the Supreme Court (reversing the decision of the Court of Appeal), found that Littlewoods was not entitled to compound interest on the repayment of VAT wrongly paid.
Littlewoods distributed catalogues to customers and sold goods shown in the catalogues. It employed agents, who it paid a commission in cash or in kind: commission was paid in cash at the rate of 10%; or paid in kind in the form of goods supplied by Littlewoods at 12.5%. Between 1973 and 2004, it accounted for VAT on supplies made to its agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, i.e. by 2.5%. However, the taxable amount of the supplies was actually reduced by the entire 12.5%, which constituted the agents’ commission. Littlewoods submitted a repayment claim under VATA 1994 s 80; and between 2005 and 2008, HMRC repaid £205m, as well as simple interest under s 78, amounting to £268m.
The issue was whether Littlewoods was also entitled to compound interest under common law, totalling £1.25bn, following the CJEU’s decision in the case (C-591/10).
The first question was whether the Court of Appeal had been correct to hold that Littlewoods’ claims were excluded by VATA 1994 ss 78 and 80, regardless of EU law. Littlewoods argued that s 78 provides a statutory right to interest, which is of a residual character, and leaves common law claims unaffected. Like the lower courts before it, the Supreme Court found that s 78 is inconsistent with the availability of concurrent common law claims to interest, and must therefore be interpreted as impliedly excluding such claims.
The CJEU had endorsed a general entitlement to interest, but had left it to member states to determine whether compound interest should be paid to provide an ‘adequate indemnity’. The second question was therefore whether HMRC should reimburse in full the use value of the money, which over an exceptionally long period of time Littlewoods had paid by mistake. The Supreme Court found that there was no requirement in the CJEU’s jurisprudence that the value which the member state, by the award of interest, places on the use of money, should make good in full the loss which a taxpayer has suffered by being kept out of his money. It added that, consistently with a widespread practice among member states of the EU, the UK had treated the award of simple interest as an appropriate remedy for being held out of money over time, whether the claimant was HMRC or a taxpayer.
Why it matters: The Supreme Court commented that the Court of Appeal had erred ‘in reading too much into the phrase “an adequate indemnity” and failed to give sufficient weight to its context in the relevant passage of the CJEU’s judgment’. It concluded: ‘The resultant payment of (simple) interest cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity, in the sense in which that expression should be interpreted.’ This decision may be the last step in a long judicial saga, since the Supreme Court stated that no further reference to the CJEU was needed. In the wake of this decision, claims for compound interest by other taxpayers seem likely to fail.
