THE TAXMAN could face a bill running into the billions when the European Court of Justice issues its judgment in a case between Littlewoods and the Revenue.
The retailer contests HM Revenue & Customs should pay it compound interest on VAT overpayments that it made between 1973 and 2004. HMRC had paid simple interest on the overpayment refunds, resulting in a much smaller payment.
Should the court rule in favour of Littlewoods, the taxman would be liable for an extra £1bn in refunds to the high-street chain and could open the door to similar claims from hundreds of other businesses and institutions.
Stuart Walsh, partner at Pinsent Masons, said a ruling against HMRC "could blow a multibillion-pound hole in the government's deficit reduction plans".
He added: "The value of Littlewoods' claim stems from a series of cases culminating in the Fleming case in 2008. These cases resulted in HMRC being made liable to repay, in full, VAT overpayments dating back to 1973 when VAT was first introduced; HMRC had previously capped these repayments, which was declared unlawful.
"The Littlewoods case will see if those payments should have been made with simple or compound interest."
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