The opinion of an Advocate General in the Court of Justice of the European Union makes it unlikely that much of the billions in unpaid interest accrued from overpaid VAT will be passed from the Treasury to taxpayers says a leading law firm.

The case in question, Littlewoods (C-591/10), was heard by the CJEU on 22nd November 2011 says McGrigors ( Advocate General Verica Trstenjak has now delivered her opinion, saying that taxpayers will be unlikely to be able to claim compound interest.

As the judges normally rule in the same direction as AG opinions continues McGrigors, this looks to be the way the decision will go.

Many UK taxpayers had been overcharged VAT by HMRC in breach of EU law with some cases going back as far as 1973.

Any tax overpaid has always been refunded with only simple interest attached, not compound interest. HMRC have always maintained that this is sufficient says McGrigors.

Stuart Walsh, Tax Partner at McGrigors, said “This is a significant blow to thousands of British businesses which are contesting VAT claims. Given the vast sum of money at stake and the parlous state of the public finances, this guidance could provide a major boost to the Treasury’s coffers. The statutory rate of interest paid by HMRC is significantly lower than the base rate and calculated on a simple basis. Taking inflation into account, some taxpayers will have received just a fraction of what they are owed in real terms. Allowing HMRC to pay simple interest below the base rate effectively incentivises it to sit on taxpayers’ money to improve its own cash-flow position. Compound interest would have removed that perverse incentive.

McGrigors, which is representing five lead taxpayers on the issue of compound interest (John Wilkins (Motor Engineers) Ltd. & others v HMRC (“the CIP”)), says that the UK courts will have to follow the guidance of the CJEU.

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