HMRC 'not obliged to pay compound interest'

UK statute does not oblige HMRC to pay compound interest on VAT repayments to taxpayers, the Upper Tribunal has ruled.

In its first judgment in a leading tax case, the tribunal accepted that taxpayers had a right in principle to compound interest as a matter of EU law, but did not agree that this country’s VAT statute could be interpreted to take account of it.

Instead, it decided taxpayers should seek compound interest from HMRC by a separate civil law claim for restitution. This meant defeat for five motor dealerships that had been trying to claim compound interest on tax refunds – and who earlier this year had been part of the VAT Interest Cars group litigation in the High Court.

The ruling in that case was in contradiction to that of the Upper Tribunal: the judges found that more than 150 dealerships were entitled in principle to receive compound interest, but were out of time to make a claim.

However, big four accountancy company Deloitte & Touche – which represented one of the appellants in the Upper Tribunal – said that there are a number of other ongoing cases that are testing the application of compound interest to VAT repayments, and the extra interest paid out by the Revenue could total in excess of £1 billion.

Senior indirect tax partner Tony McClenaghan claimed that the Upper Tribunal’s ruling ‘results in an odd and unsatisfactory position’.

He added: ‘Although the taxpayers have lost at this stage, an appeal is highly likely. If the appeals from the motor dealers’ group litigation [in the High Court] and this… decision are heard together, the Court of Appeal will have a welcome opportunity to bring a single unified approach to what is a developing and highly complex area of law.’

Jason Collins of law firm McGrigors – which brought the VAT Interest Cars case – disputed Deloitte & Touche’s estimation of possible outlay by the taxman, saying it is more likely to be ‘several billion’ if the Court of Appeal agrees with the judges in the High Court and also decides that many other companies are still within the time limits to make claims for compound interest.

Issue: 4224 / Categories: News , VAT