Several companies in the gambling sector have been involved in long-running battles with UK HM Revenue and Customs (HMRC) over VAT payments. But, whilst several companies have won their cases against the tax man, future victories might be hollow thanks to a new tax introduced in the Chancellor’s 2015 Autumn statement.

Chancellor George Osborne has introduced a special tax rate of 45% on interest payments to companies that win tax cases against HMRC. The Autumn Statement said: “the government has provided that a special 45% rate of corporation tax on income is to be applied to restitution interest”.

The payments would ordinarily have attracted corporation tax at the current rate of 20%. HMRC explains the higher rate will apply in those cases where a company has paid tax “under a mistake of law”.

HMRC’s guidance further explains:
If a restitution award is made, whether as a result of a judgment or an agreement, the interest element of the award (i.e. the element which represents compensation for the time value of money) will be chargeable to corporation tax (“CT”) at a special rate of 45% instead of the normal rate of CT (currently 20%). This interest is defined as restitution interest. The clause does not apply to any element of the award that represents the repayment of overpaid tax. The clause does not apply to interest payments made by HMRC under its statutory provisions.

The government argues that the higher rate is justified because many repayments relate to times when the standard corporation tax rate was higher than the current rate of 20%. But the guidance also openly states that “this measure is expected to reduce losses from litigation if HMRC were to be unsuccessful”.

It is forecast that the special tax will bring the government a total of GB£ 670 million between the 2015/2016 and 2020/2021 tax years, including GB£ 270 million in 2015/2016.
The government’s tax move comes a few months after HMRC lost a ruling in relation to VAT overpayments made by retailer Littlewoods between 1973 and 2004. The Court of Appeal ordered HMRC to pay GB£ 1.2 billion to the retailer, a ruling which the HMRC is appealing.

The episode goes to show that, whatever sector you are in, gambling or otherwise, you can win a few battles against government but in the long-run you invariably lose the war. 

Lorien Pilling, Director, Global Betting and Gaming Consultants