In a claim from a motor dealer who had overpaid VAT for several years and reclaimed the VAT overpaid with interest, the High Court has recently ruled that a trader who is due a tax refund for overpaid VAT can, in principle, claim compound interest. This is because European Community law allows it, although UK tax law only provides for simple interest in such cases.  Although the case was lost for other reasons, the judge ruled that ‘Community law does override the otherwise exhaustive and exclusive statutory scheme for the payment of interest on overpaid VAT, where the overpayment arose from breach of directly effective provisions of Community law’.

That is the good news. The bad news is that the judge also concluded that ‘as a matter of English domestic law, the statutory scheme in VATA 1994 for the repayment of wrongly levied VAT and the payment of simple interest thereon is exhaustive and excludes any other remedy’.

If a repayment arises due to the ‘directly effective provisions of Community law’, then compound interest will apply. If this is not the case, simple interest will apply. However, the question as to how compound interest would be calculated is moot and it may well be that the applicable rate might be a lower one which would equate to the calculation of simple interest at a higher rate.