Dorsey London Tax Update

This update was originally published in July 2007.

This newsletter reports on two important decisions concerning community law released today, the House of Lords' decision in the Sempra Metals case (whether compound interest is recoverable on compensation for breach of community law claims) and the decision of the European Court of Justice in C-231/05 Oy AA (cross border contribution payments).

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The Sempra Metals Case

In this case the House of Lords has asked what level of interest should be paid to compensate for the cash flow disadvantage in the early payment of corporation tax in breach of community law. The circumstances are of course the payment of ACT which, had a group income election been available cross border, could have been delayed until the corporation tax liability date some nine months or so later. In the Hoechst case the ECJ decided that this was a breach of community law and the UK had to compensate for the cash flow disadvantage suffered in the early payment of tax (or disgorge the benefit it had received by the early payment of tax). The question was, did the provision of an effective remedy of community law require interest to be calculated at any particular rate and on a compound or simple interest basis?

The case is directly relevant to any circumstance where tax had been paid earlier than it should in breach of community law, so that what has been suffered is a cash flow disadvantage. Such circumstances include not only the payment of both utilised and unutilised ACT but also circumstances like the early payment of corporation tax where interest payments have been deferred beyond 12 months by reason of the treaty clearance and thin cap provisions (ie. delaying when the interest deduction was taken into account). It will also arise where reliefs have been utilised to shelter unlawful tax imposts which subsequently result in lawful tax being paid earlier than it should.

The case may also have a relevance to the repayment of overpaid VAT or any interest based claims.

The House of Lords by a majority has used this occasion to re-state the law of restitution generally in England. In basic terms the tax payer has succeeded and interest for the cash flow disadvantage should be calculated on a compound basis. Lord Nicholls also...

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