Opinion: Payment of interest in respect of the delayed repayment of VAT must provide ‘compensation’, time limits and conditions for claims are permitted
Joined cases C-13/18 Sole-Mizo and C-126/18 Dalmandi Mezogazdasági Zrt.
On 11 September 2019 the CJEU delivered the opinion of Advocate General Hogan (AG) in these joined Hungarian referrals which consider the procedures and payment of compensation in respect of the delayed repayment of VAT.
National legislation, which was in force between 1 January 2005 and 26 September 2011, made the refund of excess deductible VAT conditional on the full payment of the transactions having generated the deductible VAT. In the absence of that payment, this excess had to be carried forward to the subsequent tax period, which meant that it was deducted from the amount of VAT to be paid in the subsequent period.
In 2011, the CJEU held that this practice was contrary to Article 183 of the VAT Directive. The legislation was repealed and amended national legislation now allows excess deductible VAT to be refunded without having to wait for the payment of the consideration due.
In December 2016, Sole-Mizo submitted a claim for compound interest on the amounts of excess deductible VAT which had not been repaid on time because of the application of the repealed legislation. The claim was partly accepted but the request for interest to be calculated on a compound basis was refused, the tax authority suggesting that interest should be calculated using a rate corresponding to the simple central bank’s base rate (as an infringement of EU law). Sole-Mizo appealed, asserting that under existing national legislation (for an infringement of national law) the interest to compensate the damage caused by the previous legislation should be calculated at twice the central bank’s base rate, to apply a different rate breached the principles of equivalence, effectiveness and proportionality.
Also, in similar circumstances, in December 2016 Dalmandi submitted a request for payment of interest on the amounts of VAT that had not been repaid on time between 2005 and 2011. Dalmandi’s claim considered the entire period between the due date of the refund for each reporting period concerned and the due date of the refund for the reporting period during which the amending law was adopted. Dalmandi applied, for the purposes of this calculation, a rate of twice the central bank’s base rate. In addition, Dalmandi requested payment of compound interest for the period from 5 December 2011 to the effective payment date.
The tax authority partly accepted Dalmandi’s claim but refused the calculation at twice the central banks rate/additional interest and held that part of the claim for earlier periods was out of time. Dalmandi appealed asserting that the decision is contrary to EU law; namely the principles of equivalence, effectiveness and direct effect.
As well as considering a number of procedural points regarding the timing of claims and associated conditions, the AG has opined that EU law requires, in principle, full compensation. In order to assess the compatibility of the national practice in question with Union law, it is necessary to determine, first, the damage caused and, secondly, whether the compensation provided for by the national practice aims at fully covering the loss and damage incurred. The AG stated that, under the principle of the primacy of Union law, the rate of interest to be applied in order to ensure full compensation should correspond to the one that a taxable person would have paid to obtain from a credit institution the amount corresponding to the excess deductible VAT. The AG also opined that the CJEU in Littlewoods did not intend to depart from this principle of full compensation.
Comments: If followed, this potentially requires compound interest, and certainly higher rates of interest than paid as default interest in the UK (i.e. if followed, the Supreme Court judgment in Littlewoods may be overturned). However, the AG then goes on to consider the Hungarian national law provisions in question if “the Court considers that the compensation required does not have to approach something amounting to full compensation or otherwise disagrees with the foregoing analysis”.
This is an interesting case that may bring compound interest back on the agenda. However, there are hurdles to go through, starting with the view of the CJEU, and then the intersection with the clear judgment of the Supreme Court in Littlewoods that statutory interest is sufficient as a matter of EU law. We can expect HMRC to firmly reject any claims for higher rates of simple interest/compound interest now and to vigorously fight any legal challenges, including looking at time limits and procedural challenges. It is likely that it is now too late to seek compound interest for Fleming repayments (and for those that had compound interest claims before and withdrew them, HMRC may strongly resist any attempts to resurrect them).
Source EY
