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VAT claimants ‘unlikely’ to receive compound interest

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Taxpayers are unlikely to be entitled to billions of pounds in unpaid interest on overpaid VAT, tax experts said after the Advocate General delivered her opinion in Littlewoods (C-591/10) last week.

Deloitte noted that Advocate General Trstenjak said it was for EU Member States to determine ­– subject to the principles of effectiveness and equivalence – whether interest on the repayment of wrongly paid taxes should be simple interest or compound interest.

Stuart Walsh, Tax Partner at McGrigors, said the opinion was a ‘significant blow’ to thousands of British businesses contesting VAT claims. ‘The statutory rate of interest paid by HMRC is significantly lower than the base rate and calculated on a simple basis. Taking inflation into account, some taxpayers will have received just a fraction of what they are owed in real terms,’ he said.

‘Allowing HMRC to pay simple interest below the base rate effectively incentivises [HMRC] to sit on taxpayers’ money to improve its own cashflow position. Compound interest would have removed that perverse incentive.’

The Advocate General 'concludes that simple interest does conform with the principle of effectiveness and suggests that it is a matter for the local court to decide whether there is a breach of the principle of equivalence’, Deloitte said.

If followed by the Court of Justice of the European Union (CJEU), the opinion suggests that taxpayers seeking compound interest are likely to be disappointed, ‘but it remains possible that when the CJEU finally decides the case in a few months, it may not follow the opinion’.

The Advocate General proposed that the Court answer questions referred for a preliminary ruling as follows:

‘1. Under European Union law a taxable person who has overpaid VAT which was collected by the Member State contrary to the requirements of EU VAT legislation has a right to reimbursement of the VAT collected in breach of EU law and a right to payment of interest on the principal sum to be reimbursed. The question whether the interest on the principal sum to be reimbursed is to be paid on the basis of a system of “simple interest” or a system of “compound interest” concerns the detailed rules governing the interest claim stemming from European Union law, which are to be determined by the Member States in accordance with the principles of effectiveness and equivalence.

‘2. If the referring court should conclude that the detailed rules governing payment of interest on VAT collected in breach of EU law at issue in the main proceedings are less favourable than the detailed rules governing similar domestic interest claims and that there is therefore a breach of the principle of equivalence, it is obliged to interpret and apply the national rules in such a way that interest is paid on the VAT collected in breach of EU law in accordance with the more favourable rules which apply to similar domestic claims.’