HM Revenue & Customs (HMRC) has insisted it will appeal against a high court decision to award Sir David and Sir Frederick Barclay's Littlewoods catalogue shopping business £1.2bn in a top-up settlement relating to a long-running legacy VAT dispute.

The judgment handed down on Friday is thought to be one of the biggest single company defeats for HMRC, which had already paid out £470m to Littlewoods in 2004 in an attempt to settle the matter.

It finds the total VAT and interest repayments to the Barclays' empire should be £1.67bn, though the case is almost certain to be taken to appeal and may not be resolved until 2017 if, as expected, it is eventually referred to the supreme court.

A spokesman for HMRC said: "We think today's decision is at odds with how parliament intended VAT law to work and will now seek leave to appeal."

The long-running dispute stems from an error in the treatment of commissions paid to an army of Littlewoods regional agents during the previous 30 years.

In 2004 HMRC accepted that the company, which was owned by the Moores family for almost all of that period, had overpaid £205m in VAT over almost three decades. What has been hotly contested since is the appropriate interest payment Littlewoods should receive.

HMRC had originally settled the dispute with a simple interest payment, but in 2007 the Barclay brothers, who spend much of their time in the tax havens of Monaco and their private island of Brecqhou in the Channel Islands, launched another legal claim demanding the settlement be paid out with compound interest.

The brothers, owners of the Telegraph newspaper titles and the Ritz hotel, hired John Kay, a professor at London School of Economics, to testify that compound interest is the most appropriate measure to assess compensation.

With overpayments stretching back to 1973, he said the interest bill should be £1.4bn. On Friday, Mr Justice Henderson agreed. "The award of compound interest should be computed in accordance with the unchallenged rates and methodology advanced by the claimants' expert, Professor Kay."

The argument has already been through the British tax tribunal system, from where it was referred to the European court of justice. The court in Luxembourg then ruled that it was for the British court to determine such cases, so the matter returned to the high court in London last autumn.

The Barclays acquired loss-making Littlewoods, together with its claim against HMRC, for £750m in 2002 through their offshore family trust. A year later they added the catalogue retailing division of General Universal Stores, merging it with Littlewoods and renaming the holding company Shop Direct. They have since added a number of smaller acquisitions, including buying the web brand for Woolworths from administrators in 2009, and developed the Very.co.uk online brand.

On Thursday HMRC won a more modest court victory over Littlewoods in relation to the corporation tax paid on VAT repayments. The sum involved was £30m.

If it eventually receives the £1.2bn payout, a spokesman for Littlewoods said "the net proceeds will be used for further investment for the benefit of all stakeholders".