Customs and Excise v General Motors Acceptance Corp (UK) Plc

Where a hire-purchase agreement provides that termination reduces the consideration for the supply, the reduction is not converted into bad debt merely because termination follows the hirer’s breach. The resale proceeds are not consideration paid by the hirer and may be excluded when calculating the reduced consideration. A resale after the finance company has regained possession under the agreement is a non-chargeable disposal under article 4(1)(a) of the Value Added Tax (Cars) Order 1992, whether termination followed breach or was consensual. Regulation 24 of the Value Added Tax Regulations 1995 requires reliable evidence of the reduction, but the documents need not be served on a non-taxable hirer or identify the VAT element. They must disclose the reduced price and its capital-interest apportionment.

The Commissioners appealed from a decision of the VAT and Duties Tribunal concerning VAT treatment of cars supplied by GMAC under hire-purchase agreements. Three issues arose: whether termination following breach gave rise only to bad-debt relief under section 36 of the Value Added Tax Act 1994; whether resale after consensual termination fell within article 4(1)(a) of the Value Added Tax (Cars) Order 1992; and whether GMAC’s records satisfied regulation 24 of the Value Added Tax Regulations 1995. The central questions were whether clause 9 reduced the consideration and what documentary evidence was required for a regulation 38 adjustment.

The Commissioners’ appeal was dismissed. GMAC succeeded on all three issues.

1. Bad-debt relief. Clause 9 reduced the consideration for the supply from the cash price by the outstanding instalments and resale proceeds. It was immaterial that the mechanism formed part of the original agreement and operated after breach. The resale proceeds were not paid by the hirer as consideration, and redelivery of the car was not consideration for the supply. Regulation 38 therefore applied to the reduction; the case was not confined to bad-debt relief under section 36 of the Value Added Tax Act 1994. This construction also respected the VAT principle that the taxable person should not account for more tax than the consumer has paid.

2. Resale after termination. Article 4(1)(a) of the Value Added Tax (Cars) Order 1992 applied where the finance company regained possession in accordance with the finance agreement, whether or not the hirer was in breach and whether or not the company actively exercised a contractual right. The statutory language was not ambiguous. The article’s purpose was to prevent double taxation and distortion in the used-car market. The regulation 38 and Cars Order regimes were separate and could both operate.

3. Documentation. Regulation 24, read consistently with article 11C.1 of the Sixth Directive and in the light of regulation 38, served to record genuine adjustments, prevent fictitious claims and permit verification from the taxable person’s records. For a hirer without input-tax relief, it did not require a post-termination document served on the hirer or identifying the VAT element. A document created at or after the reduction had to record acceptance that the triggering event occurred and disclose the reduced price. The available records also had to evidence the division between capital and interest. GMAC’s specimen documentation met those requirements.

High Court (Chancery Division): on appeal from the VAT and Duties Tribunal’s decision released on 28 January 2003, the Commissioners’ appeal was dismissed.