The Commissioners for Her Majesty’s Revenue and Customs v British Telecommunications PLC

This appeal concerned whether BT could in 2009 claim VAT bad debt relief in respect of supplies made between 1978 and 1989 by relying on directly enforceable rights under Article 11C(1) of the Sixth VAT Directive and, if so, whether domestic provisions (in particular section 22 VATA 1983 as terminated by section 39(5) Finance Act 1997) could be disapplied or construed so as not to prevent those claims.

The Court of Appeal held (i) the first paragraph of Article 11C(1) is directly effective and Member States’ implementing conditions are generally formalities, not substantive obstacles to the underlying right; (ii) the insolvency condition in the then "Old Scheme" (section 12 Finance Act 1978 / section 22 VATA 1983) was disproportionate in that it identified bad debts by reference to the debtor’s insolvency status rather than by reference to a test of whether the debt was objectively bad and thereby excluded many small but genuine bad debts; and (iii) however, section 39(5) Finance Act 1997 (which finally ended the Old Scheme) did not have to be disapplied in BT’s favour because BT had had sufficient notice and opportunity to assert its rights before the statutory cut-off.

The court also rejected BT’s alternative contention that its claims properly arose under the restitutionary/time-limited recovery provisions re-enacted as section 80 VATA 1994 (section 24 Finance Act 1989) and so benefited from the extension in section 121 Finance Act 2008.

Background and nature of the claim

BT wrote to HMRC on 30 March 2009 seeking repayment of VAT paid in respect of unpaid sums charged to customers between 1 January 1978 and 31 March 1989. The claim sought bad debt relief (approximately £65.2m agreed between the parties, excluding interest). HMRC refused; BT appealed. The question for the tribunals and this court was whether BT could enforce rights said to derive from Article 11C(1) of the Sixth VAT Directive despite domestic rules and time-limits.

Procedural posture

• BT appealed to the First-tier Tribunal (Tax Chamber); three preliminary issues were transferred to the Upper Tribunal (Tax and Chancery Chamber) for determination.
• The Upper Tribunal (Warren J and Judge Hellier) answered the three preliminary issues largely in BT’s favour: it held Article 11C(1) claims could be enforced and that section 39(5) Finance Act 1997 fell to be disapplied or construed because inadequate notice had been given; it found the insolvency condition incompatible with EU law; but held section 80 VATA 1994 and section 121 Finance Act 2008 did not assist BT.
• HMRC obtained permission to appeal to the Court of Appeal on four grounds and BT cross‑appealed on the section 80/section 121 point.

Issues framed by the court

1. Whether, assuming Article 11C(1) provided BT a directly enforceable right, the exercise of that right in 2009 was barred by EU general principles and/or by section 39(5) Finance Act 1997;
2. Whether section 39(5) had to be disapplied or construed under EU law so as not to affect BT’s exercise of its Article 11C(1) rights;
3. Whether section 80 VATA 1994 and section 121 Finance Act 2008 applied to BT’s claim.

Court’s reasoning and conclusions

• The Court of Appeal agreed with the Upper Tribunal that the first paragraph of Article 11C(1) is directly effective: it implements the objective in Article 11A(1)(a) that VAT should be charged on the consideration actually received and the Member State conditions ordinarily concern formalities for proving a claim. Accordingly a taxpayer may enforce the Article directly where domestic implementation is deficient.
• The Court also agreed that the Old Scheme’s insolvency condition was disproportionate: it identified a bad debt by reference to the debtor’s insolvency status rather than by reference to whether the debt was objectively irrecoverable, with the predictable effect of excluding many small but genuine bad debts and thereby infringing Article 11C(1).
• On timing and the effect of section 39(5) Finance Act 1997, however, the Court held that BT had had many years and adequate warning (including the 1990 reforms and Budget announcements in late 1996 and the Finance Bill in December 1996) to assert its rights; a prudent and circumspect trader in BT’s position could foresee repeal and had ample opportunity to bring claims prior to the cut‑off. Consequently the Court allowed HMRC’s appeal on preliminary issue 2 and held that section 39(5) did not have to be disapplied in BT’s favour in respect of the present stale claims.
• Finally, the Court rejected BT’s argument that its claim fell properly to be made under the overpayment/recovery provisions (Finance Act 1989 / section 80 VATA 1994) because the tax originally accounted for had been tax due at the time and the subsequent non-payment did not retrospectively render it not due.

Wider comments: the court accepted that if properly notified and in appropriate factual circumstances disapplication of domestic time‑limits or curtailing provisions may be required to protect directly effective EU rights, but emphasised legitimate expectation, legal certainty and the factual matrix of notice and opportunity to act.

Appeal allowed in part. The Court of Appeal held that Article 11C(1) of the Sixth VAT Directive is directly effective and that the "insolvency condition" in the Old Scheme (section 12 Finance Act 1978 / section 22 VATA 1983) was disproportionate and incompatible with that EU right, but concluded that section 39(5) Finance Act 1997 did not have to be disapplied for BT's stale claims because BT had had adequate notice and opportunity to pursue its rights before the statutory cut‑off; BT's alternative reliance on section 80 VATA 1994 / section 24 Finance Act 1989 failed.

This is an appeal to the Court of Appeal from the Upper Tribunal (Tax and Chancery Chamber) (judgment dated 3 August 2012). The Upper Tribunal had transferred preliminary issues from the FTT and answered them largely for BT; HMRC appealed to the Court of Appeal, which delivered this judgment on 11 April 2014 (neutral citation above).