BMW AG & Anor, R (on the application of) v HM Revenue & Customs

HMRC may distinguish associated from non-associated VAT traders where associated companies can control accounting periods and payment timing to secure a systematic group cash-flow advantage unavailable to independent traders. That difference can objectively justify requiring associated traders to align their accounting periods.

Where the governing legislation provides no detailed list of relevant factors, HMRC decides the relevance and intensity of its investigation, subject to Wednesbury review. It need not investigate hypothetical arrangements not raised before the decision, or an issue concerning third-party supplies that was not a live issue. The power to allow monthly VAT returns also permits HMRC to alter or revoke that permission.

BMW AG was separately registered for UK VAT and purchased cars from associated BMW UK Manufacturing Ltd. Because BMW AG exported most of the cars, it was a repayment trader and had been permitted to make monthly VAT returns. HMRC later directed it to use quarterly periods aligned with the associated VAT group’s periods.

Tugendhat J, in [2008] EWHC 712 (ADMIN), held the policy rational and lawful but quashed the direction because HMRC had not considered the effect on third-party supplies or a hypothetical direct-export arrangement. The Court of Appeal considered the policy’s legality, the scope of HMRC’s inquiry, and whether HMRC could revoke monthly-return permission.

Lord Justice Moses gave the judgment, with Lord Justices Lloyd and Pill agreeing. The Court of Appeal allowed HMRC’s appeal, dismissed BMW AG’s application for permission to pursue the vires challenge, and restored the direction requiring quarterly returns.

1. Rationality and equal treatment. The cash-flow disadvantage to HMRC from a particular transaction may be the same whether the traders are associated or independent. Associated companies nevertheless have an additional capacity: a group’s controlling mind can coordinate accounting periods and payment dates, secure a systematic advantage for both supplier and purchaser, and retain input tax within the group. Independent traders cannot assure that result. The categories were therefore not alike, and the differential treatment was objectively justified.
2. Scope of HMRC’s discretion. Article 252 of the Principal Directive and Regulation 25 of the Value Added Tax Regulations SI 1995/2518 provide no detailed lexicon of relevant considerations. It was for HMRC, rather than the court, to decide how best to reduce the Exchequer’s cash-flow disadvantage and which factors were relevant, subject to Wednesbury review. The policy was neither unlawful nor irrational.
3. Hypothetical comparison. The judge’s comparison with a single company manufacturing and exporting its own cars did not address HMRC’s concern. A single trader could not create the mismatch or retain input tax within an associated group. HMRC was not legally required to imagine or investigate that hypothetical situation, which had not been raised before the decision.
4. Third-party supplies. A decision-maker determines the manner and intensity of inquiry into an accepted relevant factor. Failure to investigate BMW AG’s small volume of third-party supplies could justify quashing only if no reasonable decision-maker could have declined to investigate it. BMW AG had not treated the issue as live, and there was no factual basis for the judge’s conclusion that HMRC erred in law.
5. Revocation. Regulation 25 contains no restriction preventing HMRC from altering or revoking a previous permission or direction. Such a power is implicit in the statutory purpose of managing VAT; otherwise a departure from the default quarterly system could operate in perpetuity.

1. Court of Appeal (Civil Division): [2009] EWCA Civ 77. HMRC’s appeal was allowed, BMW AG’s application for permission was dismissed, and the quarterly-return direction was restored.
2. Administrative Court, Queen’s Bench Division: Tugendhat J, [2008] EWHC 712 (ADMIN). The policy was held rational and lawful, but the direction was quashed for defects in the decision-making process.