VAT and Compound Interest

Those dealing with straightforward VAT input and output calculations may not be aware of the complexities of VAT when it comes to international transactions or the extent to which the European Court of Justice (ECJ) has an influence on more complex VAT questions.

In fact there are numerous occasions on which the UK tax tribunals need to refer tax and VAT matters to the ECJ to obtain a ruling on whether tax treatments comply with EU law. One such instance currently under decision is the calculation of interest payments in respect of overpayment of VAT. In UK law, any interest payment in respect of tax overpayments is deemed to be calculated on a simple interest basis. The ECJ have now been asked to rule on whether under EU law interest in respect of overpaid VAT should be calculated on a compound basis.

The question is further complicated by the need to clarify which court has jurisdiction over this matter with the Tax Tribunal and High Court potentially overseeing different aspects of the one consideration. The foremost case under consideration at present relates to an overpayment of tax by Grattan. In dismissing a claim by HMRC that elements of the case should not be referred to the ECJ, the tax tribunal ruled that “The substance of the question is whether the principle of effectiveness and/or the principle of equivalence would be offended if Grattan had to obtain (if successful in establishing a right to compound interest for overpaid VAT in the first place) part of its claim in satisfaction (to the extent of simple interest) under VATA 1994, ss 78 and 80, and the balance in a restitutionary claim before the English High Court.”

The outcome of the ECJ ruling is awaited with interest. This case highlights the potential complexities of tax matters and the need to consult a tax specialist when dealing with complex questions.

As tax mitigation specialists Newshams are able to give advice on how tax may affect any private or business transaction and how to put in place an effective mitigation strategy.

Contact us now on 020 7470 8820 and ask to speak to a tax adviser about how we can reduce your tax costs or e-mail us at and we’ll get straight back to you.
08 November 2011

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