After HMRC repaid Littlewoods £205 million in overpaid VAT and £268 million in simple interest, Littlewoods claimed a further £1.25 billion in compound interest going back more than 40 years. The Supreme Court held that the Value Added Tax Act 1994 excludes any concurrent common-law claim to that interest. It also held that EU law requires only reasonable redress, which the simple interest already paid supplied.
Littlewoods carried on catalogue sales and paid agents a commission either in cash, at 10 per cent of sales, or in kind, as goods priced at 12.5 per cent of sales. Between 1973 and 2004 it accounted for VAT on the goods supplied as commission by reducing the taxable amount only by the 2.5 per cent enhancement. On a correct view the taxable amount was reduced by the whole commission, so Littlewoods overpaid VAT.
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Claims under section 80 of the Value Added Tax Act 1994 were conceded. Between 2005 and 2008 HMRC repaid £205 million and, under section 78, paid £268 million in simple interest. In proceedings begun in 2007 Littlewoods claimed a further £1.25 billion as compound interest at common law. The claim rested on unjust enrichment, whether from payment under a mistake of law or from receipt of undue tax, and on the principle that the use value of money may be measured by compound interest. Extended limitation for mistake meant that the period exceeded 40 years. About 5,000 further claims were stayed; HMRC estimated the VAT exposure at £17 billion.
English law
Vos J held that sections 78 and 80 excluded the claims as a matter of construction and referred the EU-law questions to the Court of Justice. After that court ruled, Henderson J held that only compound interest met EU law, so the statutory bar had to be disapplied. The Court of Appeal agreed. Littlewoods cross-appealed on construction; HMRC appealed on EU law.
Lords Reed and Hodge, with whom Lord Neuberger, Lord Clarke and Lord Carnwath agreed, held that section 80 creates a specific remedy for overpaid VAT, limited by an unjust-enrichment defence, a short limitation period and section 80(7). Parliament cannot have intended those limits to be avoided by a common-law claim. Section 78 then provides simple interest, at rates fixed by regulations, where official error produces a section 80 repayment or certain related VAT consequences, and only if and to the extent that HMRC would not otherwise be liable. Its restrictions on rate, simple calculation and time would be defeated if compound interest were generally available at common law whenever section 80 required repayment.
The reservation in section 78(1) cannot be read as saving common-law claims. When the section was enacted, the common law did not generally award interest for late payment of a debt or on a claim for money had and received. The later recognition of a free-standing claim for the use value of money was outside Parliament’s contemplation, and a literal reading would make section 78 a dead letter. The reservation therefore covers only other statutory liabilities to interest, such as interest on appeals or judgments, and section 78 impliedly excludes the claims.
EU law
The Court of Justice held that the taxpayer was entitled to repayment of VAT collected in breach of EU law and to interest on it. National rules on the rate and method of calculation had to satisfy the principles of equivalence and effectiveness. The UK court had to decide whether the very substantial simple interest already paid gave Littlewoods adequate redress.
The Supreme Court rejected the reading, adopted by Henderson J and the Court of Appeal, that an adequate indemnity meant interest broadly commensurate with the full use value of the money. In context the phrase means reasonable redress. The Court of Justice recognised a general right to interest but left rate and method to the member state, and its reference to the sums already paid indicated that substantial simple interest over an exceptionally long period could be reasonable redress. There is no general EU requirement of full reimbursement of the use value of money. That conclusion fits the widespread use of simple interest in other member states and the Court of Justice’s other case law, which requires interest from payment until repayment but does not prescribe compounding or a rate restoring full use value.
The interest Littlewoods received, reflecting both a retrospective common-law change and the constraints on retrospective limitation under EU law, could not realistically be treated as less than an adequate indemnity. No further reference was required.
Verdict: The Court unanimously allowed HMRC’s appeal and dismissed Littlewoods’ cross-appeal. The statutory scheme excluded the additional common-law claim, and the simple interest already paid provided adequate redress under EU law on these facts.
Source: Littlewoods Limited and others v Commissioners for Her Majesty’s Revenue and Customs [2017] UKSC 70
