HMRC defeats Littlewoods in landmark case over VAT dispute

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The Supreme Court has ruled that HMRC does not owe high street retailer Littlewoods £1.25bn in compound interest in relation to historic VAT overpayments, putting to rest a decade-spanning legal battle. The landmark ruling sets a precedent which will prevent thousands of other companies and taxpayers from pursuing similar claims for compound interest.

This is bad news for golf clubs hoping for a future windfall from the increased interest they ​could have received as a result of a ruling in favour of Littlewoods.

Littlewoods v HMRC – background to the ruling

In 2004 it emerged that Littlewoods had overpaid millions in VAT to HMRC from 1973 up until that point. HMRC repaid the principle sum of £205m between 2005 and 2008, in addition to the simple interest of £268m.

However, the retailer proceeded to take legal action against the taxman, seeking restitution for the “mistake of law” or “unlawfully demanded tax” in the form of a calculated compound interest claim of £1.25bn. This claim has ultimately been unanimously dismissed by the Supreme Court.

Why did the Supreme Court rule in favour of HMRC?

The Supreme Court had two separate issues to consider. An earlier lower court ruling had concluded that Littlewoods’ common law claims were barred by sections of the Value Added Tax Act 1994. Littlewoods appealed this decision, but the ruling was upheld by the Supreme Court.

The Supreme Court also considered an HMRC appeal against an earlier ruling in the European Court of Justice (ECJ) that denying Littlewoods compound interest was in violation of EU law.

Again, the Supreme Court found in favour of the taxman, questioning the interpretation of the term “adequate indemnity” in the decision making process of the ECJ judgment, concluding: “the payment of interest in this case cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity.”

What does the ruling mean for taxpayers?

Whilst a great outcome for HMRC, the ruling is bad news for firms and taxpayers who have overpaid VAT in the past, as it means any future claims for entitlement to compound interest cannot be brought against the taxman.

The Supreme Court judgement stated that 5,000 claims relating to VAT are pending as a result of this ruling. HMRC accounts also show that there were 19 ongoing cases which could have required the taxman to make tax repayments amassing a total contingent liability of almost £19bn, although the impact on HMRC would have been mitigated by the fact that interest claimed would have been taxed at 45%.

For help and advice on VAT compliance, VAT refunds and VAT disputes contact our VAT expert Robert Twydle.

This ​article is written for general interest only and is not a substitute for consulting the relevant legislation or taking professional advice. The authors and the firm cannot accept any responsibility for loss arising from any person acting or refraining from acting on the basis of the material included herein.