HM Revenue & Customs v GMAC (UK) Plc

Where a member state provides partial VAT relief for total or partial non-payment, any excluded class must be justified and comply with EU proportionality requirements. The restriction must be appropriate and necessary to its objective and go no further than required.

Conditions requiring property to have passed or formal insolvency unlawfully excluded broad classes of genuine bad debts. However, accrued claims may be terminated after adequate notice. A taxpayer given sufficient opportunity to exercise its EU rights cannot avoid the resulting statutory bar. Where the applicable domestic machinery imposes no surviving time limit, EU law does not independently require a claim to be made within a reasonable time.

GMAC supplied motor vehicles on hire purchase and accounted immediately for VAT on the full sale price. Customers sometimes defaulted while title remained with GMAC. The domestic bad debt schemes made relief conditional upon property having passed and, under the earlier scheme, upon formal insolvency and proof in the insolvency.

The First-tier Tribunal and Upper Tribunal held that those conditions were incompatible with article 11C(1) of Directive 77/388 EEC. The Upper Tribunal also held that section 39(5) of the Finance Act 1997, which terminated claims under the old scheme, had to be disapplied because inadequate notice had been given.

HMRC appealed on proportionality, the statutory bar and an asserted EU reasonable-time rule. GMAC cross-appealed concerning alternative domestic routes to relief. The central issues were whether the property and insolvency conditions were lawful, whether section 39(5) barred pre-April 1989 claims, and whether delay had independently extinguished GMAC’s EU rights.

1. Appeal allowed in part; cross-appeal dismissed. HMRC succeeded on the statutory-bar issue but failed on its challenges concerning the property condition, insolvency condition and an EU reasonable-time rule. Floyd LJ gave the judgment, with which Theis J and Arden LJ agreed.
2. Article 11C(1) of Directive 77/388 EEC permitted a member state to withhold relief altogether for total or partial non-payment. A wholesale derogation required no justification beyond the rationale recognised in the European authorities. A member state which instead introduced partial relief had to justify the exclusion of particular classes. Such restrictions remained subject to proportionality scrutiny: they had to be appropriate and necessary for their objective and no more extensive than required.
3. The property condition was incompatible with EU law and had to be disapplied. It excluded not only hire-purchase debts but every supply subject to retention of title. Retention of title did not make a bad debt more difficult to establish. The Directive itself classified possession transferred under hire purchase as a supply of goods, so suggested uncertainty between goods, services and finance did not justify exclusion.
4. The insolvency condition was also disproportionate and had to be disapplied. Its detailed requirements made formal bankruptcy or winding-up proceedings necessary. Those proceedings were unavailable for some debts and commercially irrational for many others. The condition therefore excluded broad classes of genuine bad debt and could not be justified as either a convenient bright-line rule or a de minimis provision.
5. Section 39(5) of the Finance Act 1997 nevertheless barred claims concerning supplies before 1 April 1989. Member states could impose reasonable conditions and time limits and could terminate an earlier scheme, provided that effectiveness and legitimate expectations were respected. GMAC had ample time to assert its rights and received adequate notice of the old scheme’s termination. Exercise of its rights was neither excessively difficult nor virtually impossible.
6. No separate EU reasonable-time limit applied while GMAC invoked its rights through the moulded domestic machinery. Once time limits tied to the invalid insolvency condition were disapplied, that machinery imposed no time limit. EU law did not require the court to add one. Section 80 of the Value Added Tax Act 1994 was not an alternative route because the VAT was due when originally accounted for.

• Court of Appeal: HMRC’s appeal was allowed on the effect of section 39(5) of the Finance Act 1997, but dismissed on the reasonable-time, property-condition and insolvency-condition grounds. GMAC’s cross-appeal was dismissed.
• Upper Tribunal (Tax and Chancery Chamber): Held that the property and insolvency conditions were incompatible with EU law. It held that section 39(5) ordinarily barred the claims but had to be disapplied because adequate notice had not been given.
• First-tier Tribunal (Tax Chamber): Held that the property and insolvency conditions were incompatible with article 11C(1) of Directive 77/388 EEC and that section 39(5) had to be disapplied.