The Court of Appeal in Littlewoods: compound interest claim upheld

The eagerly awaited Court of Appeal judgment in Littlewoods Retail Ltd and others v HMRC [2015] EWCA Civ 515 was given on 21 May (and reported in Tax Journal, 28 May 2015). HMRC appealed against certain findings by Vos J in Littlewoods No.1 [2010] STC 2072 and by Henderson J in Littlewoods No. 2 [2014] STC 1761. A reference had been made in Littlewoods No. 1. In July 2012, the CJEU decided, in case C-591/10 (‘Littlewoods CJEU’), that Littlewoods had an EU law right to ‘an adequate indemnity for the loss occasioned through the undue payment of VAT’: see [2012] STC 1714.

 

The Court of Appeal has now held, in a judgment delivered by Arden LJ, that there are no reasons to disturb the findings of Henderson J. Accordingly, Littlewoods was entitled to succeed in its restitutionary claim and recover compound interest on VAT overpaid between 1973 and 2004. The key issues fell under two main heads: first, the legal route to remedy (see paras 15 to 142) and, secondly, calculation of the appropriate quantum (see paras 143 to 208).

 

As previous decisions had consistently held, the only route for a taxpayer to recover overpaid VAT is through the mechanism of VATA 1994 s 80. Subsection (7) excludes all other remedies, including at common law. Section 78 requires HMRC to pay interest on VAT overpayments in cases of official error at a statutory rate calculated on a simple basis.

 

Although HMRC had repaid the principal sums of VAT and statutory interest, Littlewoods contended this was not an adequate indemnity under EU law. Section 78 imposes the obligation on HMRC to pay statutory interest ‘if and to the extent they would not be liable to do so apart from this section’. This statutory proviso is referred to as ‘the s 78 reservation’.

 

HMRC argued before Henderson J that s 78, together with s 80, excludes all other remedies for the refund of overpaid VAT and interest.

 

Littlewoods argued that the s 78 reservation preserved other remedies, such as an action for restitution at common law; alternatively, that a conforming interpretation of s 78 should be adopted to protect rights derived from EU law, namely the right to an adequate indemnity. On Littlewoods’ argument, this equated to interest calculated on a compound, not a simple, basis.

 

The Court of Appeal upheld Henderson J’s conclusions for essentially the reasons which he gave. Sections 80 and 78 are intended as a coherent code for the recovery of overpaid VAT and interest. A cardinal feature of the statute is that HMRC should pay simple interest at a statutory rate. As the right to interest attaches to the repayment of principal, it followed that s 80(7) also took away any claim for interest at common law.

 

The s 78 reservation, properly construed, did not assist. Nor was a conforming interpretation of s 78 possible, since this would go against the grain of the statutory code: see Monro v HMRC [2009] Ch 69. It followed from this that Littlewoods’ EU law rights could only be asserted by a disapplication of ss 78 and 80.

 

Notwithstanding Littlewoods CJEU, the parties remained diametrically opposed on the extent of the EU right in play. HMRC argued it was clear from the opinion of Advocate General Trstenjak that the principle of effectiveness was satisfied provided the member state paid interest that was not so low as to deprive the EU law right of any substance; she had strongly hinted that a payment of statutory interest of £268m was substantial and therefore gave an adequate indemnity; and the CJEU had followed her opinion.

 

The Court of Appeal, however, upheld Henderson J’s conclusion, namely that the CJEU had adopted a different formulation from the advocate general’s, supported by subsequent case law: see Imirie [2013] STC 1321 (C-565/11) and British Sugar (joined cases C-113/10, C-137/10 and C-234/10), CJEU judgment dated 27 September 2012.

 

The claimant is entitled to reimbursement of the amounts paid to the state or retained by it, including losses constituted by the unavailability of sums of money.

 

The correct question is not: is the indemnity substantial? But: is it adequate in all the circumstances? The circumstances of Littlewoods’ case, were exceptional. The overpayments had extended over 30 years, during a period when high interest rates generally prevailed.

 

How should the statutory code be disapplied?

 

The court upheld Henderson J’s conclusion that EU law did not permit a selective disapplication. The significance of this was that Littlewoods could choose to rely on either type of common law restitution, the ‘Woolwich’ cause of action (subject to a six year time limit) and an action based on mistake (where the time limit under Limitation Act 1990 s 32(1)(c) is six years calculated from the date the mistake was discovered or could with reasonable diligence have been discovered). 

 

On the question of quantum, four distinct sub-issues arose: 

 

(a)   what rate of interest should be awarded?;

(b)   should it be compounded?;

(c)   for what period should it run; and

(d)   how should the overpayments be treated in relation to government finance? 

 

As regards (a) and (b), Littlewoods’ claim was founded on restitution. A key principle is that such a claim is not compensatory in nature but is based on restoring to the claimant the benefit obtained by the defendant.

 

Accordingly, Littlewoods did not seek a market rate of interest. Instead, the debate revolved around whether the benefit enjoyed by HMRC was to be assessed objectively or by reference to the actual use which the government made of the overpayments. If the latter approach was correct, it was open to HMRC to argue ‘subjective devaluation’ (sometimes called a ‘defendant-focused rate’), which would have the effect of reducing the claim.

 

Henderson J took a restrictive view. The Court of Appeal, however, undertook a further analysis of the opinions of a divided House of Lords in Sempra Metals Ltd v IRC [2007] STC 1559 and of the Supreme Court judgments in Benedetti v Sawaris [2013] UKSC 50.

 

The court concluded that, for the purposes of the domestic law of restitution, the presumption in favour of using an objective rate could be rebutted by evidence of actual use, particularly in cases where the defendant is an involuntary recipient of the benefit. It would be unfair to order a defendant to restore a benefit of no subjective value.

 

In the present case, however, HMRC was not to be treated as an involuntary recipient. Moreover, Henderson J found that any saving on government borrowing had been used for expenditure in the following year rather than reducing the level of borrowing. According to the Court of Appeal, it was a fair assumption that money spent on public projects was money well spent. HMRC did not seek to argue otherwise. The appropriate rate, therefore, should be based on the objective value of the use of money over time.

 

This has the advantage of simplicity and certainty. Henderson J had gone on to decide that, in any event, use of a defendant-focused rate would not comply with the EU law principle of effectiveness. Unsurprisingly, in view of its conclusions on (a) and (b), the Court of Appeal did not find it necessary to decide this point.

 

As to (c), the period for which interest runs must be calculated from the date of overpayment to the date of judgment. Loss of use of the interest itself continued even after the principal sums had been repaid. HMRC’s reliance on Imirie on this point was misplaced. The court also rejected HMRC’s attempt to overturn Vos J’s conclusion that the VAT overpayments should be treated as reducing government borrowing at the end of the year in which they were received. Henderson J had doubted this was correct and HMRC had seized upon this obiter dictum to support its case. Crucially, however, Vos J’s conclusion was a finding of fact based on the evidence before him. The Court of Appeal robustly concluded that it was too late for HMRC to go behind that finding or to seek to adduce new evidence.

 

On each of the issues before it, the Court of Appeal upheld the result reached by Henderson J. The case demonstrates, however, that HMRC will fight hard on every point and deploy complex and sophisticated arguments. A further appeal to the Supreme Court must be a possibility. The case involves points of law of considerable public importance and it would be surprising if the court did not grant permission to appeal. A further period of uncertainty is inevitable.

 

In the meantime, action points for businesses and their advisers remain as before. In particular, they should:

 

Finally, let us suppose the Supreme Court hears an appeal. It concludes, for example, that the scope of the EU law principle of effectiveness is not acte clair in light of the tension between objective and subjective valuation of benefit.

 

As the national court of last resort, the Supreme Court would be bound to make a further reference to the Court of Justice in Luxembourg: see art 267 of the Treaty on the Functioning of the European Union. This drama could all be played out against the backdrop of a referendum on whether the UK should remain a member of the EU.

 

A thought to conjure with, perhaps, for all concerned?