Littlewoods overpaid VAT to HMRC between 1973 and 2004. Between 2005 and 2008, HMRC repaid the principal sum of £205m, together with simple interest of £268m.

At the Supreme Court, Littlewoods was seeking additional interest, on the ground that such interest is due under the common law of restitution, either as restitution for a mistake of law, or as restitution of tax unlawfully demanded. [Littlewoods Ltd and others (Respondents) v Commissioners for Her Majesty’s Revenue and Customs (Appellant); Littlewoods Ltd and others (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) [2017] UKSC 70].

The two issues for the Supreme Court were whether Littlewoods’ common law claims are excluded by sections 78 and 80 of the Value Added Tax Act 1994 as a matter of English law, and without reference to EU law. The lower courts found that Littlewoods’ common law claims were barred by the 1994 Act, and Littlewoods was appealing this issue.

Secondly, the Supreme Court also had to decide if Littlewoods’ claims for compound interest are excluded by sections 78 and 80 of the 1994 Act, whether that exclusion is contrary to EU law, in light of the Court of Justice of the European Union’s (CJEU) judgment in Case C-591/10 Littlewoods.  The lower courts had found that denying compound interest was contrary to EU law, and HMRC had appealed to the Supreme Court on this issue.

On the first point, the judges said the right to interest in section 78 is subject to certain limitations, including a limit on HMRC’s liability to pay interest to cases of error by HMRC and the requirement to calculate interest on the simple rate, not the compound rate.

The Supreme Court found that these limitations would be defeated and rendered effectively pointless if it were possible for the taxpayer to bring a common law claim, and that in addition the type of common law claim made by Littlewoods was not recognised at the time the 1994 Act was drawn up.

The ruling stated: ‘Those limitations are a special feature of the statutory regime and would have no equivalent in a common law claim. They would therefore be defeated if it were possible for the taxpayer to bring a common law claim. Parliament cannot have intended the special regime in section 78 to be capable of circumvention in that way.’

As regards the second point, the Supreme Court said the CJEU has given member state courts a discretion to provide reasonable redress in the form of interest in addition to the principal sum. The judges argued the lower courts had read too much into the phrase ‘adequate indemnity’ in the CJEU judgment.

The ruling stated: ‘In our view, there is no requirement in the CJEU’s jurisprudence that the value which the member state, by the award of interest, places on the use of money should make good in full the loss which a taxpayer has suffered by being kept out of his money.’

As a result, the Supreme Court dismissed Littlewood’s claim under common law and also found in favour of HMRC over the question of whether or not EU law required compound interest to be paid.

The ruling concluded: ‘Littlewoods have already recovered overpaid tax, and interest on that amount, going back several decades.

‘The size of that recovery reflects a combination of circumstances which could not have occurred in most of the other EU member states: the retroactive nature of a major development of the common law by the courts, so as to allow for the first time the recovery of money paid under a mistake in law, and the inability of the legislature to respond to that development, under EU law, by retroactively altering the law of limitation so as to protect public finances.

‘The resultant payment of interest cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity, in the sense in which that expression should be interpreted.’

Dominic Stuttaford, head of tax, Europe, Middle East, Asia and Brazil, at law firm, Norton Rose Fulbright, said: ‘In one of the largest tax disputes to go to court today to-date, HMRC will unsurprisingly be pleased with today’s outcome; it is not only the amount at stake in this particular instance but also the number of other EU-related claims for compound interest.

‘The saving for the Exchequer will be enormous, estimated to be over £17bn for claims relating to VAT repayments standing behind this case. Notwithstanding that, if the judgment had gone against HMRC, the effect would have been diluted by the fact that the interest would have been subject to 45% tax.’

This view was endorsed by Andrew Hubbard, tax consultant at RSM, who said: 'This Supreme Court judgment will be an immense relief to HMRC – and to the UK taxpayer. The latest HMRC accounts revealed there were 19 ongoing cases in which HMRC was potentially liable to make tax repayments exceeding £100m - with the total contingent liability reaching almost £19bn.

'The Littlewoods case was by far the biggest and this judgment will effectively put a stop to a potential 5,000 follow-up claims for repayment of compound rather than simple interest.

‘This case has been ongoing for years and has no doubt caused many sleepless nights for the incumbent chancellors. I wouldn’t be surprised if champagne corks are heard popping in the Treasury as a result.’

Littlewoods Ltd and others (Respondents) v Commissioners for Her Majesty’s Revenue and Customs (Appellant); Littlewoods Ltd and others (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) [2017] UKSC 70 is here.

Report by Pat Sweet