Compound interest claims
1. Background
1.1 As you are no doubt aware, following the successful claim to recover VAT overpaid in respect of demonstrator sales and demonstrator bonuses, HM Revenue and Customs also made a payment of statutory interest to you. This statutory interest figure was calculated on a simple basis (i.e. non-compounded) and the interest rates used were generally lower than the Bank of England base rates.
1.2 It has always been our view that the payment of statutory interest did not fully compensate motor dealers for the loss of the VAT, which arose as the result of incorrect interpretation of EC legislation by HM Revenue and Customs. In order to fully compensate the business it appears to be necessary for Customs to calculate the interest due on a compound basis using commercial rates of interest. This view was supported in a recent direct tax case relating to the payment of Corporation Tax (Sempra Metals).
1.3 Following the release of the decision in the Sempra Metals case we submitted claims to HM Revenue and Customs on behalf of many dealers for the payment of interest on a compound basis. These claims were all initially rejected by Customs on the grounds that UK VAT legislation specifically defines the rate of interest that will be used to calculate statutory interest, and also states that the interest will be calculated on a simple basis.
1.4 Following the initial rejection of the compound interest claims, we submitted appropriate appeals to the VAT tribunal. In response to these appeals, Customs have now applied to ‘strike out' the cases on the grounds that the Tribunal does not have the jurisdiction to determine whether or not compound interest is due. These issues will be dealt with in the VAT Tribunal shortly.
1.5 Notwithstanding the above, in cases such as this one where a principal sum of VAT has already been repaid by Customs (as well as interest on a simple basis) Counsel have advised us that the most appropriate route would be to claim the shortfall (i.e. the extra amount which would have been paid if the interest had been calculated on a compound basis) in the High Court as a claim for damages or commercial restitution. It is the opinion of Counsel that we have a good chance of success if such a claim, based on compound interest, is submitted to the High Court (a copy of this written opinion is available upon request).
1.6 In order to protect your position it is important to pursue both of the above routes in parallel.
1.7 It is necessary to note that there are a number of potential time-limit issues that may affect both of the routes discussed above. It is for the Courts to decide when the relevant time-limits began and ended, however, it is possible that you could make a claim via one, or both, of the above routes and still fail despite the fact that the Courts may ultimately decided that compound interest is payable in a VAT context. Nonetheless, the only way that you give your business a chance of receiving a significant compound interest repayment is to make a claim as soon as possible.
2. High Court - Group Litigation Order (GLO)
2.1 Rather than pursuing costly individual cases our partners in this exercise, McGrigors Solicitors, applied to the High Court for a Group Litigation Order (GLO). A GLO is essentially the grouping of a number of different cases that have similar issues of fact or law. The Group Litigation Order that has now been issued by the Court specifies the similar issues of fact that are common to each claim. The GLO has now been published by the Law Society (as well as by ourselves) and anyone that meets the common criteria specified in the GLO (i.e. those motor dealers that received principal sums of overpaid VAT and a subsequent statutory interest payment) will be entitled to lodge a claim under the GLO. As the purpose of the GLO is to remove the problems caused by the hearing of many individual cases that have similar facts, it is unlikely to be possible for a motor dealer to pursue separate litigation via the High Court. As a result, for any motor dealer to benefit from a decision of the High Court that compound interest must be paid by Customs in these circumstances it will be necessary for them to join the GLO.
2.2 A number of lead-cases have now been identified, which will proceed to a full hearing early next year. The result of the lead cases will determine the outcome of all the claims made under the GLO. Therefore if the lead case is successful compound interest will also be paid to all the other claimants without the need for further individual hearings.
2.3 A key advantage of the GLO is that all claimants are severally liable for the cost of the lead case. Therefore, the legal fees incurred by the lead claimants will be spread amongst all the motor dealers that submit claims following the announcement of the GLO. This ensures that no single motor dealer incurs huge legal fees in relation to the action and also allows us to accurately estimate the liability of each individual claimant. In addition, as each claimants liability is only ‘several', the remaining claimants are not liable for the fees due to be paid by another claimant if that claimant is unable to pay for any reason.
2.4 The GLO lead case will be heard in the High Court and, depending on its outcome and subsequent appeals, could proceed through the Court of Appeal, The House of Lords and ultimately the European Court of Justice. Therefore litigation may require several years before the definitive position is known. However, dealers included in the GLO will not have to take any further specific action themselves during this period and will have protected their interests to ensure that they benefit from any eventual favourable position.
3. Claim Value
3.1 Although the interest rate that will be awarded by the Court is not known, we are calculating claims on the basis interest should be payable at the commercial rate of 3% above base-rate, and in the alternative at a government borrowing rate of 1% above base-rate (in line with the principles discussed in the Sempra Metals case). It is also our intention to compound the claims on a daily basis, with effect from the time the tax was overpaid up to the date that the claim for compound interest is prepared.
3.2 In order to estimate the impact that this method of calculation will have on the value of the interest payment due to motor dealers, we have re-calculated the interest that would be payable in two actual cases (assuming that the higher commercial rate of interest is awarded by the Courts) . In both instances, the difference between the statutory interest paid initially and the compound interest now due was more than 4 times greater than the initial interest payments received by the relevant dealers.
3.3 Potentially therefore, a successful action could mean significant windfall payments i.e. original statutory interest paid of £50,000 x 4 = £200,000 additional interest awarded.
3.4 It is important to point out that this rate of interest may be disputed by HMRC, and the Courts may decide that a different rate is more appropriate. For example, in a recent direct tax case compound interest was awarded at the government borrowing rate (i.e. 1% above base-rate). If this is the case in this instance then your business will still receive a significant payment of further interest.
4. Likely Costs
4.1 The costs of preparing and undertaking a GLO through the appropriate Courts with specialist Solicitors and legal counsel will be substantial and would be inhibitive for a single or small number of claimants. Accordingly we will co-ordinate and facilitate the GLO within the industry to include as many dealers as possible, to reduce the individual claimant's costs to a manageable amount.
4.2 Based on our informed review of the likely number of GLO claimants and the anticipated costs, it is estimated that each dealer will be required to pay between £5,000 and £13,500 plus VAT to lodge and progress the GLO action to its conclusion. If more claimants join the GLO, these costs will reduce. It is probable that McGrigors will require payment of the maximum possible fees soon after you have signed up to the GLO, however, this money will sit in a client account in your name (accruing interest) and will only be spent as and when it is necessary throughout the court process. It is hoped that the fees collected will cover the full cost of the GLO (assuming that the case will proceed all the way to the ECJ ) and the alternative action that is being pursued in the VAT Tribunal.
4.3 We will continue to act for you in facilitating your inclusion in the GLO action by preparing the necessary damages claim for submission to the courts, instructing legal counsel, co-ordinating legal representation and advising on the progress of the lead cases. In addition, we will regularly monitor and update you on the process, likely outcome, and costs share, to ensure that you have all the necessary information for you to effectively consider your continued participation and benefits of the action taken.
4.4 Reflecting this involvement, we in conjunction with Trevor Jones Chartered Accountants will enter into new terms of engagement with you for £1,000 plus VAT and 10% plus VAT of any successful claims acceptance. These terms will be confirmed in new engagement letters to you, replacing our existing one (if such an agreement is in place).
4.5 A parallel terms of engagement will also be required between you and the appointed solicitor, McGrigors, for their legal representation to the High Court, setting up of the GLO and instructions to counsel for undertaking this case. Their initial costs should be no more than £2,000 plus VAT per claimant plus a disbursement of the appropriate court fees which are based on the actual size of the claim to a maximum cost of £1,530 per claimant.
4.6 On your agreement to these terms we therefore anticipate that your initial fixed costs will be less than £5,000 plus VAT.
i.e.Barnard Atkins Limited/Trevor Jones Chartered Accountants claim preparation £1,000
McGrigors, legal representation £2,000
Court fees maximum £1,530
Total: £4,530
4.7 Each GLO claimant is severally liable for a proportion of the legal costs incurred by the lead case, and these will be charged at the time that the GLO is ready to proceed. On current information and the expectation that sufficient claimants join the GLO action, these subsequent costs should be in the region of a further £5,000 to £8,700 plus VAT, depending on whether the case is appealed and ultimately referred to Europe. However, as discussed above, it is likely that McGrigors will collect the full £8,700 shortly after you have joined the GLO. The balance of the £8,700 that has not been spent at the point in time that you choose to leave the GLO, or the claim process reaches a conclusion, will be refunded to you.
4.8 It is our aim to attract a significant number of claimants to this GLO in order to make the costs viable for each claimant within the stated parameters. Please note that there are already in excess of one hundred participants within the GLO.
4.9 Notwithstanding the above, it should be noted that if the GLO claim action is successful HMRC will meet approximately 60 - 70% of the fixed costs that you will incur in this process. On the other hand, if the claims are ultimately unsuccessful, each individual claimant will have to meet a proportion of Customs costs, which have been included in our cost estimates provided above.
4.10 If the GLO action is therefore successful after a European Court hearing, your benefit could be as high as 4 times your original interest claim against your maximum costs of approximately £5,400 (£13,500 less 60% costs paid by HMRC) plus our 10% contingent success fee plus VAT. If the action is ultimately unsuccessful, your maximum costs should be no more than £13,500 (plus VAT where applicable).
4.11 It should be noted that each individual claimant has the opportunity to withdraw their claim at any point in time. Therefore, if you did not want to incur further costs following an unsuccessful High Court hearing, the claim could be withdrawn at this point. If appeal action continued however after your withdrawal, you would unfortunately not benefit from any subsequent favourable decision.
5 Timescales and Way Forward
5.1 The High Court previously heard McGrigors application in relation to the GLO and the formal Order has now been issued by the Court. In addition, a number of lead-cases have now been identified and agreed with HMRC.
5.2 A full hearing of the issues in the GLO has now been listed in the High Court for early next year. As we have discussed above, there is also the distinct possibility that the losing party in the High Court will launch an appeal to the Court of Appeal, and possibly subsequently to the House of Lords and finally the European courts. If this case does proceed all the way to Europe then it may unfortunately take several years to resolve.
5.3 We would urge you to join this action immediately as any delay will reduce the chances of a successful claim.
5.4 Should you have any specific questions regarding strategy please do not hesitate to contact Rob McCann, Colin Mathieson or Steve Howard at Barnard Atkins.
May 2008
