Littlewoods Ltd & Ors v HM Revenue and Customs

A statutory scheme providing simple interest on overpaid VAT excludes common law restitutionary interest claims as a matter of domestic law. Where the tax was levied contrary to EU law, however, the taxpayer is entitled to reimbursement of the loss caused by the unavailability of its money. An adequate indemnity depends on all the circumstances and does not invariably require compound interest.

If the statutory scheme fails that standard, its exclusionary provisions must be disapplied. The court cannot restrict the taxpayer to selected domestic causes of action. In valuing unjust enrichment, objective use value is the starting point. A defendant may establish a lower actual benefit, but the circumstances may justify retaining the objective measure.

Littlewoods overpaid about £204 million in VAT between 1973 and 2004. HMRC repaid the principal and statutory simple interest under section 78 of the Value Added Tax Act 1994. Littlewoods claimed approximately £1 billion more as restitution for the time value of the overpayments.

Vos J determined liability issues in Littlewoods (No 1), [2010] EWHC 1071 (Ch), and referred questions to the Court of Justice. Following that court's ruling, Henderson J decided the remaining liability and quantum issues in Littlewoods (No 2), [2014] EWHC 868 (Ch). HMRC appealed and Littlewoods cross-appealed.

The principal questions concerned statutory exclusion of restitutionary claims, the EU requirement of an adequate indemnity, conforming construction or disapplication, the domestic remedies available after disapplication, and the proper valuation of HMRC's benefit.

1. Disposition. HMRC's appeal and Littlewoods' cross-appeal were dismissed. Henderson J had made no material error on the issues before the court.
2. Domestic statutory scheme. Section 80 of the Value Added Tax Act 1994 created the exclusive means of recovering the principal amount of overpaid VAT. Section 78 formed a coherent and, subject to its express reservation, exhaustive code for compensating taxpayers for the time value of overpayments caused by official error. The reservation for other liabilities to pay interest preserved other interest regimes. It did not preserve a later-developed restitutionary claim for the time value of money. Littlewoods' common law claims were therefore excluded as a matter of domestic law: paras [31]–[50].
3. Adequate indemnity under EU law. EU law required reimbursement of the loss caused by the unavailability of money paid as unlawful tax. It did not merely require a remedy bearing the label “interest”. Whether national rules supplied an adequate indemnity depended on all the circumstances of the individual case. The standard did not invariably require compound interest, and appropriately calculated simple interest could suffice. In this case section 78 deprived Littlewoods of an adequate indemnity: paras [93]–[108].
4. Disapplication and remedies. A construction preserving the restitutionary claims would contradict a cardinal feature of sections 78 and 80 and go against the grain of the legislation. The exclusionary provisions therefore had to be disapplied. Once disapplied, the court retained its ordinary domestic procedural role and had no power to select only one effective cause of action. Littlewoods could rely on both its Woolwich claim and its mistake-based claim, subject to their respective limitation rules: paras [118]–[142].
5. Valuation of enrichment. The normal measure was the objective use value of the money, adjusted to the defendant's circumstances. A defendant could prove that its actual benefit was lower, but HMRC's evidence did not justify departing from objective use value here. Government could choose how to use the receipts, and public expenditure was difficult to value. The benefit was therefore measured by government borrowing rates on a compound basis: paras [181]–[199].
6. Compound interest continued on outstanding accrued interest after repayment of the principal until judgment. HMRC could not belatedly challenge Vos J's finding about the use of the overpayments without properly appealing it or seeking to adduce further evidence: paras [201]–[208].

1. Court of Appeal: In [2015] EWCA Civ 515, dismissed HMRC's appeal and Littlewoods' cross-appeal.
2. High Court, second stage: Henderson J determined remaining liability and quantum issues in Littlewoods (No 2), [2014] EWHC 868 (Ch), substantially in Littlewoods' favour.
3. Court of Justice of the European Union: On the reference ordered by Vos J, the Grand Chamber ruled in Case C-591/10, reported at [2012] STC 1714, on the EU right to interest and the national court's remedial role.
4. High Court, first stage: Vos J determined initial liability issues and ordered the reference in Littlewoods (No 1), [2010] EWHC 1071 (Ch).