A recent Case in the UK courts relating to Value Added Tax (VAT), which involved very large sums of money, demonstrates some key principles of European Union law. Simon Trahair-Davies of Stephen Scown LLP outlines the Case.
Spring arrived and with it the closing stages of the European Champions League and domestic football championships, while this summer brings the excitement of the World Cup in Brazil.
Despite its very loose connection to football (the claimant, Littlewoods, used to run the UK’s football betting competition known as the Pools), we thought that readers might enjoy an update on a long-running Case in the English courts relating to Europe’s favourite tax, VAT.
The away leg was recently played in the High Court in England (following group stage matches played over several years both in the UK courts and the European Court of Justice) and left the UK’s tax authority, Her Majesty’s Revenue and Customs (HRMC), facing an enormous bill of over £1 billion (€1.2 billion) in compound interest due to the claimant alone. There will almost certainly be a return fixture when HRMC appeals to the next level of the court process, the Court of Appeal, and maybe even extra time and penalties in the Supreme Court.
The Tax
VAT (variously known, among other things, as TVA, IVA, BTW or MwSt in the different EU Member States) is a value added or consumption tax that is in place across the
EU directives (as distinct from regulations) have to be transposed into each Member State by national legislation in order to be given effect. In the United Kingdom, the main domestic implementing legislation is the Value Added Tax Act 1994.
The Case
Put very simply, the Case turns on the issue of whether HRMC was liable to pay simple interest (interest paid only on the original principal, not on the interest accrued) or compound interest (interest computed on the accumulated unpaid interest as well as on the original principal) on sums mistakenly paid in VAT by the Littlewoods Group on agent’s commission for the period between 1973 and 2004.
HMRC had already paid in the region of £200 million (€244 million) in the wrongly paid VAT and £270 million (€329 million) in simple interest, but Littlewoods claimed it was entitled to compound interest.Simon Trahair-Davies is a partner in the mining and minerals team at Stephens Scown LLP in the UK. The firm has more than 70 years’ experience representing mining and minerals clients and its specialist team has recently been recognised once again by independent guides to the law Legal 500 and Chambers. Simon can be contacted on +44 (0)1872 265100 or email <%$Linker:
Essentially the UK’s Value Added Tax Act allowed for the payment of simple interest only.
The English High Court referred the Case to the European Court of Justice and asked for guidance as to whether the payment of simple interest under UK law was compatible with EU law. The Advocate General in her opinion was of the view that it was compatible, but the European Court of Justice decided that this was a matter for domestic courts to determine, and liability to pay simple interest on VAT overpaid by mistake could be an adequate remedy provided that it accorded with two key EU law
principles:
Equivalence, that the remedy afforded for the breach of EU law must be no less favourable than those remedies available for domestic actions, and effectiveness, that the remedy must not render the exercise of the claimant’s rights virtually impossible or excessively difficult).
Despite its initial view (expressed before the matter was referred to the European Court of Justice) being that simple interest would be an adequate remedy, when the Case came back to it, the High Court decided that simple interest would not provide an effective EU law compliant remedy.
An adequate remedy required payment of interest equivalent with loss of use value of the overpaid VAT, and was provided by compound interest. Consequently, the Judge ordered that HRMC was liable to pay Littlewoods in the region of £1.2 billion interest.
It is widely expected that the UK government will appeal this decision and this long-running Case will continue. This is a significant Case, which could have far reaching consequences. Businesses, tax authorities and governments across the EU await the full-time result with interest: if not quite as much interest as in the Champions League and World Cup final results.
Littlewoods Retail Ltd and others v HRMC [2014] EWHC 868 (ch).
