This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

VAT Statutory Interest Manual

What interest rate is payable: standard response to compound interest challenges

All requests for compound interest in connection with claims made under section 80 VATA or regulation 29 VAT Regs should be met with the following standard response.

The first four paragraphs and final paragraph apply in all cases. There are then different paragraphs to be included depending on whether the claim for interest is a High Court claim, an existing claim under section 78 VATA or en existing Tribunal appeal; or a new claim under section 78, a new Tribunal appeal or review.

This wording must not be altered without consulting Tax Administration, Litigation and Advice (TALA)

“HMRC takes the view that restitutionary claims for interest/compensation are excluded by section 78 and [section 80] of the VAT Act 1994 [and/or Regulation 29 of the VAT Regulations 1995.]. Therefore, it is HMRC’s view that [your client -name of business if a tax adviser wrote in], or [name of the businesses] has no right to a payment of compound interest. [ It has received simple interest under section 78 at a rate calculated by a formula set down in statute viz the Air Passenger Duty and Other Indirect Taxes (interest rate) Regulations 1998 and no further interest is due.]

The High Court considered the type and amount of interest payable where HMRC makes a refund of overpaid VAT in the case of Littlewoods in November 2013. The Court had previously made a referral to the Court of Justice of the European Union which ruled in July 2012 that there is no requirement in European Law 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 and effectiveness.

The High Court ruled in March 2014 that Littlewoods did have an entitlement to additional interest. This finding was based on the ‘exceptional’ circumstances specific to the Littlewoods claimants.

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 given permission to appeal; this is therefore not the end of the litigation.

[For High Court claims, insert the following paragraph:

“HMRC does not consider that the judgment provides a clear basis that could be applied to other High Court claimants or a formula for doing so. As such HMRC will apply for any claims for compound interest already lodged (and new claims) with the High Court or County Court to continue to be stayed pending final determination of the Littlewoods litigation”] 

[For existing claims and Tribunal appeals, insert the following paragraph:

“The High Court Judgment also said that it was not possible to construe sections 78 and 80 of the VAT Act 1994 so as to conform with any European law right to additional interest. This confirmed a previous decision of the Upper Tribunal. HMRC’s permission in relation to Tribunal appeals is therefore unchanged by the Littlewoods judgment, namely that these should continue to be stood over until there has been a final determination as to the availability of compound interest in the United Kingdom.”] 

[For new claims, Tribunal appeals and reviews, insert the following paragraph:

“HMRC will therefore continue to oppose any new requests for compound interest or appeals claiming that compound interest is due, and will consider applying for strike out where the clam is made outside of the 4 years allowed by section 78(11) of the VAT Act 1994.”] 

HMRC’s position is set out in Revenue and Customs Brief 20/14 published on 6 May 2014.”

The standard appeal paragraphs must be used with all interest decisions including the refusal of compound interest claims. Please see VSIM7300.

VAT Act s.78

VAT Act s.80

VAT Regulations 1995