Companies to suffer 45% corporation tax on government mistakes

Donald Drysdale By Donald Drysdale for ICAS

17 November 2015

The new 45% rate of corporation tax has been labelled as unfair, explains Donald Drysdale.

New special rate of corporation tax

The Summer Budget of July 2015 heralded an age of unprecedentedly low company tax, with the headline rate promising to fall to 18% by 2020. Nonetheless, the government has furtively introduced a new corporation rate of 45%.

This special rate is charged on amounts of restitution interest which may be paid by HMRC to companies under claims relating to the payment of tax on a mistake of law or unlawful collection of tax. There’s also an obligation on HMRC to withhold the tax due from a payment of restitution interest when made.  These new provisions are contained in the Finance Bill, which is now in final form and expected to receive Royal Assent any day now.  They apply to interest (whenever it accrues) if it arises on a court order or final agreement made on or after 21 October 2015.

Background to the measure

In May 2015 the Court of Appeal ruled in the case of Littlewoods Retail Limited and Others v HMRC. Littlewoods had overpaid VAT from 1973 under a mistake of law, and HMRC had subsequently repaid the principal amounts with statutory interest which was simple rather than compound interest.

In an earlier judgment, the ECJ had held that the EU principle of effectiveness requires that the national rules for calculation of interest should not deprive the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT.  The Court of Appeal then determined that this test had not been satisfied by the payment of simple interest at the statutory rate.

Instead, the Court agreed that in Littlewoods' circumstances an ‘adequate indemnity’ should be compound interest at the rate at which the government could have borrowed in the market over the relevant period. Based on this approach, Littlewoods’ claim for restitution of some £1.2 billion was upheld, based on the difference between the statutory simple interest and an alternative calculation based on compound interest at actual government borrowing rates.

The Court emphasised that the Littlewoods case was of an exceptional nature, having regard to the length of time for which interest was payable and the very high rates of interest which had existed during most of the first half of that period.  Thus the judgment should not have put HMRC in fear of floodgates of further claims.

HMRC’s response

In June HMRC published a Revenue & Customs Brief, setting out their view that the judgment of the Court of Appeal is at odds with both the requirements of EU law and how the UK Parliament intended VAT law to work. They are seeking leave to appeal to the Supreme Court and, in view of the sum involved, it seems likely that this will be granted.

In the meantime HMRC’s Brief reiterated the view of the Court of Appeal that in many cases the statutory simple interest paid would be adequate and no further payments would be due.  For any other claimant to succeed in establishing a right to a higher rate of interest and/or to compound interest, the details of their claim would have to be considered in similar detail in a separate court hearing.

In June, therefore, it seemed that the matter had been resolved to the government’s satisfaction.  But not so!

A change in the law

While Littlewoods may face a further battle before the Supreme Court, the government has now decided to protect their position against other claims.  They have done so by introducing a late amendment to the Finance Bill at the Report Stage, allowing no time for any effective Parliamentary debate on the measure.

Now, if a restitution award is made, whether by a court judgment or an agreement, the interest element of the award is chargeable to corporation tax at the special rate of 45% instead of the normal rate of corporation tax (currently 20%).  The 45% rate is not charged on any element of the award that represents the repayment of overpaid tax, nor does it apply to simple interest paid by HMRC under the pre-existing statutory provisions.

Is the 45% rate justifiable?

The government claims that the new 45% rate reflects the higher rates of tax that applied historically over the period to which typical awards relate – for example, the main rate was 52% from 1973 to 1982 inclusive.  They also argue that the 45% rate is appropriate because the compound interest is not taxed annually as it accumulates.

This argument might be sustainable if all restitution awards, like that claimed by Littlewoods, dated back to 1973 – when the UK joined the EEC (as it then was) and first implemented VAT.  However, restitution claims typically arise in disputes where HMRC’s treatment of cross-border transactions allegedly breached EU law, and may relate to taxes other than VAT (for example, corporation tax).  Many relate to periods from the 1990s onwards, and since 1990 the main rate of corporation tax has dropped steadily from 34% to 20%.

The new 45% tax rate is being widely criticised as unfair on grounds that it seeks to deprive taxpayers of part of the compensation due to them under EU law.  The government claims, cynically, that the measure will reduce losses from litigation in cases which HMRC lose.  But surely in a fair society, if our legislators or HMRC get things wrong, the extra cost should be borne from the public purse rather than by the particular taxpayers who’ve been victimised?

Article supplied by Taxing Words Ltd.


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