The High Court determined the rate at which and the dates from which interest would run on repayments of VAT made by Customs to the taxpayer in connection with the sale of mobile phones outside the UK.

Facts

The taxpayers were companies in a group which dealt in mobile phones which it sold outside the UK. The group had a holding company which did not trade but provided working capital each month to group members, in return for which it received dividends. Since no VAT was payable on the sales, the taxpayers reclaimed the VAT paid from Customs by making returns each month.

Customs took the view that the taxpayers had been involved in so-called ‘carousel frauds’, whereby a series of transactions resulted in the original overseas seller repurchasing the same mobile phones. VAT was then reclaimed and the original importer would disappear, having used false documentation. Accordingly, the repayments of VAT claimed by the taxpayers were withheld for May and June 2005. As a result, the taxpayers could not repay their loan to the holding company and were unable to trade. In those circumstances, the taxpayers sought permission to apply for judicial review of Customs’ decision not to make repayments claimed. During the hearing, Customs offered to make the repayment on a ‘without prejudice’ basis and indicated that they would not oppose permission.

A few months later, the European Court of Justice ruled that transactions, which were not themselves vitiated by VAT fraud, constituted supplies of goods or services effected by a taxable person acting as such and an economic activity, regardless of the possible fraudulent nature of another transaction in the chain of which that taxable person had no knowledge and no means of knowledge (Optigen Ltd & Ors v C & E Commrs (Case C-354/03, C-355/03 and C-484/03) [2006] BTC 5,050).

Following that judgment, Customs agreed to make the repayments claimed on the basis that, if it later emerged that the taxpayers were not in fact entitled to the repayments made, steps would be taken to recover the repayments. Accordingly, the only remaining issues for the court were as to the rate of interest due on the sums repaid and the dates upon which interest became payable. It was accepted that s. 35A(3) of the Supreme Court Act 1981 was the proper basis for the claim and that the rate of interest was at the court's discretion.

The taxpayers argued that the rate of interest ought to be no less than eight per cent per annum, a rate below the minimum commercial rate that could have been obtained by the taxpayers on the financial markets.

Issue

Whether the taxpayer was entitled to a higher rate of interest than the judgment rate or the commercial rate; and whether interest should start to run from 16 days after the date of the return (as the taxpayers contended) or 30 days (as Customs contended).

Decision

Collins J (ruling accordingly) said that, in all the circumstances and taking a broad brush approach, the appropriate rate was seven per cent overall and the dates from which interest should run were 1 July 2005 and 6 July 2005 respectively.

The entitlement to interest arose under s. 35A(3) of the 1981 Act which expressly limited the taxpayers to simple interest. In R (on the application of Elite Mobile plc) v C & E Commrs [2005] BTC 5,113, the court had held that, in a VAT context, the VATA 1994, s. 78 rate should be used unless it was so significantly out of line with current commercial rates that it could only be characterised as unjust. However, unlike the present case, that provision was dealing with an administrative award of interest covering appeals and was not the appropriate starting point for a case such as the present.

Further, the judgment rate was not the appropriate rate to look at as a starting point. These were commercial transactions and a commercial rate of interest ought to reflect the cost of borrowing the unpaid sums. The correct rate was the commercial rate, the standard for which was the base rate plus one per cent in the absence of evidence to the contrary. However, it was also proper to have regard to VATA 1994, s. 78 which was relevant as it would have been the applicable rate if proceedings had not been instituted. In all the circumstances and on the facts of this case the appropriate rate was base rate plus 2.5 per cent making a total of seven per cent (R (on the application of Elite Mobile plc) v C & E Commrs [2005] BTC 5,113, Olympia Technology Ltd [2005] BVC 4,102; Decision No. 19,145, and RSPCA (Decision No. 19,440, 1 February 2006) considered). As to the date from which interest should run, a reasonable period was needed to enable Customs to investigate the claim for repayment. That would amount to 30 days in respect of the first payment and 16 for the second.

Queen's Bench Division (Administrative Court). Judgment delivered 14 February 2006.