Firms are set for a possible tax-back bonanza following an overpayments row about interest rates.

But it could yet take years to resolve, says Denis Holly, Midlands VAT director for accountants and business advisers Horwath Clark Whitehill.

Currently, when a business has overpaid VAT, HM Revenue & Customs will only pay simple interest for the period it has been incorrectly holding it.

Mr Holly said: "This has been a festering sore as simple interest does not give an adequate measure of the commercial cost to a business of not having the money involved available to use.

"Compound interest is a better measure of the commercial restitution HMRC should make."

And gradually, it seems, this is beginning to happen.

A recent direct tax case involving Sempra Metals held that compound interest was a better measure of the cost to the taxpayer than simple interest in such circumstances.

Indeed, the principle has now been accepted for VAT in the High Court.

"However, in view of the cost to the Government especially with major claims already in the system going back to 1973 where payment of compound interest will dwarf the underlying VAT overpaid, they are likely to appeal," said Mr Holly.

"I have a client where the underlying VAT is £160,000, simple interest will add another £200,000, and compound interest £425,000.

"This will run and run and needs carefully monitoring if a business has made a claim."