The Advocate General has issued her opinion in the Littlewoods case concerning Compound Interest – it is an opinion that, not untypically, leaves more questions than answers, and therefore we will have to wait for the full decision of the European Court of Justice (ECJ) in order to achieve the hoped for clarity on this issue.
The case concerns whether repayments of VAT which had previously been paid due to an error by HM Revenue and Customs (official error), are sufficiently compensated by the award of simple interest, or whether they should be awarded compound interest or another form of remedy.
Many businesses have benefitted from repayments in such cases where VAT has been paid based on HMRC’s (legacy HM Customs and Excise) mistaken interpretation of VAT regulations. For example, motor retailers had historically accounted for VAT on the sale of demonstrator vehicles, even where the VAT incurred on the purchase could not be recovered; this was later determined to be incorrect as a result of the clarification obtained in a case taken by the Italian Republic – we now know that where input tax recovery is blocked on the purchase of a demonstrator car, as it is considered to be used in part for non-business purposes, the onward sale is exempt from VAT.
Claims for such overpaid VAT could (until 31 March 2009) be made going back to the date of first VAT registration, which in some cases was as far back as April 1973.
VAT repayments in cases of official error have always been awarded simple or statutory interest, as contained in section 78 of the VAT Act 1994 (replacing earlier legislation). However, many businesses consider that the award of simple interest is insufficient compensation, and have made a claim for compound interest to be paid instead. If successful this would lead to significantly higher repayments from HMRC, particularly when you consider the high interest rates experienced during the 1980s and 1990s.
In the current case, the ECJ has considered whether the UK has effectively implemented the European legislation in respect of the principles of both effectiveness and equivalence. The principle of effectiveness provides that Member States of the EU must not make it impossible or unreasonably difficult for a business to obtain a remedy, whilst the principle of equivalence provides that Member States must treat similar matters in a similar way; on this basis, a business should be able to obtain a reasonable level of compensation, in the same or similar way to other compensation payments for other similar taxes.
It is understood that the rules provided for claiming overpaid VAT are effective, however, the equivalence point has remained contentious. It appears from the narrative of the Advocate General’s opinion that simple interest is considered a sufficient remedy, but only where compound interest is not provided as a remedy for other similar taxes. As such, the Advocate General has indicated that the Court should rule that the UK considers whether compound interest is available for similar taxes and suggests that a further reference to the ECJ may be necessary on this point.
It is possible that the decision of the full Court (which we are expecting in the spring of this year) will add further clarity as to whether ‘similar taxes’ means just indirect taxes or direct taxes, but until then the compound interest debate looks set to continue. If a further reference is to be made we could still be several years away from an answer – until then the book remains open.
Nevertheless, even if compound interest is considered to be the appropriate remedy, businesses may still be prevented from receiving an award of compound interest. Under the Limitation Act (which sets out the time limits in which claims are to be made) for example, many opportunities to make claims are limited to the sixth anniversary of a certain event. Using this as a dictating principle many of the VAT claims will be adjudged as out-of-time.
Whilst the issue of compound interest may be reaching the end of the road, there are still opportunities for businesses to recover overpaid or underclaimed VAT for the past four years – if you think you may have paid too much VAT or would like to consider ways of releasing cash-flow benefits, contact Karen Mulcahy or Sarah Franklin at The VAT Consultancy on 01962 735350.