Compound Interest in UK Law

I also agree with Lord Nicholls that the loss on the late payment of a debt may include an element of compound interest. But the claimant must claim and prove his actual interest losses if he wishes to recover compound interest, as is the case where the claim is for a sum which includes interest charges.

In the nature of things the proof required to establish a claimed interest loss will depend upon the nature of the loss and the circumstances of the case. Or the loss may be loss of an opportunity to invest the promised money. Here again, where the circumstances require, the investment loss may need to include a compound element if it is to be a fair measure of what the plaintiff lost by the late payment. Or the loss flowing from the late payment may take some other form.

Chancery courts had further regularly awarded interest, including not only simple interest but also compound interest, when they thought that justice so demanded, that is to say in cases where money had been obtained and retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position.

Those judgments show that, in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit. The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.

I confirm that I remain of the same opinion, and I would therefore answer the comparable question in the present case in Littlewoods' favour. The Revenue did not, of course, concede the point before me, but recognised that it would be more sensible to reserve it for a higher court since I had so recently considered it myself and decided it against them.

Since the award of compound interest to PAC by the courts below was based on the application of the reasoning in Sempra Metals which we have disapproved, it follows that HMRC succeed on Issue II, and PAC's claims to compound interest under categories (b) and (c) must be rejected. PAC's claim to compound interest under category (a) would also have been rejected, if it had not been accepted by HMRC.

It is also striking, as the Commissioners have forcefully submitted, that there is no clear statement by the ECJ, whether in FII or any subsequent case, that the former settled jurisprudence has been changed by the formulation of the San Giorgio principle in paragraph 205 of the ECJ's judgment in FII, and that, in cases of overpayment as much as cases of premature payment, the San Giorgio principle requires the recipient to pay compensation for the time value of the wrongful retention of tax when it was not lawfully due.