A landmark case means that businesses could get billions back from HMRC in overpaid VAT, writes Stuart Long, solicitor at Howard Kennedy.

A landmark case means that businesses could get billions back from HMRC in overpaid VAT, writes Stuart Long, solicitor at Howard Kennedy.

Following a case brought by two motor traders regarding the payment of excessive VAT over a number of years, on 8 May the High Court ruled that HMRC must pay compound interest to taxpayers on overpaid VAT.

This is in line with the European Commission principle of ‘effectiveness’ which demands that individuals are entitled to reimbursement ‘not only of the tax unduly levied but also of the amounts paid to that state or retained by it which related directly to that tax.’

Effective reimbursement requires that compound interest should be paid, as only this reflects the commercial value of the use of money over time when it was retained. The basis upon which an award of compound interest should be made is calculated by reference to the rates of interest and other terms applicable to government borrowing in the market during the relevant period.

This means that the taxpayer can now claim compound interest as opposed to simple interest – something which could prove very costly for HMRC.

Consequently, all businesses that have overpaid (or under claimed) VAT should ensure that claims are lodged for compound interest as soon as possible, as there are a number of different bases on which claims may be made with correspondingly different time limits. If you think this might apply to your business, seek professional advice now.