The Barclay brothers, who have fought Irish investor Patrick McKillen for four years for control of three of London’s finest hotels, must be given a £1.2 billion tax rebate by the British taxman, a London court has ruled.

Sir David and Sir Frederick Barclay have fought a battle with HM Revenue and Customs for over a decade over VAT overpayments stretching back 30 years made by Littlewoods, the catalogue shopping business they now own.

An error was made in the 1970s by revenue about the amount of VAT that should be paid on commissions paid to thousands of the agents employed by the company, then owned by the Moore family.

Revenue and Customs accepted that Littlewoods had paid £205 million more than it should in VAT and paid £470 million in compensation to the company shortly before it was sold by the Moores. The compensation had been calculated on the basis of simple interest.

The Barclays, using an offshore family trust, bought the company in 2002 for over £700 million.

The purchase of Littlewoods, which has been merged into another Barclays company, Shop Direct, included rights to the still-continuing legal action against Revenue and Customs. In 2007, they demanded compound interest.

VAT overpayment
Mr Justice Henderson yesterday ruled the total compensation required for VAT overpayments and interest losses is £1.67 billion – one of the biggest-ever awards by a British court. In his ruling, the judge said it is possible for Revenue & Customs to reopen the underlying tax issues, "because it would be an abuse of process to permit them to do so".

European Union law “entitles the claimants to receive an adequate indemnity for the loss occasioned to them” for VAT overpayments, “broadly commensurate with the loss of use value of the overpaid tax”.

Revenue has given notice it intends to appeal.