Partner Article

Compound interest – Treasury ‘cash flow’ and OBR ‘black hole’

A VAT decision awarding interest on a ‘compound’ basis could spell cash flow problems for the Treasury and exposes OBR forecasts to a ‘black hole’.

While the findings of the recent High Court decision in favour of Littlewoods are good news for the many claimants who are seeking payment of compound interest on VAT repayments, it could create difficulties for the Treasury.

Several thousand companies are seeking VAT refund claims dating back to 1973. As such, claims are a result of ‘official error’ in HMRCs’ interpretation on the VAT liability of supplies; the VAT repayments are subject to interest. Historically such interest has been calculated on a ‘simple’ basis.

The High Court recently agreed with Littlewoods’ argument that simple interest is not the appropriate measure of restitution as it does not properly compensate for the loss caused by overpayment of VAT. The only proper remedy was compound interest. This is no mere academic distinction. The repayment was £204m, simple interest was £268m, but compound interest a staggering £1.2bn.

A further decision on compound interest is expected in the next few weeks. If this also goes in the taxpayer’s favour, then it could result in several billion pounds having to be paid out by HMRC.

Announcements over the last few weeks could now be coming back to haunt HMRC. In the Budget it was announced that users of tax avoidance schemes will be required to pay tax upfront and will only get the tax back if it subsequently established that the scheme works.

In relation to VAT reclaims relating to gaming machines, HMRC stated that, as there were now no decisions in the taxpayer’s favour in respect of gaming machines, HMRC would be recovering refunds previous paid out.

But the boot is now on the other foot. If several billion pounds is now repayable to taxpayers as compound interest on historic VAT reclaims, will HMRC adhere to its own protocols and make immediate payments to taxpayers?

If it does, this would result in a ‘black hole’ in the OBR forecasts and could result in a radical adjustment to its latest Economic and Fiscal Outlook. The latest forecast assumes that future litigation successes by HMRC will total £3.6bn over the forecast period - that £3.6bn is now likely to be ‘spent’ on VAT claims alone.

So wait for the announcement of a further £3.6bn of tax raising measures. You have been warned.

This was posted in Bdaily's Members' News section by Baker Tilly .