It was hoped that a recent European Court of Justice (ECJ) decision would finally resolve the question of whether simple interest was an effective remedy in the context of claims by taxpayers for repayment of VAT which had been incorrectly charged (Littlewoods Retail Ltd & Ors v HMRC, C-591/10). Instead, the decision has left taxpayers frustrated, as the ECJ decided that the question should be answered by the national courts, which seem divided over this issue.

Between 1973 and 2004, the taxpayer overpaid VAT on supplies relating to its catalogue-based home shopping business, which involved selling goods through a network of agents. The taxpayer claimed repayment of the overpaid VAT under section 80 of the Value Added Tax Act 1994 (VATA) (section 80). HM Revenue & Customs repaid that VAT together with simple interest pursuant to section 78 of VATA (section 78). VATA does not provide for the payment of compound interest.

In order to claim compound interest, the taxpayer brought a claim for restitution in the High Court on two grounds: an unlawful demand (pursuant to the principles laid down in Woolwich Equitable Building Society v IRC [1992] STC 657); and a mistake of law (based on the principle established in Deutsche Morgan Grenfell Group plc v IRC [2007] STC 1).

The High Court considered whether:

The court provisionally found that the statutory remedy provided by VATA was an exclusive regime for the recovery of interest and provisionally decided that EU law did not require the disapplication of section 78 and the payment of compound interest.

If EU law did require an award of compound interest, section 78 could not be construed in accordance with EU principles and so that section should be ignored in order to give effect to the EU law right to bring a claim on the grounds of an unlawful breach (but not a mistake of law).

The court referred a number of questions to the ECJ, including whether or not the current remedy provided in sections 78 and 80 accords with EU law, and if not, whether compound interest should be payable instead.

The ECJ confirmed that, where an EU member state has charged tax in breach of EU law, taxpayers are entitled to repayment of that tax together with interest. It was for the national court to decide the conditions on which such interest would be paid, subject to the EU principles of effectiveness (the conditions imposed must not render the right to payment virtually impossible or excessively difficult) and equivalence (the conditions imposed on EU infringement claims must not be less favourable than those relating to similar domestic claims).

Effectiveness. The ECJ gave guidance to the national court that the question is whether, looking at all the circumstances, simple interest would deprive the taxpayer of an adequate indemnity for the loss arising as a result of the undue payment of tax. Frustratingly, the ECJ did not go any further on this point (unlike the Advocate-General (AG), who considered that the effectiveness test had been met).

However, the ECJ noted that the taxpayer had received simple interest equating to more than 23% of the unlawfully charged VAT, perhaps indicating that the taxpayer had already been compensated by the simple interest.

The AG had opined that there would only be a breach of the principle of effectiveness if the remedy was so low that it largely deprives the interest claim of substance. This was not the case here as the interest rate payable was calculated by reference to the average base lending rates.

Equivalence. The ECJ said that it was not necessary to offer taxpayers every cause of action in English law in order for a remedy to be equivalent. It was sufficient to make a cause of action available for claims based on infringements of national law which have a similar purpose and similar essential characteristics to claims based on infringements of EU law.

The High Court will now have to decide whether simple interest, paid in accordance with section 78, is an effective and equivalent remedy. We have seen that there is disagreement at the Supreme Court level as to whether the principle of equivalence requires the unlawful breach and mistake of law remedies to be available to a claimant (Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19; www.practicallaw.com/3-520-0238), and a further reference to the ECJ has been made on this issue.

On the basis of the AG's opinion, and comments made by the ECJ in relation to the level of the simple interest already paid, there is a significant risk the High Court will find that the principle of effectiveness is satisfied by the payment of simple interest alone.

But, if it does, the taxpayer would be expected to appeal potentially to the Supreme Court, and so this issue may take some time to resolve. It is disappointing that, although the ECJ is consistent in its conclusions that remedies are a matter for the national courts, its judgment does not take us much further.