Claims for compound interest possible

Last year the High Court ruled that compound interest is payable in principle on overpaid VAT. In many cases, this will mean that the interest receivable will exceed the value of the erroneously paid VAT.

Mr Justice Henderson ruled that compound interest is appropriate restitution for loss of use of the funds rather than the remedy currently available under UK law. However, this is only available where the overpayment of VAT arose because UK legislation or HMRC policy is contrary to EU law. In all other circumstances, only simple interest is payable.

Furthermore, the High Court ruled that taxpayers have six years from the date they discovered they had erroneously overpaid VAT to make a claim in restitution.

At the same time as this litigation was proceeding, a number of claimants opted to appeal the award of simple interest to the Upper Tribunal, rather than bringing proceedings in the High Court. The appellants were grouped together and referred to as the ‘Compound Interest Project’ (CIP). In September 2009, the Upper Tribunal delivered its judgment, ruling that it does not have jurisdiction to award compound interest relating to VAT overpayments. As such, a taxpayer’s claim for compound interest should only be made by way of a claim in restitution in the High Court.

The result of all this litigation is that, as matters currently stand, taxpayers are entitled to restitution (equivalent to compound interest) where they have overpaid VAT as a result of the UK being in breach of EU law to the detriment of the taxpayer. Furthermore, there is a six-year time limit in which to issue the claim in the High Court. However, now that HMRC have appealed this decision to the Court of Appeal, we are still a long way from a final resolution. As such, we recommend that affected taxpayers protect their position by lodging restitutionary claims in the High Court. A cost/benefit analysis should be carried out first to weigh up the benefit of obtaining interest at a compound rate against the cost of issuing the claim.

The CIP appellants have also been granted permission to appeal the Tribunal’s decision to the Court of Appeal. As there is still hope of a positive outcome via this litigation route, we recommend that taxpayers protect their position by submitting an appeal to the First-Tier Tribunal against HMRC’s refusal to pay compound interest. Although it does appear likely that such appeals must be submitted within 30 days of HMRC’s notification that they will only pay interest at a simple rate, the Court of Appeal may grant an extension to this time limit.

If businesses have submitted claims to HMRC for overpaid VAT and they are yet to be settled, we advise that they be ready to submit appeals to the Tribunal within 30 days of receipt of notification that simple interest will be paid. As above, due consideration should also be given to bringing additional proceedings in the High Court.

Baker Tilly can advise on the optimum course of action, as each case must be reviewed on its own merits.