Retailers hope to bag VAT windfall from European ruling

IT IS JUST A month before the chancellor provides the answers over speculation about what Budget giveaways, if any, the Treasury can afford.

Thousands of UK businesses, however, are hoping for an additional multi-billion pound windfall if the Court of Justice of the European Union, (CJEU) backs taxpayers in a long-running dispute over VAT repayments.

The CJEU will decide whether the retailer Littlewoods (and others), who have overpaid VAT, should receive their rebate from HM Revenue and Customs (HMRC) with compound interest, which is allowed to accumulate over a long period and is worth more than simple interest.

Littlewoods and others argue that their repayment should be paid using compound interest; making its claim worth an estimated £1bn. HMRC says the rebate should be paid using simple interest.

In January, the Advocate General, which advises the European court, gave a legal opinion favouring HMRC. The Advocate General said that although taxpayers are entitled to receive interest on their tax repayments, the details aren't specified under European Union rules - meaning that national tax authorities can decide what type of interest is paid.

Because the Advocate General's opinion is not legally binding the CJEU has to rule on the Littlewoods case.

A lot of money is resting on the court's ruling. Total claims are estimated to be worth billions of pounds because refunds for overpaid or under-claimed VAT can go back decades.

Around 10,000 pending cases in the UK's first-tier tax tribunal - accounting for around half of all claims -- are from businesses claiming compound interest on VAT repayments, according to one tax expert familiar with the tribunal system.

A spokesman for the tax tribunal declined to comment on the number of pending claims for compound interest on VAT repayments.

"VAT is hugely complex," says Nick Warner, VAT partner at accounting firm PKF.

"Sometimes there is a discrepancy between UK and European Union legislation." Disputes are often over whether a business service is subject to VAT or VAT exempt.

If the CJEU makes a clear ruling in favour of HMRC it will kill off most of the claims for compound interest because UK courts will be obliged to follow the court's decision. If the CJEU says that compound interest should be paid on VAT repayments it could leave HMRC with a huge bill.

In 2009, the BBC reported that claims for VAT against the taxman were worth a total of £8.5bn.

The legal battle over VAT repayments dates back to 1996 when the government said that the tax authority would only refund overpayments of VAT backdated for up to three years.The previous limit was six years.

The three-year cap was thrown out following a legal battle that went to European judges and ended at the House of Lords.

The Lords gave companies until the end of March 2009 to make any additional backdated claims, which became known as the Fleming claims (named after an Aston Martin dealer and descendant of James Bond writer Ian Fleming, who fought one of the legal cases).