The indication is that taxpayers will be denied compound
interest claims on overpaid VAT when the case comes back.
The Littlewoods case arose after HMRC was forced to repay
VAT charged in breach of EU law from 1973 to 2004.
Where a taxpayer has overpaid VAT, it is entitled
to a remedy which is consistent with the EU principles of
equivalence and effectiveness.
Since October 2004, HMRC has repaid more than
£200 million ($314 million) in overpaid VAT and almost
£270 million in simple interest on the VAT repayment to
Littlewoods, in accordance with the Value Added Tax Act
However, Littlewoods argues that it is entitled to a total
remedy of £1 billion, based on calculations applying the
compounded rates of interest applicable to UK government
borrowing during the period in question.
The ECJ ruling said: "EU law must be
interpreted as requiring that a taxable person who has overpaid
VAT which was collected by the member state contrary to the
requirements of EU legislation on VAT has a right to
reimbursement of the tax collected in breach of EU law and to
the payment of interest on the amount of the latter.
"It is for national law to determine, in compliance with the
principles of effectiveness and equivalence, whether the
principal sum must bear simple interest, compound interest or
another type of interest."
The key issue of whether Littlewoods is entitled to further
repayments based on compound interest has thus been referred back to the UK High Court.
Andrew Loan, of Macfarlanes, said this is likely to mean
that the High Court will confirm its preliminary view that
simple interest is adequate.
"Based upon cases in the UK courts over the past two years, I think
it is likely the High Court will decide it is not necessary to
apply compound interest to provide an effective remedy for
taxpayers," said Loan.
"Under the principles of equivalence and effectiveness,
member states must give taxpayers a legal remedy for
infringements of EU law that is accessible and is equivalent to
what would be available if it were a claim under domestic law,
but there is no requirement that the member state must always
offer its most favourable remedy in all cases," he added.
In its ruling, the ECJ also said that the payments already
made by HMRC to Littlewoods corresponding to interest due over
about 30 years, exceeds by more than 23% that of the principal
sum of around £200 million.
Robert Waterson, of Dorsey & Whitney, said the inclusion
of these bare figures must be irrelevant to the central
question of whether or not the remedy provided is effective
since this should require an analysis to correct for the
erosive effect of inflation and restitution for the undue
benefit enjoyed by HM Treasury.
Loan added that the ECJ seems most concerned to ensure that
taxpayers receive equivalent remedies for EU claims and
domestic claims, and not to harmonise the different legal
frameworks of member states.
"One issue for taxpayers in the UK is that it matters how the
claim made from the outset. Compound interest can be claimed as
part of a restitutionary claim at the High Court, but compound
interest is not available for a repayment claim under the
statutory VAT rules, whether the claim is based on EU law or UK
domestic law. The High Court in Littlewoods has said that the
statutory claim excludes claims in the High Court, and the ECJ
says that the legal system only needs to ensure the remedy
available is equivalent for EU and domestic claims," said
Littlewoods is the UK's lead VAT compound interest
case and its final determination in the UK High Court will
impact several other cases.
An HMRC spokesman said: "The European Court has today
confirmed there is no European law requirement for compound
interest. It is now up to the UK courts to decide the
appropriate type and amount of interest.
"HMRC's position remains that the payment of simple interest is
correct for refunds on overpaid VAT."