HMRC paid Littlewoods £205m in relation to a VAT claim by them, stretching back over a period of up to 30 years.

Interest under the normal simple basis was calculated at £268m, as being due to Littlewoods.

However the owners of Littlewoods were not satisfied that this was sufficient recourse for them not having the money for so long and challenged in the Courts that interest should be calculated on a compound basis.  If successful they stand to gain additional interest of around £1bn.

As the case rumbles on, its outcome could have a significant effect on everyday taxpayers.  If HMRC lose will underpayments of tax also be charged with compound interest?  Also, are the rates of interest payable fair, in terms of the rate payable on refunds being lower than that on tax due.

English: George Osborne MP, pictured speaking ...
English: George Osborne MP,  (Photo credit: Wikipedia)

The government has made a number of high profile U-turns in recent weeks.

The chancellor has decided to modify plans to impose VAT charges on takeaway food and static holiday caravans, as well as deciding not to introduce a limit on the amount of tax relief that can be claimed on charitable donations.

All three changes appear to have come about directly as a result of considerable public pressure, with the ‘pasty tax’ in particular capturing the public’s imagination. However these U-turns are expected to cost the treasury in the region of £120m in lost revenue.

Pasty Tax

The pasty tax, as it has now become known, was proposed in order to bring clarity to the VAT position on the supply of baked goods.

However, the proposed changes in the budget appeared to cause more confusion and place a greater administrative burden on taxpayers. The amendments should reduce the burden on those affected, but the recent furore has merely highlighted the discrepancies and complications involved in the current VAT system.

Static Caravans

The VAT amendment will mean a rate of 5%, rather than the full rate of 20% being applied to static holiday caravans to ‘reflect their position between permanent residences that are not liable for VAT and other caravans that are liable for the standard rate’.

Cap on Charitable Donations Relief

The above amendments on VAT can be seen to have clear tax and administrative reasons for the U-turns. However the removal of the cap limiting income tax relief on donations to charities to £50,000 appears, on the basis of donation figures, to be as a result of the public outcry rather than based on substantiated facts.

In order to exceed the previously proposed cap an individual would have to make donations exceeding £100,000 in one tax year (assuming they were a 50% rate taxpayer).  That is a substantial donation and it is unlikely that the vast majority of individuals could afford such giving in one tax year.

This was confirmed by BBC Radio 4 who conducted a study of the largest charities and found that only around 1% of their income came from donations over £50,000, suggesting that the cap would have had nowhere near the impact on charities’ funding as heralded by the media and various charity lobby groups.  It would be interesting to see how many donations charities receive in excess of £100,000, as this was the effective ceiling for donations that was initially proposed.

Whatever your views on the U-turns, it will be interesting to see how the chancellor proposes to fill the £120m ‘gap’.