Littlewoods Retail Ltd & Ors v Revenue & Customs

The issue that arises for decision on this application is whether the claims of the various claimants against The Commissioners for Her Majesty’s Revenue & Customs (“HMRC”) should be stayed until 56 days after the release of the decision of Henderson J in separate proceedings in group litigation brought by the VAT Interest Cars Group Litigation Order (“the VIC GLO”). It is the VIC GLO lead claims that are listed to be heard in the Chancery Division in February 2009, that is in about three months’ time.

All bar one of the claimants in the present case (“the Littlewood companies”) carried on a catalogue-based business as a home shopping retailer. Each claimant was registered for VAT. Between 1973 and 2004 amounts were paid by the Littlewood companies to HMRC in respect of VAT on certain of their trading activities. It is accepted on behalf of HMRC that on a correct interpretation of the VAT Act 1994 (“VATA 1994”) and the 6^th Directive such payments were not due to HMRC.

Most of the principal sums have been repaid by the Commissioners in accordance with Section 80 of VATA 1994. HMRC have also paid simple interest to the Littlewood companies on those sums pursuant to Section 78 of VATA 1994 at the rate specified in section 197 of the Finance Act 1996. However, not all of the principal sums claimed by the Littlewood companies have been paid. HMRC dispute the claim of certain of the Littlewood companies to be entitled to payment of such principal sums. The amount of the disputed principal sums may itself be a matter of dispute, but on any basis exceeds £36 million. It would appear that the Higher Court has no jurisdiction to determine liability for the quantum of the disputed principal amounts. Those are issues within the exclusive jurisdiction of the VAT & Duties Tribunal.

The claimants claim (in various capacities) to be entitled, either at common law or under Community law, to repayment from HMRC of interest on the principal sums overpaid at a compound rate of interest.

Although not quantified in the Particulars of Claim, the total amount sought to be recovered from HMRC is in excess of £1 billion. These unquantified claims are formulated in two ways. Firstly, the Littlewood companies claim to be entitled to restitution on the time value of the sums demanded, levied and retained by HMRC contrary to the provisions of VATA 1994 and also contrary to the 6^th Directive. These sums are said to have been paid by mistake. According to the Littlewood companies, the time value falls to be measured by reference to a compound rate of interest reflecting the cost of national government borrowing. The second (and alternative) basis of the claim is for damages for breach by HMRC of their statutory duty, arising out of directly effective community law rights and/or in accordance with Case C- 479/93 Francovitch v Italian Republic [1995] I-3843. The value of this latter basis of claim also falls to be measured, according to the Littlewood companies, by reference to a compound rate of interest reflecting their weighted averaged costs of capital or their cost of borrowing.

It is unnecessary for the purpose of the present judgment to spell out in detail how it is that these amounts of VAT came to be erroneously claimed by HMRC. Suffice it to say that the claims relate to VAT paid by the Littlewood companies on the commission paid by them at a rate of generally 10% to independent agents through whom goods were sold to customers. The claims relate to the period from 1973 (when VAT was introduced) to 20 October 2004. HMRC have conceded that the 10% commission element is properly to be treated as a discount so that VAT should only have been paid on the discounted price of the goods.

The two claims of the Littlewood companies were commenced on 13 March and 5 October 2007 respectively. The first claim was stayed pending the decision of the House of Lords in Sempra Metals Ltd v IRC [2008] 1 AC 561. After the judgment in Sempra was handed down, both claims were by consent stayed indefinitely in 2008

“to allow the parties time to consider the future conduct of the claim and the possibility of a general stay pending the outcome of a lead case”.

PriceWaterhouseCoopers Legal (“PWC”) now acts for the Littlewood companies as well as for several other claimants who have similar claims against HMRC. By letter dated 16 January 2008 PWC wrote to HMRC setting out a suggested way forward. PWC proposed that generally endorsed claim forms be served. It was proposed that following service the parties should agree to apply for an order staying the proceedings, with liberty for HMRC to apply for an order for service of Particulars of Claim and further liberty to either party to apply to the court for future directions. PWC anticipated a dialogue with HMRC in relation to the further conduct of each claim, including discussion of the possibility of a general stay of the proceedings pending the outcome of a lead case.

By letter dated 20 June 2008 PWC gave HMRC 56 days’ written notice to end the stay. No reason was given. The response of HMRC was to make application on 12 August 2008 for a further stay.

The claimants in the VIC GLO are a group of motor dealers whose case is that they overpaid VAT to HMRC. The position in their case is that, like the Littlewood companies, the motor dealers have been repaid principal together with simple interest. The motor dealers claim to be entitled to a further remedy, namely an award of compound interest at a commercial rate on the principal sums from the date of overpayment. Reliance is placed by the motor dealers on the decision of the House of Lords in Sempra.

The Particulars of Claim in the VIC GLO have been heavily amended. The amended Particulars of Claim assert that, until the decision in Sempra, a tax payer in the motor dealers’ position could not reasonably have known that its belief that their claim was limited to a return of the principal sums and interest thereon was mistaken. The claim for compound interest is formulated as one for restitution of the amount by which HMRC has been unjustly enriched. The amount of the claim is pleaded as being based on a rate calculated by reference to the average cost of government borrowing over the material period.

HMRC has served a defence which in effect admits that the dealers did overpay VAT and so were entitled to obtain a refund. HMRC further admit the dealers’ entitlement to simple interest on the overpayments but deny that they are entitled whether under EC law or otherwise to recover additional interests on a compound basis or at a “commercial rate”. An issue is raised in the defence as to the date when the dealers could and should with reasonable diligence have discovered that their belief as to the amount of the interest recoverable was mistaken. To the extent that the dealers ought to have discovered earlier that their belief was mistaken, HMRC deny that the dealers are entitled to recover compound interest. HMRC’s pleaded position in the VIC GLO (see e.g the Barnes defence at paragraph 59 et seq) is that all claims advanced in the VIC GLO (however formulated) are excluded by sections 80 and 78 VATA 1994, which, according to HMRC, provide a complete and exclusive statutory code for the recovery of overpaid VAT and interest. Finally HMRC deny that any of the motor dealers’ directly enforceable EC rights have been breached.

Mr Andrew Macnab submits on behalf of HMRC that justice and convenience require that the claims of the Littlewood companies be stayed until after the judgment of Henderson J in the motor dealers’ case. That would be consistent with the approach adopted hitherto on behalf of the Littlewood companies. Moreover it is submitted that a stay would save expense and court resources.

Mr Macnab further contends that there are several overlapping core issues which have very large potential financial consequences not only in this litigation but also in other similar outstanding claims against HMRC (which I am told are numerous). The just, efficient, expeditious and fair way of dealing with the claims of the Littlewood companies is to stay them until after Henderson J has decided them in the motor dealers’ litigation. That is the time when the future conduct of the claims of the Littlewood companies can be assessed in the light of the judge’s conclusion. Such a stay is unlikely significantly to delay the resolution of the claims of the Littlewood companies. Mr Macnab contends that HMRC should not be required now to divert its resources to another claim or to have to contest the two claims simultaneously.

Mr Macnab raises a further consideration, which is not mentioned in the Notice of Application, namely that the Littlewood companies’ claims include claims for principal sums said to be repayable by HMRC. He says that the decision whether these disputed principal sums are repayable is initially for HMRC to make and that any appeal lies to the VAT and Duties Tribunal which has exclusive jurisdiction over such matters: see Autologic Holdings PLC v IRC [2006] 1 AC 114 at 125, paragraphs 11-15, Lord Nicholls). This means, says Mr Macnab, that the Littlewood companies’ claims will in any event have to be stayed at some time in the future and the progress of the claims of the Littlewoods companies would be halted until the Tribunal has resolved those disputes.

Mr Steven Elliott, who appears for the Littlewood companies, accepts that the court has jurisdiction in appropriate circumstances to stay an action pending the outcome of another case: see CPR 3.1(2) (f). However, he contends that the appropriate time for consideration of any further stay in this action will come after Henderson J delivers judgment in the motor dealers case. To stay the present action until then would delay his clients’ claims without any compensating advantage to them.

Mr Elliott submits that the course which he advocates would not result in a disproportionate expense to HMRC or any inappropriate use of court resources. In any event Mr Elliott suggests that the losing party in the motor dealers action would be likely to appeal with the result that resolution of the claims of the Littlewood companies might be delayed for several years. To be kept out of the money to which they claim to be entitled would seriously prejudice the Littlewood companies.

In support of his submissions Mr Elliott relies on the following authorities: Kingcastle Ltd v Owen-Owen [CA February 1999]; R v Yates Settlement [1954] 1 All ER 619; Corbett v South Yorkshire Strategic Health Authority [2006] EWCA Civ 1797.

The issue which I have to decide on this application is a narrow one: is it right for me to impose an immediate stay of the Littlewood companies’ claims with a view to a further consideration of the future conduct of this action taking place after Henderson J has delivered judgment in the VIC GLO in or about March 2009? Or should I allow the Littlewood companies’ action to proceed until judgment in the VIC GLO, leaving it to Henderson J to decide at that time whether a further stay of the present action should be re-imposed?

The answer to those questions falls to be determined by reference to the court’s powers of case management contained in CPR 3.1 and in particular 2(f). Although efficiency and the appropriate use of court resources are important considerations, I think that Mr Elliott is right to emphasis the entitlement of his clients, other things being equal, to come to court and to pursue their claim if necessary to trial.

That consideration plainly cannot be a trump card. There clearly is an overlap between the issues raised in the statements of case of the Littlewood companies and the motor dealers. The broad question raised in each case is whether and, if so, in what circumstances HMRC is liable not only to repay overpaid tax with simple interest but also to pay compound interest. Common underlying issues include the way to measure the time value of the overpayments; the claimants’ entitlement to rely on section 32(1)(c) of the Limitation Act, 1980; the remedies available under Community law and under domestic law and the correct method of calculating the rate of compound interest in the circumstances of the claimants’ respective cases.

I do not accept that the commonality of those issues is of itself sufficient for a stay to be imposed. Ultimately it may turn out to be appropriate for the motor dealer’ action to be the lead case. But in my judgment the right time to attempt to resolve that question will come when Henderson J has delivered judgment. I accept of course that it is more than likely that there will be appeals by one party or the other in the motor dealers’ action. That consideration is more appropriately factored into the decision whether to stay the Littlewood companies’ action after Henderson J has delivered judgment than it is now.

The disadvantage to the Littlewood companies of re-imposing a stay now is that their action will fall further behind, making it more difficult for them to catch up with the motor dealers’ action, assuming that would otherwise be the appropriate course. In my view the reluctance of the Littlewood companies to stand idly by whilst issues which affect them are resolved in the context of the motor dealers’ claims is understandable. I am not persuaded that the Littlewood companies’ stance on the present application should be prejudiced by the consideration that they were agreeable to a stay being imposed at an earlier stage of these proceedings. The determinative question in my judgment is whether HMRC can establish that permitting the action to proceed from now until such time as Henderson J gives judgment would cause them such prejudice as to make it appropriate for me to impose a stay. The period from now until judgment in the motor dealers’ action is likely to be about five months. HMRC has not yet served defences in the present action. No doubt some time will have to elapse before they will be in a position to do so.

I am not unsympathetic towards Mr Macnab’s concerns about the need to avoid unnecessary duplication of costs and about the fact that the team dealing with the motor dealers’ action is already overstretched. But it seems to me that the bulk of the burden of the work which will need to be done in the Littlewood companies’ action in the next 3 or 4 months will fall principally on them and their legal advisers rather than on HMRC, who have the advantage that they have already had to confront the common issues in the context of the motor dealers’ action.

Mr Macnab submits that it would be pointless for me to permit the Littlewood companies action to proceed because the VAT & Duties Tribunal has exclusive jurisdiction over the disputed issue as to whether further principal sums are payable by HMRC. I am not persuaded that this is a sufficient reason for re-imposing a stay now. The better course in my judgment is for the action to proceed and for the appropriate way of resolving any issue about the principal sums which may need to be decided after Henderson J has given judgment in the motor dealers’ action. By that time HMRC will have served their defences in these actions which should mean that the ambit of any dispute about the principal sums is clarified.

In all the circumstances I refuse the application by HMRC for a stay.