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Procedure.Tax
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S2: Interest to the taxpayer
SDLT: interest on overpaid SDLT
"(1) A repayment by the Inland Revenue to which this section applies shall be made with interest at the rate applicable under section 178 of the Finance Act 1989 for the period between the relevant time (as defined below) and the date when the order for repayment is issued.
(2) This section applies to—
(a) any repayment of tax, and
(b) any repayment of a penalty under this Part.
In that case the relevant time is the date on which the payment of tax or penalty was made.
(3) This section also applies to a repayment by the Inland Revenue of an amount lodged with them in respect of the tax payable in respect of a transaction.
In that case the relevant time is the date on which the amount was lodged with them.
(4) No interest is payable under this section in respect of a payment made in consequence of an order or judgment of a court having power to allow interest on the payment.
(5) Interest paid to any person under this section is not income of that person for any tax purposes." (FA 2003, s.89)
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Interest on overpaid IHT
"(1) Any repayment of an amount paid in excess of a liability for tax or for interest on tax shall carry interest from the date on which the payment was made until the order for repayment is issued at the rate applicable under section 178 of the Finance Act 1989.
(2) Interest paid under this section shall not constitute income for any tax purposes." (IHTA 1984, s.235)
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VAT: interest for HMRC error
"(1) Where, due to an error on the part of the Commissioners, a person has—
(a) accounted to them for an amount by way of output tax which was not output tax due from him and, as a result, they are liable under section 80(2A) to pay (or repay) an amount to him, or
(b) failed to claim credit under section 25 for an amount for which he was entitled so to claim credit and which they are in consequence liable to pay to him, or
(c) (otherwise than in a case falling within paragraph (a) or (b) above) paid to them by way of VAT an amount that was not VAT due and which they are in consequence liable to repay to him, or
(d) suffered delay in receiving payment of an amount due to him from them in connection with VAT,
then, if and to the extent that they would not be liable to do so apart from this section, they shall pay interest to him on that amount for the applicable period, but subject to the following provisions of this section." (VATA 1994, s.78(1))
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Only to the extent of the error
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"(1A) In subsection (1) above—
(a) references to an amount which the Commissioners are liable in consequence of any matter to pay or repay to any person are references, where a claim for the payment or repayment has to be made, to only so much of that amount as is the subject of a claim that the Commissioners are required to satisfy or have satisfied" (VATA 1994, s.78(1A)(a))
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Must be claimed in writing
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"(10) The Commissioners shall only be liable to pay interest under this section on a claim made in writing for that purpose." (VATA 1994, s.78(10))
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No interest where repayment supplement applicable
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"(2) Nothing in subsection (1) above requires the Commissioners to pay interest—
(a) on any amount which falls to be increased by a supplement under section 79; or
(b) where an amount is increased under that section, on so much of the increased amount as represents the supplement." (VATA 1994, s.78(2))
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No compound interest
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(1A) In subsection (1) above—
[...]
(b) the amounts referred to in paragraph (d) do not include any amount payable under this section." (VATA 1994, s.78(1A)(b))
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Amount of interest
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"(3) Interest under this section shall be payable at the rate applicable under section 197 of the Finance Act 1996" (VATA 1994, s.78(3))
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Applicable period: output tax paid but not due (within s.80(2A)) or input tax credit not claimed
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"(4) The “applicable period” in a case falling within subsection (1)(a) or (b) above is the period—
(a) beginning with the appropriate commencement date, and
(b) ending with the date on which the Commissioners authorise payment of the amount on which the interest is payable.
(5) In subsection (4) above, the “appropriate commencement date”—
(a) in a case where an amount would have been due from the person by way of VAT in connection with the relevant return, had his input tax and output tax been as stated in that return, means the date on which the Commissioners received payment of that amount; and
(b) in a case where no such payment would have been due from him in connection with that return, means the date on which the Commissioners would, apart from the error, have authorised payment of the amount on which the interest is payable;
and in this subsection “the relevant return” means the return in which the person accounted for, or (as the case may be) ought to have claimed credit for, the amount on which the interest is payable." (VATA 1994, s.78(4) - (5))
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Applicable period: output tax paid but not due (not within s.80(2A))
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"(6) The “applicable period” in a case falling within subsection (1)(c) above is the period—
(a) beginning with the date on which the payment is received by the Commissioners, and
(b) ending with the date on which they authorise payment of the amount on which the interest is payable." (VATA 1994, s.78(6))
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Applicable period: delayed payment
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"(7) The “applicable period” in a case falling within subsection (1)(d) above is the period—
(a) beginning with the date on which, apart from the error, the Commissioners might reasonably have been expected to authorise payment of the amount on which the interest is payable, and
(b) ending with the date on which they in fact authorise payment of that amount." (VATA 1994, s.78(7))
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No interest for delays caused by the taxpayer
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"(8) In determining in accordance with subsection (4), (6) or (7) above the applicable period for the purposes of subsection (1) above, there shall be left out of account any period by which the Commissioners' authorisation of the payment of interest is delayed by the conduct of the person who claims the interest.
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(8A) The reference in subsection (8) above to a period by which the Commissioners' authorisation of the payment of interest is delayed by the conduct of the person who claims it includes, in particular, any period which is referable to—
(a) any unreasonable delay in the making of the claim for interest or in the making of any claim for the payment or repayment of the amount on which interest is claimed;
(b) any failure by that person or a person acting on his behalf or under his influence to provide the Commissioners—
(i) at or before the time of the making of a claim, or
(ii) subsequently in response to a request for information by the Commissioners,
with all the information required by them to enable the existence and amount of the claimant's entitlement to a payment or repayment, and to interest on that payment or repayment, to be determined; and
(c) the making, as part of or in association with either—
(i) the claim for interest, or
(ii) any claim for the payment or repayment of the amount on which interest is claimed,
of a claim to anything to which the claimant was not entitled.]4
(9) In determining for the purposes of subsection (8A) above whether any period of delay is referable to a failure by any person to provide information in response to a request by the Commissioners, there shall be taken to be so referable, except so far as may be prescribed, any period which—
(a) begins with the date on which the Commissioners require that person to provide information which they reasonably consider relevant to the matter to be determined; and
(b) ends with the earliest date on which it would be reasonable for the Commissioners to conclude—
(i) that they have received a complete answer to their request for information;
(ii) that they have received all that they need in answer to that request; or
(iii) that it is unnecessary for them to be provided with any information in answer to that request." (VATA 1994, s.78(8) - (9))
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- Error must not be too remote from overpayment
"[149] Looking at the evidence as a whole, I am not satisfied that the Margin Error was a real cause of the overpayment of VAT on demonstrator bonuses. In my view it is too remote from the overpayment and I cannot say on the balance of probability what motor dealers would have done if the Margin Error had not been made." (Pye Motors Limited v. HMRC [2022] UKFTT 471 (TC), Judge Cannan)
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- Error due to enacting legislation contrary to EU law is error on part of HMRC
"[55] Neither case ultimately adds to the straightforward argument that HMRC have already made (which is also, essentially the basis for the FTT’s analysis), namely that an error of Parliament does not fall within the words of the legislation. As discussed above, that does not take account of the clear EU law context in which the provision must serve duty; that if the FTT’s analysis correct it would result in a significant lacuna in the framework of redress which the Supreme Court made clear was exclusive; and the reality that HMRC is the responsible State body in the relevant field.
[56] We thus agree, as a matter of domestic statutory construction, that the phrase “error on the part of the Commissioners” in s. 78(1), construed in its wider context, is capable of covering the error arising from the enactment of the property condition. We do not therefore need to address the appellants’ further arguments on the need to adopt a conforming interpretation pursuant to the relevant EU law principles." (HBOS Plc v. HMRC [2023] UKUT 13 (TCC), Bacon J and Judge Raghavan)
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Exclusive regime
"[34] In section 78, Parliament has thus created a specific right to interest for taxpayers who have overpaid VAT, but has done so subject to limitations, including those set out in subsections (1), (3) and (11). 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. Unlike section 80, however, section 78 contains no provision expressly excluding alternative remedies. That does not prevent the exclusion of alternative remedies by implication....
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[37] In this context, the aspect of the decision in Sempra Metals which is important is that it was accepted for the first time that a claim would lie at common law for the use value of money by which the defendant was unjustly enriched, even if the money itself had been repaid, and that the enrichment could normally be calculated by compounding interest over the period of the enrichment. That decision was not contemplated by Parliament when it enacted sections 78 and 80, many years earlier. If a claim based on the principle established by that decision were held to be available to Littlewoods, on the basis that it fell within the critical words in section 78(1) (“if and to the extent that they would not be liable to do so apart from this section”), then it would equally be available in any other case where an amount was paid under section 80. As counsel for Littlewoods accepted in argument, section 78 would effectively become a dead letter. It follows that the literal reading fatally compromises the statutory scheme created by Parliament. It cannot therefore be the construction of the critical words which Parliament intended.
[38] Is it possible to construe the critical words more narrowly than their literal sense? What source or sources of a liability to pay interest can Parliament have contemplated, which were to take priority over the liability created by section 78? Given the background which we have explained, such sources can only have been statutory..." (HMRC v. Littlewoods Limited [2017] UKSC 70)
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- Not due to HMRC error where HMRC guidance included proviso
"[140] HMRC represented that demonstrator bonuses would not generally be treated as discounts, but there was a proviso to that general rule and motor dealers would have been aware that there was a proviso. Each case would be looked at on its own merits. On balance, I am satisfied that HMRC would apply the proviso to demonstrator bonuses which were paid in the line of supply. There was therefore no reason that the appellant should have been misled by what was described as the general rule. It could have applied the proviso, or at least queried the position with HMRC. There is no suggestion that the appellant did query the position with HMRC, unlike other motor dealers as recorded in the Burnes Note." (Pye Motors Limited v. HMRC [2022] UKFTT 471 (TC), Judge Cannan)
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VAT interest following successful appeal
(3) Where on the appeal the tribunal has determined that—
(a) the whole or part of any disputed amount not paid or deposited is due, or
(b) the whole or part of any VAT credit paid was not payable,
so much of that amount, or of that credit, as the tribunal determines to be due or not payable shall be paid or repaid to HMRC with interest at the rate applicable under section 197 of the Finance Act 1996.
(4) Interest under subsection (3) shall be paid without any deduction of income tax.
(5) Nothing in this section requires HMRC to pay interest—
(a) on any amount which falls to be increased by a supplement under section 79 (repayment supplement in respect of certain delayed payments or refunds); or
(b) where an amount is increased under that section, on so much of the increased amount as represents the supplement." (VATA 1994, s.85A)
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Overpaid customs duties
“Community Customs Code (Council Regulation 2913/92/EEC) Article 241
Repayment by the competent authorities of amounts of import duties or export duties or of credit interest or interest on arrears collected on payment of such duties shall not give rise to the payment of interest by those authorities. However, interest shall be paid: -
where a decision to grant a request for repayment is not implemented within three months of the date of adoption of that decision, - (referred to in this decision as “the First Exception”)
where national provisions so stipulate, (referred to in this decision as “the Second Exception”)
The amount of such interest shall be calculated in such a way that it is equivalent to the amount which would be charged for this purpose on the national money or financial market”
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Bank of England base rate applied
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"[80] The parties accept that the statutory interest so far paid by HMRC to Xerox under s 127 FA 1999 does not fulfil this definition. The definition at Art 241 is difficult to apply in practice since “the purpose” of this interest charge (compensation for wrongful payment of tax to a government authority) is not something which is generally priced on the national money or financial markets. However, it is clear that the intention is to import a recognised market rate of interest to payments made under Art 241.
[81] Interest rates are decided by reference to commercial factors, including the length of time within which re-payment is to be made, the perceived risk of the lending and the credit rating of the respective parties. On that premise, it is possible to argue that the “market rate” which should be paid under the First Exception of Art 241 should not necessarily be the same as the rate paid under the Second Exception, since the First Exception applies where a revenue authority has failed to repay duty which has been determined to be due within three months, so that any interest payable would be equivalent to a default or late payment rate of interest (likely to be more punitive) whereas payments falling under the Second Exception are merely compensation for time value of money.
[82] Xerox has suggested that the default rate applied in the Air Passenger Duty and Other Indirect Taxes (Interest Rate) (Amendment) Regulations 2020 should be used as a proxy for the calculation of this rate, particularly by reference to the statements of the First-tier Tribunal in the Vividas case.
[83] The interest rates stipulated by these regulations are default rates of interest; they apply in circumstances where taxpayers have failed to make returns and/or make payments of tax.
[84] In my view applying what is a default or late payment rate to interest payments falling within the Second Exception of Art 241 is not appropriate and does not reflect how interest arising “for this purpose” would be “calculated on the national money or financial markets”. More relevant in a non-default type situation is the Bank of England’s overnight money rate, (the Bank of England base rate) referred to by HMRC as “the official bank rate determined by the most recent meeting of the Monetary Policy Committee of the Bank of England” and the rate used as the starting point for commercial lending in the UK.
[85] Art 241 does not give any specific guidance about the period for which interest should be paid, particularly in respect of payment triggered by the Second Exception. However, the parties have accepted that any additional interest under Art 241 should be paid for the same period as that already claimed as statutory interest." (Xerox Limited v. HMRC [2022] UKFTT 92 (TC), Judge Short)
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No EU law right to compound interest
[70] 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...
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[73] 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." (HMRC v. Littlewoods Limited [2017] UKSC 70)
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