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Taxpayers are entitled to claim compound interest if VAT has been collected by HMRC in breach of European law, the High Court has ruled.
The judgment was made in a case brought by McGrigors as a group litigation order on behalf of VAT Interest Cars, an assembly of more than 150 motor dealerships.
The outcome could be that HMRC are forced to pay out many billions of pounds’ to firms seeking their full entitlements of interest, said the law firm.
During the hearing, presiding judge Mr Justice Henderson struck down UK legislation that provides only for simple interest at a low rate. His decision followed developments in EU law since 2007, when the House of Lords ruled that Sempra Metals was entitled to compound interest on overpaid corporation tax.
McGrigors partner Jason Collins said that the court had ‘confirmed what has been an elephant in the room for the taxman: namely that if HMRC collects any tax, including VAT, in breach of EU law, they must give a full account of the benefit they had had, not the derisory rate of interest they apply on a simple basis.’
HMRC have accepted the decision, but are confident that the statutory regulations in domestic VAT law (VAT Act 1994, sections 78 and 80) will not extend the ruling to non-EU issues.
While Justice Henderson went on to find that the car dealerships were on their facts out of time to bring their claims in the High Court (the firms are now seeking permission to appeal), many other types of companies will have plenty of time to claim their full entitlement.
‘The decision will prompt many businesses to bring High Court claims,’ added Jason Collins, whose employer has already issued claims totalling about £1 billion and expects many more to come.
The latest VAT ruling is likely to be of serious concern to HMRC because it adds to pressure on the department that began last year with the Lords’ ruling in Fleming (t/a Bodycraft) and Conde Nast (which provoked the dealerships’ case). The Revenue was forced to legislate to repay all taxpayers who had overpaid VAT between 1973 and 1996, irrespective of when they realised they had overpaid.
Jason Collins remarked: ‘With very old claims, compound interest dwarfs the amount of the VAT that has to be refunded’.
VAT consultant Neil Warren was more succinct. ‘This will mean a lot more money for a lot more people,’ he said.
‘It seems fair and reasonable that taxpayers who have overpaid VAT because of an error by the Revenue in interpreting EU law should be properly compensated with a proper rate of interest.
‘The High Court judgment is good news for taxpayers, but bad news for the Government’s borrowing problems.’
