High Court lets Treasury off the hook on VAT refunds, but appeals loom

Ministers are are breathing a sigh of relief after a landmark High Court ruling appeared to indicate that the Treasury will not have to find billions of pounds to pay additional compensation to businesses it has accepted are owed refunds of value added tax (VAT).

In a test case, brought by Littlewoods, the high street retail chain, the High Court ruled that while HM Revenue & Customs would have to pay interest on the £200m that it has already accepted is owed to the company as a VAT refund, its liability is limited. The bill will now be calculated with simple interest added to the VAT refund, rather than compound interest.

That precedent is set to save the Treasury sizeable sums because the bill for refunds of overpaid VAT already runs into several billion pounds. While money has been set aside to pay compensation for VAT overcharged since 1973 because of an inadvertent breach of European Union law, the Treasury has always insisted it should pay simple, rather than compound interest. Had it lost the Littlewoods case, therefore, the cost of the VAT refunds would have presented taxpayers with potentially huge costs that have not been planned for in ministers' current financial projections.

George Bull, head of tax at Baker Tilly, the accountancy firm, said the ruling was consistent with other judgements handed down in recent months. In particular, a group of motor dealers who had hoped to claim compound interest on tax refunds they are owed was told by the Court of Appeal that they had run out of time to pursue their case.

Despite this, HMRC is not yet in the clear.

Some aspects of the Littlewoods case may yet be appealed to a higher court, with the High Court due to rule next month on whether parts of the judgement should be referred to the European Court of Justice. A related ruling on a different case is also due in the Court of Appeal, where a group of complainants is fighting for compound interest payments on a different basis.

Mr Bull warned: "The Treasury can breathe a sigh of relief following the High Court and Court of Appeal rulings, but the fight is not yet over for taxpayers to assert their right to compound interest." Final clarity on the issue may take as long as two more years to arrive, with the European courts not expected to issue their rulings on the outstanding questions before the end of 2011 or even mid-2012.