After the ruling on Friday, Mr Justice Henderson said that companies should be entitled to compound rather than simple interest on VAT after the government failed to interpret European law properly.
Tax professionals are anticipating an increase in claims over the next few months.
"Any traders who have made reclaims for overpaid VAT will be impacted by this decision and should consider making a claim for compound interest carefully," said Tony McClenaghan an indirect tax partner at Deloitte, UK.
"The principle that awards of compound interest are payable by HMRC to reflect proper commercial compensation is highly significant."
The ruling follows a class action brought by a group of motor dealers who had overpaid VAT on bonuses received from car manufacturers and on the sale of demonstrator cars. They argued that HMRC had incorrectly interpreted VAT law.
Mr Justice Henderson upheld the motor dealers' argument that the EU law principle of effectiveness overrides the UK domestic law provision.
This follows a similar decision by the House of Lords in the Sempra case in July 2007 which looked at compensation for UK subsidiaries of EU parent companies required to pay advance corporation tax when UK subsidiaries of UK parent companies were not required to do so.
"In terms of the law, this decision is bleeding obvious," said one tax lawyer connected to the case. "I can't believe the revenue expected to win. All their estimates for paying out were based on losing the case."
Despite winning the case, the judge ruled that the motor dealers made their underlying claims too late. They knew in 1996 that they could make claims for overpaid VAT, but, on the basis of the law at that time, they felt that claiming was not worth their while as claims cannot be awarded more than six years after a complaint could have been lodged.
"The decision is no doubt rather disappointing for these taxpayers, although they could appeal," said Andrew Loan, a corporate tax partner at law firm Macfarlanes.
This ruling will impact claims made following the Condé Nast case in which the judge ruled that companies were entitled to reclaim any VAT that was overpaid between 1973 and 1996. As a result of the more recent judgement, any payments must be paid with compound interest too, leaving HMRC significantly out of pocket.
"As a rough estimate, I expect the amount to run into the billions," said Stephen Colclough, indirect tax partner, PricewaterhouseCoopers, UK. "We know there are appeals out there and more will come forward because the rewards are so high."
An HMRC spokesperson said: "The Judgment upheld HMRC's view that, as a matter of English domestic law, the statutory scheme in the VAT Act 1994 for the repayment of overpaid VAT (section 80) and the payment of simple interest (section 78) is complete and excludes any other remedy outside the VAT Act."
HMRC declined to comment further.
