Taxman could lose 'billions' after landmark VAT ruling
Michael Herman
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The taxman is facing more than £1 billion in legal claims after a judge today paved the way for companies to receive higher rates of interest when claiming back overpaid VAT.
Mr Justice Henderson, sitting in the High Court, ruled that businesses are entitled to receive compound rather than simple interest on VAT they overpaid as a result of Government errors in interpreting European law.
Michael Bailey, head of indirect tax at PricewaterhouseCoopers, the professional services group, said that HM Revenue & Customs will face a “massive enhancement” on the amounts it owes businesses as a result of the decision.
The timing of the judgment is crucial as it follows several recent court cases which have established that companies are entitled to rebates if the Revenue overcharged them in error. Many rebates will be worth tens of millions of pounds.
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Although the Revenue acknowledges refunds are now due, it had insisted they be made using simple interest only. That decision was challenged by a group of 150 car dealers who sued the taxman demanding compound interest.
Jason Collins, a partner at McGrigors, which represented the dealers, said: “The court has confirmed what has been an elephant in the room for the Revenue – that if it collects any tax, including VAT, in breach of EU law, it must give a full account of the benefit it has had and not the derisory rate of interest they apply on a simple basis.”
Mr Collins said today’s decision would prompt many other businesses to bring claims for compound interest. His firm alone is advising on cases worth about £1 billion.
Tony McClenaghan, senior indirect tax partner at Deloitte, said the decision was significant for all companies that had reclaimed VAT which they originally overpaid.
"Any traders who have made reclaims for overpaid VAT will be impacted by this decision and should consider making a claim for compound interest carefully," Mr McClenaghan said.
However, although today's ruling opened the way for other claims, the judge found that the dealers could not reclaim VAT in this case because their claim was made outside the relevant time limits.
McGrigors said the dealers would appeal that element of the ruling.
The Revenue said: “The Judgment upheld HMRC’s view that, as a matter of English domestic law, the statutory scheme in the VAT Act 1994 for the repayment of overpaid VAT (section 80) and the payment of simple interest (section 78) is complete and excludes any other remedy outside the VAT Act.”
It declined to comment further.
In a previous case brought by Condé Naste, the publishing group, a judge ruled that companies were entitled to reclaim any VAT that was overpaid between 1973 and 1996. Those payments, and others from similar cases, must all now be paid with compound interest.
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