Littlewoods Retail Ltd and Others v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Reed,Lord Hodge,Lord Neuberger,Lord Clarke,Lord Carnwath |
| Judgment Date | 01 November 2017 |
| Neutral Citation | [2017] UKSC 70 |
| Court | Supreme Court |
| Date | 01 November 2017 |
[2017] UKSC 70
Lord Neuberger
Lord Clarke
Lord Reed
Lord Carnwath
Lord Hodge
Appellant/Respondent (HMRC)
Jonathan Swift QC
Andrew Macnab
Peter Mantle
Imran Afzal
(Instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs)
Respondents/Appellants (Littlewoods)
Laurence Rabinowitz QC
Steven Elliott
Maximilian Schlote
Michael Jones
(Instructed by Weil, Gotshal & Manges (London) LLP)
Heard on 3 and 4 July 2017
Lord Reed AND (with whom Lord Neuberger, Lord Clarke and Lord Carnwath agree)
During the period with which this case is concerned, the claimants (whom we shall refer to as "Littlewoods") carried on catalogue sales businesses: that is to say, they distributed catalogues to customers and sold them goods shown in the catalogues. In order to carry on their businesses, they employed agents, who received a commission in return for their services. They could elect to be paid the commission either in cash or in kind. Commission was paid in cash at the rate of 10% of the sales achieved by the agent. Commission paid in kind took the form of goods supplied by Littlewoods, equal in price to 12.5% of the sales achieved by the agent.
As suppliers of goods, Littlewoods were obliged to account to HMRC for the VAT due in respect of their chargeable supplies. Between 1973 and 2004, they accounted for VAT on the supplies which they made to their agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, that is to say by 2.5%. On a correct understanding of VAT law, the taxable amount of the supplies was actually reduced by the entire 12.5% which constituted the agents' commission. Consequently, Littlewoods accounted for and paid more VAT to HMRC than was due.
Between 2002 and 2004 Littlewoods submitted claims to HMRC for the repayment of overpaid VAT in accordance with section 80 of the Value Added Tax Act 1994 ("the 1994 Act"). In 2004, HMRC conceded that VAT had been overpaid, and since then it has been paid on the correct basis.
Between 2005 and 2008, HMRC repaid £205m in accordance with section 80. In accordance with section 78 of the 1994 Act, HMRC also paid interest on the amount repaid. The interest was calculated on a simple basis, as section 78 required, and totalled £268m.
In these proceedings, commenced in 2007, Littlewoods seek additional interest, calculated on a compound basis, on the ground that such interest is due under the common law. The additional interest totals £1.25 billion. The amount involved is so enormous because, under the law of limitation applicable to common law claims, the ordinary limitation period of six years does not begin to run, where an action is for relief from the consequences of a mistake, until the claimant has discovered the mistake or could with reasonable diligence have discovered it: Limitation Act 1980, section 32(1)(c). Littlewoods maintain that the period over which the interest has to be compounded, on that basis, is over 40 years.
A further 5,000 claims for compound interest in connection with VAT or other taxes are stayed pending the resolution of these claims. The total amount involved in relation to VAT claims is estimated by HMRC at £17 billion.
The claims for compound interest are made on two bases. First, it is argued that HMRC are under a liability to make restitution on the basis that they were unjustly enriched by payments made under a mistake of law, applying the principle established in Kleinwort Benson Ltd v Lincoln County Council [1999] 2 AC 349 and Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs [2006] UKHL 49; [2007] 1 AC 558. Although the payments have been reimbursed in accordance with section 80, it is argued that compound interest remains due at common law as restitution of the use value of the money mistakenly paid, applying the principle established in Sempra Metals Ltd v Inland Revenue Comrs [2007] UKHL 34; [2008] AC 561.
Secondly, it is argued that HMRC are in any event liable to make restitution on the basis that they were unjustly enriched by payments of undue tax, applying the principle established in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70, as explained in Test Claimants in the FII Group Litigation v Revenue and Customs Comrs [2012] UKSC 19; [2012] 2 AC 337. On that basis also, it is argued that compound interest remains due under the principle established in Sempra Metals. Woolwich-type claims are only advanced, however, in respect of compound interest on overpayments made within the six years preceding issuance of the claim forms, in view of the limitation period applicable to such claims, and are therefore much more limited than the mistake-based claims.
Littlewoods contend that these common law claims are not excluded by sections 78 and 80 of the 1994 Act, as a matter of statutory construction. They also contend that, in any event, they have a right under EU law to compound interest on tax levied contrary to EU law. On that basis, they contend that, even if their claims to compound interest would otherwise be excluded by the provisions of the 1994 Act, the statute must be disapplied, or interpreted in such a way as to permit the claims to be made.
A trial on liability was held before Vos J. In his judgment, he held that, as a matter of statutory construction, the claims were excluded by sections 78 and 80 of the 1994 Act: [2010] EWHC 1071 (Ch); [2010] STC 2072. He also held that the question whether the exclusion of the claims by those provisions was contrary to EU law should be referred to the Court of Justice of the EU. In a subsequent judgment, he determined the questions to be referred, and made the order for reference: [2010] EWHC 2771 (Ch); [2011] STC 171. At the same time, he made a declaration that the claims were, as a matter of English law and without reference to EU law, excluded by sections 78 and 80 of the 1994 Act.
The questions referred were the following:
Question 1:
Where a taxable person has overpaid VAT which was collected by the member state contrary to the requirements of EU VAT legislation, does the remedy provided by a member state accord with EU law if that remedy provides only for (a) reimbursement of the principal sums overpaid, and (b) simple interest on those sums in accordance with national legislation, such as section 78 of the Value Added Tax Act 1994?
Question 2:
If not, does EU law require that the remedy provided by a member state should provide for (a) reimbursement of the principal sums overpaid, and (b) payment of compound interest as the measure of the use value of the sums overpaid in the hands of the member state and/or the loss of the use value of the money in the hands of the taxpayer?
Question 3:
If the answer to both questions one and two is in the negative, what must the remedy that EU law requires the member state to provide include, in addition to reimbursement of the principal sums overpaid, in respect of the use value of the overpayment and/or interest?
Question 4:
If the answer to question 1 is in the negative, does the EU law principle of effectiveness require a member state to disapply national law restrictions (such as sections 78 and 80 of the Value Added Tax Act 1994) on any domestic claims or remedies that would otherwise be available to the taxable person to vindicate the EU law right established in the Court of Justice's answer to the first three questions, or can the principle of effectiveness be satisfied if the national court disapplies such restrictions only in respect of one of these domestic claims or remedies?
What other principles should guide the national court in giving effect to this EU law right so as to accord with the EU law principle of effectiveness?
The Court of Justice (Grand Chamber) ("CJEU" or "the court") examined the questions together, and reformulated them as asking "in essence, whether, in a situation such as that at issue in the cases in the main proceedings, in which an amount of VAT overpaid by reason of non-compliance with EU law has been repaid to the taxpayer concerned, it is in accordance with EU law for national law to provide for the payment of only 'simple' interest on that sum, or whether EU law requires national law to provide for payment of 'compound interest' as a counterpart for the value of the use of the overpaid sums and/or the loss of the value of the use of the latter or for another method of reparation which, in that latter case, the court is asked to specify": ( Case C-591/10) [2012] STC 1714, para 22. The court answered the question as follows at para 35:
"European Union law must be interpreted as requiring that a taxable person who has overpaid value added tax which was collected by the member state contrary to the requirements of European Union legislation on value added tax has a right to reimbursement of the tax collected in breach of European Union law and to the payment of interest on the amount of the latter. It is for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum must bear 'simple interest', 'compound interest' or another type of interest."
The High Court proceedings then resumed before Henderson J, who heard a trial of all outstanding issues. In his judgment, he held that Littlewoods' claims succeeded in full: [2014] EWHC 868 (Ch); [2014] STC 1761. In particular,...
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