HM Revenue & Customs v GMAC (UK) Plc

This appeal concerned VAT bad debt relief and the compatibility of domestic statutory conditions with Article 11C(1) of the Sixth VAT Directive (taxable amount reduction for cancellation, refusal or total or partial non-payment). The court considered two domestic conditions that had been imposed for bad debt relief in the United Kingdom: the property condition (that property in goods must have passed) and the insolvency condition (that the debtor must be formally insolvent and the creditor must have proved in the insolvency). The court applied the CJEU principles in Goldsmiths and related authorities (proportionality, fiscal neutrality and the limited scope of the derogation in Article 11C(1)) and held that both the property condition and the insolvency condition went beyond what was appropriate and necessary and therefore were incompatible with EU law and to be disapplied.

The court also addressed two procedural/time issues: whether section 39(5) of the Finance Act 1997 barred claims for supplies made before 1 April 1989 and whether the claimant had lost its EU-law remedy by delay. The court held that section 39(5) validly removed the old-scheme route for pre-1 April 1989 supplies and that adequate notice had been given (so section 39(5) was not to be disapplied in respect of those supplies). The court further held that no separate EU-law reasonable-time limitation should be read into the domestic moulded remedy where, after disapplication of the invalid statutory conditions, the domestic machinery imposed no time limit.

Background and parties:

• The Commissioners for Her Majesty's Revenue and Customs (HMRC) appealed against a decision of the Upper Tribunal (Tax and Chancery Chamber) allowing GMAC (UK) Plc to obtain VAT bad debt relief by disapplying certain domestic conditions. The appeal arose from earlier decisions of the First-tier Tribunal. GMAC is a finance company supplying motor cars on hire purchase terms; it accounted for VAT at the time possession was first transferred but later suffered non-payment on some contracts.

Nature of the claim and relief sought:

• GMAC sought VAT bad debt relief for unpaid consideration on hire purchase transactions covering the period 1978 to 1997. The relief sought required disapplication of domestic statutory conditions said to be incompatible with Article 11C(1) of the Sixth VAT Directive.

Issues before the court:

1. Whether section 39(5) Finance Act 1997 barred claims relating to supplies before 1 April 1989.
2. Whether GMAC’s EU-law based claim was time-barred by the principle that EU claims must be brought within a reasonable time.
3. Whether the domestic property condition was incompatible with Article 11C(1) and had to be disapplied.
4. Whether the domestic insolvency condition (and requirement to prove in insolvency) was incompatible with Article 11C(1) and had to be disapplied.

Court’s reasoning and conclusions:

• On the substantive EU-law points the court applied the CJEU jurisprudence (notably Goldsmiths and subsequent authorities) and held that Article 11A/11C embodies a fundamental principle that the taxable amount must reflect the consideration actually obtained and that any derogation under Article 11C(1) is limited and must be justified and proportionate. The property condition (which excluded supplies where title was retained, such as hire purchase/Romalpa clauses) could not be justified and was disproportionate; it was therefore incompatible with EU law and had to be disapplied. The insolvency condition in the old scheme was also disproportionate in its effect — by requiring formal insolvency procedures it excluded whole classes of genuinely bad debts (notably small debts or those owed by individuals below statutory thresholds) — and so it too was incompatible and to be disapplied.
• On timing and procedure the court held that section 39(5) Finance Act 1997 validly terminated the possibility of old-scheme claims for supplies made before 1 April 1989; the withdrawal did not breach EU principles of effectiveness or legitimate expectations in GMAC’s case because the crossover and notice provided were adequate in the particular circumstances. The court further held that where domestic machinery (after disapplication of invalid conditions) is silent as to a time limit, EU law does not import a separate overarching reasonable-time limitation that would defeat the moulded domestic remedy.

Disposition:

• HMRC’s appeal was allowed in part: the court allowed HMRC’s ground concerning section 39(5) (so pre-1 April 1989 claims were barred by that provision) but dismissed HMRC’s appeal on grounds attacking the disapplication of the property and insolvency conditions and on the reasonable-time point. GMAC’s cross-appeal was dismissed.

Appeal allowed in part. The court held that (1) the property condition and the insolvency condition in the domestic bad debt relief scheme were incompatible with Article 11C(1) of the Sixth VAT Directive and fell to be disapplied (so HMRC’s appeals on those points were dismissed); (2) section 39(5) Finance Act 1997 validly barred old-scheme claims for supplies made before 1 April 1989 and was not disapplied in GMAC’s favour (HMRC’s appeal on that point was allowed); and (3) no separate EU-law reasonable-time limitation defeated GMAC’s moulded domestic remedy where the domestic machinery imposed no time-limit.

Appeal from the Upper Tribunal (Tax and Chancery Chamber) (Warren J and Judge Hellier), decision released 3 August 2012, itself an appeal from the First-tier Tribunal, Tax Chamber (Judge Wallace and Miss S.C. O'Neill) released 6 May 2010. The UT had referred a preliminary question to the CJEU in related proceedings (CJEU ruling given 3 September 2014) and this judgment considers the UT’s determinations in that context. See also this court's prior decision in The Commissioners for Her Majesty’s Revenue and Customs v British Telecommunications PLC [2014] EWCA Civ 433 which addressed similar issues.