Dorsey London Tax Update - May 2009

Upcoming and Anticipated Dates

FII	Interim Payments (judgment)	19 May 09
Thin Cap Group Litigation	High Court (sufficiently serious breach hearing)	21/22 May 09
Interim Payment Applications	High Court (hearing)	5 Jun 09
FII	Court of Appeal (hearing)	5 Oct 09
Vodafone 2	Court of Appeal (judgment)	Ca Oct 09
ACT Class 4	High Court (trial)	26 Oct 09
CFC & Dividend Group Litigation (portfolio dividend claims)	High Court (remitted trial)	19 Nov 09

Seminars and Presentations

4 Jun 09	Cross Border Group Relief: the Judgment in Marks and Spencer	Dorsey	London
15 Jul 09	Corporate Tax Planning Summit	IBC	London

 

Marks & Spencer (Group Relief): Judgment Seminar 4.30pm 4^th June 2009

A seminar will be held at our offices to discuss the decision of the Lower Tier Tribunal (formerly the Special Commissioners) in the Marks and Spencer group relief case largely in favour of the taxpayer and its implications for other claims.  Speakers include Graham Aaronson QC and Peter Cussons (PwC) with drinks and canapes afterwards.

Should you wish to attend please contact: allan.teresa dorsey.com (+44 207 826 4591).

Compound Interest Generally Available In Community Law Claims

The High Court has concluded in the VIC GLO that there is a general entitlement to compound interest in Community law claims. Clients with potential claims (either VAT or direct tax) for the recovery of tax with compound interest may well wish to consider issuing protective claims now to avoid the same trap as the test claimants in that case whose claims were found in any event to be out of time. Legislation is also intended to restrict rights and time limits to seek the recovery of overpaid tax starting in July 2009.

Please contact kanagasabay.savina dorsey.com or any members of the team if you would like more information.

The Judgment in the "VIC GLO"

The High Court delivered its judgment on 8 May 2009 in the VAT Interest Cars Group Litigation ("VIC GLO") confirming that, for restitution claims for overpaid VAT based on Community Law, compound interest should be paid.

The High Court delivered its judgment on 8 May 2009 in the VAT Interest Cars Group Litigation ("VIC GLO") confirming that, for restitution claims for overpaid VAT based on Community Law, compound interest should be paid.

The VIC GLO, a group of motor vehicle dealers, were claiming repayment of overpaid VAT with simple interest pursuant to Section 78 of the VAT Act 1994 ("VATA") and compound interest following the Sempra Metals case. The claims concerned the repayment of VAT incurred on the onward sale of demonstrator vehicles and on manufacturers’ bonuses. VAT incurred in these circumstances became reclaimable after the ECJ judgments following the ECJ judgments in EC Commission v Italian Republic [1997] STC 1062 and in Elida Gibbs Limited v Customs and Excise Commissioners [1997] QB 499, [1996] STC 1387. Those cases were decided in 1996 and 1997.

This judgment stands as a victory in the compound interest debate but also a cautionary tale for taxpayers in respect of the time limits for submitting overpayment claims as the test claimants were held to be time-barred and consequently their claims were dismissed.

Claims for Compound Interest

The route for reclaiming overpayments of VAT and interest is under the statutory regime of the VAT Act and at the discretion of the Tribunal (Sections 80, 78 and 84(8) respectively). Henderson J, following the Court of Appeal decision in Monroe, held that for claims based on domestic UK law the statutory regime was exhaustive and excluded common law remedies in restitution in the High Court. This means that interest can be awarded only by way of the provisions set out in Section 78 or by the Tribunal, which generally means simple interest. Whilst there have been cases where the Tribunal has awarded compound interest, the decisions are few and far between and sometimes overturned on appeal. The route for reclaiming overpayments of VAT and interest is under the statutory regime of the VAT Act and at the discretion of the Tribunal (Sections 80, 78 and 84(8) respectively). Henderson J, following the Court of Appeal decision in Monroe, held that for claims based on domestic UK law the statutory regime was exhaustive and excluded common law remedies in restitution in the High Court. This means that interest can be awarded only by way of the provisions set out in Section 78 or by the Tribunal, which generally means simple interest. Whilst there have been cases where the Tribunal has awarded compound interest, the decisions are few and far between and sometimes overturned on appeal.

However, Henderson J went on to hold that, for claims based on Community law, the exclusion of High Court restitutionary claims was overriden by the Community law requirement of an effective remedy. Community law required that taxpayers be fully reimbursed with compound interest for breaches of Community Law.

The judgment follows and amplifies the decision in Sempra, where the House of Lords held that compound interest was payable on ACT repayment claims following the Hoechst judgment. The judgment makes it clear that the entitlement to compound interest is generally available under Community law and not just in the restricted circumstances of the Sempra claim.


Time Limits

The basic time limits for submitting restitutionary claims is 6 years from the date the cause of action accrued, generally the date of the overpayment. However if the overpayment is made under a mistake, this period does not start until the mistake is discovered or could be reasonably discovered with due diligence. In the DMG and FII GLO cases the mistake was held not to be discovered until at least the date of the relevant ECJ judgment that had found the tax to be unlawfully levied.

The basic time limits for submitting restitutionary claims is 6 years from the date the cause of action accrued, generally the date of the overpayment. However if the overpayment is made under a mistake, this period does not start until the mistake is discovered or could be reasonably discovered with due diligence. In the DMG and FII GLO cases the mistake was held not to be discovered until at least the date of the relevant ECJ judgment that had found the tax to be unlawfully levied. That approach would not help the test claimants in the VIC GLO who had issued their claims in 2007 well outside 6 years from the dates of the relevant ECJ judgments (1996 and 97). They argued therefore that the mistake was not just as to the liability for the tax but that until the Marks and Spencer case in 2002 (rendering the 3 year cap unlawful) they were also mistaken as to the time period in which they could bring claims. They also argued that they were mistaken in not claiming compound interest until the Sempra case found it was available in 2007. Their claims were within 6 years of those dates.

The Court concluded however that a claim for compound interest on its own cannot be a free standing claim independent of the claim for the overpaid tax itself with simple interest. It has therefore found that, as the mistake as to the time period for claiming compound interest did not cause overpayments of VAT, nor did the mistake as to the availability of compound interest, they are not relevant. The only relevant mistake that VAT was due was discovered following the ECJ’s judgments in 1996 and 97. The claims were therefore out of time.

Implications for both VAT and Direct Tax Claims

VAT

We do not know yet whether the Claimants will appeal. It is arguable that the time limit should be overridden in circumstances where the Claimants were not aware until the date of Henderson J’s judgment that they had a remedy in restitution.

If the Claimants do appeal then a cross-appeal by the Revenue on the compound interest point seems inevitable. The fact that it was upheld as a Community law entitlement is bad news for the Revenue because it means it cannot be reversed by Parliament.

The judgment confirms advice we have previously given that claims for compound interest are not stand-alone claims but should be combined with claims for restitution of the overpayment (or time value if the tax has already been repaid). Where we have already made claims for clients, they have been made on that basis.

Clients considering making new claims should bear in mind that, as the law stands, they must be brought within 6 years of the discovery of the mistake which led to the overpayment of tax, e.g. discovery of the ECJ judgment finding the UK rules unlawful. Clients may wish to review recent developments which have given rise to VAT repayments in the light of the judgment.

Claimants making High Court claims should also consider making parallel statutory claims to cover the eventuality that higher courts uphold the requirement for compound interest claim but insist relief be obtained through the statutory route under Autologic principles. In this way they can be fully protected.

For existing or new claims that are within time there may be the possibility of seeking an interim payment at this stage.

Direct tax

For direct tax claims based on EU law the judgment is helpful because it establishes that entitlement to compound interest arises from EU law and that the right relates not merely to the calculation of the Hoechst time value component of claims but to claims for interest on overpaid tax in general.