Compound Interest is Available on Overpaid VAT

The High Court has released its judgment in the case between Littlewoods Retail Ltd and HMRC concerning whether taxpayers should be paid compound rather than simple interest by HMRC on any overpayments of VAT in circumstances where the VAT was paid and collected in breach of EU law. To date HMRC has paid simple interest on refunds, resulting in much smaller repayments.

The High Court upheld the retailer’s case and has ruled that claimants should be entitled to compound interest where VAT has been overpaid.

This judgement means that HMRC may be liable to pay billions in interest to taxpayers. This development is relevant to any businesses and organisations that have claims currently pending with HMRC, for example golf club claims regarding VAT on visitor’s fees. It will also be relevant to taxpayers who have made claims for overpaid VAT in the past which were calculated using simple interest based on a reduced average of bank base rates.

In their judgement, the High Court confirmed that EU law entitles taxpayers to receive an adequate indemnity for the loss caused by overpayments of VAT, which means an amount broadly equal to the loss of the use-value of the overpayment for the period in which the taxpayer does not have it.

Given the large amounts involved in this significant judgement, it is very likely that HMRC will seek permission to appeal to the Court of Appeal.

If you consider you may be affected by this case or have any further questions regarding this article please contact our VAT Manager, Iain Masterton on 0131 558 5800 or email