Abbey National Plc v Customs and Excise

Domestic VAT legislation may prescribe how payments are apportioned between separate supplies of goods and credit, even where the parties’ agreement or accounting treatment adopts another method. Community law does not require contractual allocations to override such legislation. A statutory apportionment provision is irrational only if it is so unreasonable that no reasonable rule-making body could have made it. Simplicity, comprehensibility and the need to manage competing interests may justify a time-order or straight-line method. Accounting principles and contractual arrangements yield to inconsistent statutory VAT requirements.

Abbey National appealed against a decision of the London Tribunal Centre of the VAT and Duties Tribunal concerning bad debt relief on conditional sale agreements for vehicle finance. The agreements combined a taxable supply of goods with a VAT-exempt supply of credit, payable through undivided instalments. On customer default, the parties disputed how payments already received should be apportioned between the goods and credit elements.

The Commissioners applied a straight-line method under an extra-statutory concession, while Abbey National argued for the actuarial or rule-of-78 method, relying on contractual arrangements, consumer-credit provisions and its accounts. The central issues were whether regulation 170 of the VAT Regulations 1995 governed the apportionment, whether it was ultra vires or irrational, and whether Community law, contractual terms or accounting principles displaced it.

1. The appeal was dismissed. Regulation 170 of the VAT Regulations 1995 remained effective throughout the relevant period and governed the attribution of payments.
2. Under regulation 170(1) and (2), payments were attributed first to the earliest supply and then to later supplies in date order. The purchaser’s allocation could displace that rule only where made at the time of payment and the relevant supply was paid in full.
3. Article 11(C)(1) of the Sixth Directive did not require domestic legislation to give primacy to the parties’ contractual allocation. The reference to conditions determined by Member States permitted detailed domestic rules, provided they were rational, consistent with general VAT principles and no further than necessary to protect the tax authorities’ rights.
4. Regulation 170 was within the Commissioners’ rule-making powers. Sections 36(5)(f) and 36(6)(b) of the Value Added Tax Act 1994 were sufficiently broad to authorise rules determining whether payments were received as consideration for a particular supply.
5. The time-order method was not irrational. The test was the stringent Wednesbury test: it was insufficient that another method might have been better, or that the provision caused difficulty or unfairness in particular cases. The rule was neither capricious nor arbitrary, and simplicity and the competing interests of finance companies and customers were legitimate considerations.
6. The straight-line method allowed by concession was likewise rational and fell within the Commissioners’ discretion. The concession did not repeal or replace regulation 170.
7. The contracts did not necessarily incorporate a rule-of-78 apportionment merely because consumer-credit rebates were calculated by reference to the APR or a related method. No necessary contractual implication arose.
8. Company accounts and commercial accounting principles could not displace statutory VAT rules. Even if the accounting treatment differed, statutory tax requirements prevailed.

• London Tribunal Centre of the VAT and Duties Tribunal: dismissed Abbey National’s appeal against the assessment made using the straight-line method.
• High Court (Chancery Division): dismissed the appeal and upheld the Tribunal’s decision.