The House of Lords has dismissed the appeals of HMRC in two separate VAT cases.
They concerned Condé Nast Publications, the publisher of Vogue and Vanity Fair, and motor trader Bodycraft.
The Lords judgment held that the introduction of a three-year limitation period for the recovery of input VAT in 1997, with no transitional period, was unlawful.
It is estimated that HMRC may have to refund tax and interest of around £1 billion.
Commenting on the cases, Andrew Loan of City law firm Macfarlanes said: 'In effect, taxpayers were retrospectively deprived overnight of the opportunity to make claims dating back more than three years.
'The Lords held that this limitation period cannot be enforced until HMRC announces - or Parliament legislates for - a prospective transitional date by which historic claims must be lodged.'
He added: 'This decision opens the floodgates to claims for repayment of input VAT incurred since VAT was introduced in the UK in 1973. Around 700 similar cases have been brought by other taxpayers, including EMI and BT.
'HMC may quickly introduce new legislation to legitimise the three-year cap, so businesses should consider making claims to recover overpaid output VAT or under-recovered input VAT, or renewing claims that were previously dismissed, as soon as possible."
Solicitor Jason Collins of McGrigors tax litigation team remarked: 'This is mixed news for the Chancellor of the Exchequer. While hoping that all types of claim would be defeated, he will breathe a sigh of relief that the worst case scenario has not come home to roost.
'Many taxpayers who had asked for their claims to be honoured after the Court of Appeal decision will now have to return the tax. The other, successful taxpayers awaiting this decision will now be pressing HMRC to pay out their claims if they have not already done so.'
He went on: 'The fight may not, however, end here. Many taxpayers will look to be compensated with full commercial rates of interest calculated on a compound basis, rather than the low simple rate of interest provided for under statute.
'Given the age of the claims, compounding could result in an interest award more than five times greater than the tax itself'.
PKF's Gerry Myton claimed he believes that there could be a six month window of opportunity to submit a claim,
'This ruling is hugely significant. Overpayments of VAT before the introduction of the three year cap on 4 December 1996 (or 1 May 1997 for certain claims) are still live, so it is not too late for businesses to check their records and submit claims' he said.
'Given HMRC's attitude to this over the years, businesses should be entitled to compound rather than simple interest, but it may be necessary to go back to court to get that principle established.'