Should VAT repayments attract simple or compound interest?

Accountants may be amongst those who are interested to learn whether the European Union’s Court of Justice will rule in favour of taxpayers in the long running battle over the repayment of VAT.

The case centres around whether HMRC should repay overpaid VAT with compound interest rather than simple interest. Retailer Littlewoods is one of the businesses that have argued that compound interest, which accumulates over a long period, should be applied. If successful, Littlewoods claim would now be worth around £1 billion.

At the beginning of the year, the Advocate General said the European Union did not have the power to dictate the type of interest national tax authorities paid. Although the Advocate General is there to advise the European Court, his opinion is not gospel and now the CJEU has to deliver a ruling on the case of Littlewoods.

As some refund claims for overpaid VAT date back for decades, the total value of claims is thought to run into billions of pounds. The first-tier tax tribunal in the UK has around 20,000 pending claims and 50% of them are from companies that want HMRC to pay compound interest on their VAT repayment.

If the European Court rules in favour of the Revenue, that will effectively kill off the compound interest claims because courts here will have to abide by that decision. However, if the CJEU rules in favour of Littlewoods, HMRC could face an enormous bill.

The VAT repayment battle has been raging since 1996 when it was decided that HMRC would only backdate repayments of VAT for a maximum of three years instead of the previous six. That decision was eventually over-ruled and the House of Lords set a deadline of the end of March 2009 for companies to file additional backdated claims.

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