QUESTION: My company overpaid VAT for many years on a mistake that was in breach of EU law. We submitted repayment claims and we have recently been advised that the interest we are paid back from HMRC will be taxed at 45 per cent. Why is this?
ANSWER: HM Revenue and Customs (HMRC) will charge corporation tax at a special rate of 45 per cent on any interest it is required to pay to taxpayers who overpaid tax under 'a mistake of law'. This new rate was a last minute amendment to the Summer Finance Bill.
The move comes in response to a Court of Appeal judgment in May that said compound interest should be paid to catalogue company Littlewoods on overpaid VAT.
Littlewoods had mistakenly overpaid VAT on sales dating back to 1973, when VAT was introduced, because it did not deduct the commission it paid to agents who collected sales from its customers from the value of those sales. HMRC has already repaid the VAT together with simple interest.
This new amendment to the legislation introduces a new rate of 45 per cent corporation tax applicable to restitution interest, instead of the current ‘normal’ 20 per cent rate for corporation tax.
Restitution interest is broadly defined as any element of a restitution award (ie a payment made by HMRC to a company following a Common Law claim in relation to tax paid ‘under a mistake of law’ – ie where HMRC has acted unlawfully) representing compensation for the time value of money.
The government is concerned about the cost to it of paying restitution interest on Fleming type claims, so has hurriedly sought to limit the damage. This change is also intended to reflect the fact that restitution interest is generally calculated on a compound basis, although the higher corporation tax rate will also apply to simple interest paid in restitution.
These new provisions will not apply to any element of the award that represents the repayment of overpaid tax, nor does it apply to any interest payment made by HMRC under its statutory provisions. These new provisions also include anti-avoidance measures to prevent companies avoiding the charge by, for example, transferring the right to the claim to a person not chargeable to corporation tax.
This increased rate of corporation tax will take effect in relation to payments of restitution interest in respect of awards that are finally determined on or after October 21 past.
This change will impact upon disputes with HMRC over the treatment of cross-border transactions which breach EU law, current high profile cases including Littlewoods v HMRC (where compound interest was claimed on the repayment of VAT, and the Court of Appeal found in favour of the taxpayer earlier this year) and Prudential v HMRC (the controlled foreign company and dividend group litigation case, where the High Court found in favour of the taxpayer earlier this year).
These new provisions are likely to be challenged as groups will claim that their reduced net receipts will no longer represent adequate compensation for their losses. As many claims for restitution interest resulted from the failure to implement EU law properly, further challenges under EU principles are likely to follow. Perhaps, all is not lost!
:: Feargal McCormack (f.mccormack@ pkffpm.com) is managing partner of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
