As of the 21st October 2015, if a company receives restitution from HMRC, the interest element of that award is subject to a special rate of Corporation Tax of 45 per cent – far higher than the normal rate of 20 per cent.
The legislation came in response to a ruling from the Court of Appeal upholding a High Court ruling that Littlewoods, the now defunct retailer, was entitled to compound interest on VAT it had overpaid to HMRC.
The company had already been repaid the principal VAT sum with simple interest (interest only on the principal sum and not “interest on interest”), but the court ruled that the “adequate indemnity” should be compound interest at the rate at which the government could have borrowed on the gilt market over the period.
HMRC have now been ordered to pay £1.2 billion to the company and are appealing to the Supreme Court – hardly surprising given the sum at stake.
The Court of Appeal made it abundantly clear that the ruling does not mean that compound interest is required to provide an “adequate indemnity” in all circumstances, but regardless of the intricacies of VAT law, the government’s response sets a dangerous precedent.
It’s difficult to see this as anything but a cynical money-grabbing exercise from a government concerned that the Littlewood’s ruling will open the floodgates to similar claims – HMRC’s “worst case” estimate of payments is £42.8 billion. Regardless of the cost to the public purse, how big the companies are or how rich the owners may be, the judiciary has ruled that HMRC’s interpretation of the law was wrong and the government should accept this.
By charging an arbitrary and extremely high rate of Corporation Tax on restitution interest, HM Treasury is effectively circumventing the courts.
The government’s defence of the 45 per rate for restitution interest as opposed to the Corporation Tax rate of 20 per cent –that it represents the higher rates of Corporation Tax that applied at the time of the VAT overpayments– is laughable. The last time the standard rate of Corporation Tax was 45 per cent was more than 30 years ago. Even 20 years ago it was 33 per cent.
This special rate is fundamentally unfair and sends an appalling message to those considering doing business in the UK: the government will charge you punitive rates of tax when they eventually give you what you were wrongfully denied in the first place.
George Osborne’s meaningless deficit reduction targets should not trump the rule of law and this rate should be abolished immediately.