In HMRC v GMAC (UK) Plc1 , the Court of Appeal has held that the UK’s legislation, which barred bad debt relief claims unless the debtor was insolvent and the property in the goods had passed, was incompatible with EU law.
This case related to an appeal brought by HMRC against an Upper Tribunal (UT) decision relating to the VAT bad debt relief provisions.
GMAC (UK) PLC (GMAC) bought cars from independent dealers (who had agreed sales with customers) and sold them under hire purchase agreements. In February 2006, GMAC made a claim to HMRC for bad debt relief in respect of supplies made under the hire purchase agreements entered into before 20 March 1997.
Article 11C(1) of the Sixth Council Directive 77/388/ECC (now Article 90 of Council Directive 2006/112/EC), provided that, in the case of cancellation, refusal or total or partial non-payment of consideration, or where the price is reduced after the supply takes place, the taxable amount is reduced under conditions that are determined by the member state. In the case of total or partial non-payment, member states may derogate from this rule.
The UK implemented Article 11C(1) by a bad debt relief scheme which enabled a person who had accounted for output tax on a supply to claim a refund of VAT to the extent the consideration for the supply was not paid (the Old Scheme). There were conditions attached which stated that the property in the goods supplied must have passed from the claimant (the Property Condition) and the debtor must be insolvent (the Insolvency Condition).
The UK legislation governing bad debt relief was amended in 1997 to remove the Property Condition and the Insolvency Condition (the New Scheme). Bad debt relief is now available if consideration for the supply has been written off in the claimant’s accounts. Under the New Scheme, pursuant to section 39(5), Finance Act 1997, no claim under the Old Scheme can be made after 19 March 1997. Further, no claim for a refund may be made under the New Scheme in relation to any supply that took place before 1 April 1989.
GMAC was ineligible for bad debt relief because title did not pass under its hire purchase agreements and it normally did not pursue insolvency proceedings against defaulting customers. Its claim for bad debt relief rested on the direct effect of Article 11C(1) and the incompatibility of the Insolvency and Property Conditions.
GMAC succeeded in the First-tier Tax Tribunal (FTT) and the UT. It was held that the Insolvency and Property Conditions were incompatible with Article 11C(1). The UT also found that the introduction of section 39(5) interfered with GMAC’s vested right to claim bad debt relief which was taken away retrospectively without any transitional measures.
HMRC appealed to the Court of Appeal.
Court of Appeal’s judgment
The Court held that the Old Scheme provisions failed the EU law test of proportionality due to the Property and the Insolvency Conditions. The Property Condition excluded bad debts from relief in any contract for the supply of goods which contained a retention of title clause. The Insolvency Condition required legal proceedings to have been taken to obtain bankruptcy of the debtor.
The Court, in considering whether section 39(5) barred GMAC’s claims, allowed HMRC’s appeal. The Court held that GMAC had more than adequate time to bring a claim due to the prolonged crossover of the Old and New schemes and it was therefore not excessively difficult or virtually impossible for the company to exercise its EU rights. The Court highlighted that this was not a case where rights were removed without any prior notice. The Court agreed with the UT that, as GMAC had bought a claim under a provision of domestic law (rather than directly enforcing EU law rights) which did not specify a time limit, there was no need to incorporate the EU reasonable time principle to bring a claim.
The decision is largely of academic interest (except for those with historic bad debt claims) as it relates to a bad debt regime that is no longer in force. However, there were some interesting observations made by the Court regarding the interaction between domestic and EU law. Where a taxpayer enforces its EU law rights pursuant to domestic law that has no time limits, the general EU law obligation to act within a reasonable time does not apply. If GMAC had sought to enforce its EU rights without reference to domestic law, the position may have been different. Given the sums at stake, GMAC may apply for permission to appeal to the Supreme Court.
A copy of the judgment is available to view here.