Brunel Motor Company Ltd v HM Revenue & Customs & Anor

For VAT purposes, a taxable supply cannot be undone merely by issuing a credit note or repossessing goods. A post-supply cancellation or reduction in consideration requires a legal entitlement arising under the original contract or a subsequent agreement, such as rescission or novation. A credit note is evidence of that entitlement, not its source. Where a tribunal fails to decide whether the original supply was discharged and instead treats the credit note as sufficient, it applies the wrong legal approach. An appellate court should allow the appeal and remit the matter where the factual findings do not compel a conclusion on whether a subsequent contract was formed by conduct.

Quartic Motor Group, represented for VAT purposes by Brunel Motor Company Ltd, supplied Ford vehicles under a dealer-sold agreement. After Quartic entered administrative receivership, Ford repossessed unpaid vehicles, issued credit notes cancelling the earlier billings, and issued new invoices for equivalent sales. HMRC repaid Ford’s output VAT and assessed Quartic for the corresponding input VAT.

The VAT and Duties Tribunal dismissed Brunel’s appeal on 3 April 2003. Peter Smith J dismissed Brunel’s appeal on a point of law on 24 January 2008. The central issue before the Court of Appeal was whether the credit notes evidenced a legally effective cancellation, price reduction, rescission or novation of the original supplies, or were merely unilateral acts by Ford.

Appeal allowed and remitted. The Chancellor gave the leading judgment. Lord Justice Richards and Lady Justice Hallett agreed.

1. The original vehicle sales were taxable supplies. Their output-tax and input-tax consequences could be altered only under statutory authority, principally article 11 C 1 of the Sixth Council Directive (77/388/EEC) and regulation 38 of the VAT Regulations 1995 SI 1995/2518.
2. Cancellation or a post-supply reduction in price under article 11 C 1, and a decrease in consideration under regulation 24, require a legal entitlement to the adjustment. That entitlement may arise under the original contract or a subsequent agreement, including rescission or novation. A credit note is evidence of the entitlement but cannot create it.
3. Repossession under a retention-of-title clause did not itself nullify the original supply. Nor did Ford have an unlimited contractual power to alter the price by issuing a credit note. The relevant provisions had to be read consistently, and the contract did not confer such a power.
4. The Tribunal had failed to ask the correct question. Its findings did not compel the conclusion that Ford and the receivers had made a subsequent contract rescinding the original supplies. Whether a contract was concluded wholly or partly by conduct, and whether any such contract existed, were questions of fact: see Carmichael v National Power plc [1999] 1 WLR 2042. The judge therefore could not supply that finding as a matter of law.
5. The matter was remitted to the VAT and Duties Tribunal for rehearing. If a subsequent agreement were found, regulation 38 would apply. Because Brunel was an insolvent person within regulation 24, regulation 38(6) would require the adjustment in the VAT account for the period in which the original supply occurred.

1. Court of Appeal (Civil Division), [2009] EWCA Civ 118: allowed Brunel’s appeal and remitted the matter to the VAT and Duties Tribunal.
2. High Court, Peter Smith J, 24 January 2008: dismissed Brunel’s appeal on a point of law.
3. VAT and Duties Tribunal, 3 April 2003: dismissed Brunel’s appeal concerning the validity and VAT effect of Ford’s credit notes.