Littlewoods Retail Ltd & Ors v HM Revenue & Customs

HMRC could not reopen admitted issues concerning overpaid VAT where doing so would constitute an abuse of process. EU law required an adequate indemnity for the loss of use value of VAT paid contrary to EU law. Simple statutory interest was inadequate on the exceptional facts. Sections 78 and 80 of the Value Added Tax Act 1994 could not be construed compatibly with EU law and had to be disapplied to permit both Woolwich and mistake-based restitutionary claims. The appropriate measure was compound interest reflecting the objective use value of the money, calculated by reference to Government borrowing costs. The claims therefore succeeded in full.

The claimants sought recovery of the compounded use value of VAT paid between 1973 and 2004 on mail-order agency commissions. HMRC had repaid the principal and simple statutory interest under section 78 of the Value Added Tax Act 1994, but the claimants sought further interest. Following an earlier decision of the Court of Appeal and settlements under section 85, HMRC attempted to argue, relying principally on Grattan Plc v Revenue and Customs Commissioners [2013] STC 502, that the VAT had been due. The issues included estoppel and abuse of process, the adequacy of simple interest, the compatibility of sections 78 and 80 with EU law, the available restitutionary causes of action and the proper measure of recovery.

1. Underlying liability. The court was bound by the ratio of Customs and Excise Commissioners v Littlewoods Organisation Plc [2001] EWCA Civ 1542 that the relevant third-party-purchase commission taken in goods was a discount and was not consideration for the agent’s services. Grattan Plc v Revenue and Customs Commissioners [2013] STC 502 did not establish that the VAT in issue had been lawfully due.
2. Estoppel and abuse of process. Although the Caffoor principle applied to the VAT determinations and agreements, HMRC’s attempt to reopen liability was independently an abuse of process. HMRC had accepted the earlier decision, entered into settlements, conceded overpayment at the first trial and proceeded with the EU reference on that basis. Arnold v NatWest Bank Plc [1991] 2 AC 93 supplied no exception, since Grattan Plc was not a sufficiently fundamental change in the law.
3. Adequate indemnity. EU law conferred a right to repayment with interest. The required indemnity had to be broadly commensurate with the loss of use value of the overpaid tax from payment until repayment. Simple interest under section 78 was inadequate, even after allowing for the interest already paid.
4. Domestic remedies. Sections 78 and 80 could not be construed conformably with EU law. They had to be disapplied so that the claimants could pursue both Woolwich and mistake-based restitutionary claims.
5. Quantum. The objective use value of the money was properly measured by compound interest reflecting the Government’s borrowing costs. The Government’s actual use of the money was irrelevant to that objective measure. No deduction was permitted for hypothetical additional corporation tax. The claims succeeded in full.

First instance decision. The judgment records earlier proceedings in the same litigation, including Littlewoods Retail Ltd v Revenue and Customs Commissioners [2010] EWHC 1071 (Ch), but no appeal from the present judgment.