Why Littlewoods v HMRC ends a VAT case for the golf industry

At the end of last year a VAT case between Littlewoods and HMRC was settled. This brought to an end the dispute between many golf clubs and HMRC over the VAT they had overpaid on green fees, writes Jon Archibald

November 2017 saw the end of a decade-long dispute between Littlewoods Ltd & Ors – the famous retailer / football pools operator – and HMRC. Initially, the dispute was over a refund of overpaid VAT by Littlewoods but subsequently was about compensation paid to Littlewoods in the form of simple interest.

In short, between 1973 and 2004, Littlewoods overpaid VAT on agents’ fees to the tune of £205 million. It subsequently made a claim for this amount under Section 80, VAT Act 1994 (credit for, or repayment of, overstated or overpaid VAT). HMRC repaid this over three years (with some legal wrangling over a portion of this amount). Additionally, it agreed to pay Littlewoods’ interest pursuant to Section 78, VAT Act 1994 (interest in certain cases of official error), calculated on a simple basis and totalling £268 million. However, Littlewoods was unsatisfied with simple interest and initiated legal proceedings, starting in 2007. Littlewoods was seeking additional interest calculated on a compound basis which produced a much higher figure, namely £1.25 billion. The figure is so large due to the time period covered by the claim, that is, 40 years.

Due to a historic ruling in 2009 (in the cases of Fleming T/A Bodycraft and Condé Nast), businesses were allowed, for a short transitional period, to make claims for overpaid / under-claimed VAT far in excess of the usual capping limits (at the time, three years). The transitional period ended in March 2009, so claims of this length are unlikely to arise again. Nowadays, taxpayers are restricted to a four-year time limit on Section 80 claims.

The details and history of the Littlewoods claim are complex and varied, and the litigation has been through every one of the UK tax courts. In 2010, the case was actually referred by the High Court to the Court of Justice of the EU (CJEU) – the EU’s highest court. However, rather than decide the matter, the CJEU referred it back to the High Court, stating that it was a matter for the individual member states to decide. Having had the burden placed firmly back on their shoulders, the UK courts consecutively found in favour of Littlewoods, first in the High Court and then in the Court of Appeal.

Finally, in November 2017, the matter was heard in front of four judges in the Supreme Court, who found unanimously in HMRC’s favour, much to their and the Exchequer’s relief. The decision itself runs to some 21 pages, so in summary, although the Supreme Court was asked to look at four questions, the case effectively boiled down to one key principle: whether the UK’s form of financial remedy for overpaid VAT (simple interest) was adequate. The opinion was, of course, that it was, so Littlewood’s claim for compound interest was dismissed. Interestingly, the court also commented that, had the award of simple interest been out of line with EU policy, the CJEU would have decided this in their 2012 judgment.

What does this mean for golf clubs?

In December 2013, the CJEU decided a case concerning Bridport and West Dorset Golf Club in respect of VAT charged on green fees to non-members by non-profit making golf clubs. Historically, non-profit making golf clubs could treat their membership income as exempt from VAT, but had to treat non-member green fees as standard-rated. Although this point had been unsuccessfully challenged in the courts, Bridport was successful in its case. This is because the court ruled that member states (here, the UK) had no power to exclude certain groups from the exemption.

The result of this case meant that Bridport, and many other private members’ golf clubs that had stood behind the case, were able to reclaim the VAT that they had charged on non-member green fees. However, this wasn’t a simple case of HMRC repaying all the golf clubs all the VAT that it had charged. Indeed, HMRC claimed that golf clubs would be ‘unjustly enriched’ (effectively in receipt of a windfall). The unjust enrichment point was, not surprisingly, challenged by various golf clubs. Three clubs (Berkshire Golf Club, Glen Golf Club and Wilmslow Golf Club) were chosen as collective test cases for the court to decide on this point.

The clubs argued that the economic loss to them as a result of HMRC’s historic treatment of non-member green fees amounted to 95 per cent of the VAT paid. HMRC argued that this was actually much lower (between 35 and 54 per cent). The court ultimately found heavily in favour of the clubs and decided that 90 per cent was a reasonable figure. Thus, all of the golf clubs that had submitted claims on the back of these cases were allowed to recover 90 per cent of the VAT that had been incorrectly charged.

The final matter, which has now been resolved as a result of the Littlewoods case, was compensatory interest. Rather than accept simple interest on their claims, many golf clubs decided to stand behind the Littlewoods case in the hope that a decision in Littlewoods’ favour would result in HMRC being forced to pay (the much higher) compound interest. As the Littlewoods case was decided in the UK’s highest court, and because the CJEU had already ruled that it was a matter for the UK courts to decide, the decision is now final and affected golf clubs will be forced to accept simple interest as compensation.

The £1.25 billion at stake is a large amount by anyone’s estimation. However, as there were apparently over 5,000 cases standing behind Littlewoods, the actual amount at stake was ultimately an estimated £18 billion!

Jon Archibald is assistant manager at Kingston Smith, a top 20 accountancy firm located in the UK