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HMRC internal manual

VAT Statutory Interest Manual

What interest rate is payable: Compound interest challenges

In many parallel challenges in Tribunal and by way of claims for restitution in the High Court, taxpayers are claiming entitlement to compound interest instead of simple interest. The litigation is complex, unresolved and continuing.

HMRC’s view is that interest / compensation claims for restitution are excluded by section 78 and section 80 VATA and Regulations 29 of the VAT Regulations 1995 therefore payment of interest at a compounded rate is not due.

The question of whether or not there is a European law right to compound interest, where a taxpayer’s directly effective rights under European law have been breached, was referred by the High Court to the Court of Justice of the European Union in December 2010. The Court’s judgement was released on 19 July 2012.

The European Court ruled that there is no European law requirement for compound interest. Where overpaid VAT is paid back to the taxpayer with interest, it is for the national courts to determine the appropriate type and amount of interest, in accordance with the principles of:

  • equivalence - national rules on procedures and sanctions to enforce European Law must not be less favourable than the rules applicable to similar domestic actions, and
  • effectiveness - national rules on procedures and sanctions to enforce European Law must not render such enforcement virtually impossible or excessively difficult.

The matter was referred back to the UK courts for a final decision and was heard in the High Court during a 3 week period in October and November 2013. The Court handed down its judgment in Littlewoods Retail and Others on 28 March 2014 having found that Littlewoods claim for additional interest succeeded in full.

This finding however was based on the ‘exceptional’ circumstances specific to the Littlewoods claimants. It did not provide a clear basis that could be applied to other claimants or a formula for doing so.

HMRC does not agree with the judgment and considers it to be at odds with European Law and how Parliament intended VAT law to work. HMRC has been granted leave to appeal and so accordingly this is not the end of the litigation.

The High Court judgment also said that it was not possible to construe sections 78 and (80) VATA so as to conform with any European law right to additional interest. This confirmed a previous decision of the Upper Tribunal. HMRC’s position is set out in Revenue and Customs Brief (20/14) published on 6 May 2014 and remains that the payment of simple interest is a fully effective remedy where the Principal VAT Directive has been breached resulting in a refund of overpaid VAT. The VAT legislation provides an exhaustive statutory scheme for doing this.

You should continue to reject all requests for compound interest, the appropriate response paragraphs can be found at VSIM5300. However, if in doubt about how to reply please consult with Tax Administration, Litigation and Advice (TALA), see VSIM1400.

VATA s78 and

VATA s80

VAT Regulations 1995