Regency Factor Plc v The Commissioners for HMRC

Member States may impose formal record-keeping conditions for VAT bad debt relief where those conditions pursue legitimate collection, anti-evasion or administrative objectives and do not make relief impossible or excessively difficult. A single-account requirement may be lawful where it creates a readily verifiable audit trail and helps identify the relevant supply and write-off. The domestic scheme must be assessed as a whole, including any discretion to accept alternative proof. A taxpayer that fails to prove substantive entitlement before the First-tier Tribunal is not entitled to a second opportunity on appeal.

Regency claimed VAT bad debt relief. The First-tier Tribunal held that there was no bad debt and that Regency had failed to comply with the procedural requirements for making a claim: [2019] UKFTT 0144 (TC).

The Upper Tribunal disagreed with the first conclusion but upheld the procedural ground: [2020] UKUT 0357 (TCC). Regency appealed on the compatibility of the procedural requirements with EU law. HMRC sought to reinstate the First-tier Tribunal’s conclusion on the substantive bad debt issue, but that issue was not argued. The central question was whether the requirement to maintain a single bad debt relief account was a lawful formal condition and whether Regency had otherwise proved its entitlement.

Appeal dismissed. Lord Justice Lewison gave the reasons, with Lady Justice Macur and Lord Justice Underhill agreeing. HMRC’s points on the substantive bad debt issue did not arise.

1. Article 90 of the Principal VAT Directive requires reduction of the taxable amount where consideration is not received. Article 273 permits Member States to impose additional obligations to ensure correct VAT collection, prevent evasion and simplify tax administration. That discretion is limited by VAT neutrality, proportionality and the requirement that conditions remain connected with proving non-recovery.
2. The CJEU authorities distinguish substantive restrictions on the right to relief, which fall within the narrow derogation permitted by Article 90(2), from formal conditions governing proof and administration under Article 273. A formal condition may be more general, but where compliance is impossible or excessively difficult, the taxpayer must be allowed to establish entitlement by other means.
3. Compatibility must be assessed by considering the domestic scheme as a whole. Section 36 of the Value Added Tax Act 1994, together with regulations 168, 171(3) and 172 of the Value Added Tax Regulations 1995, pursued legitimate objectives. The discretions to permit alternative records or other proof supplied an adequate safety valve.
4. The single-account requirement in regulation 168(3) was a lawful formal condition. It created an audit trail that HMRC investigators could readily check, assisted the correct levying of VAT, helped prevent evasion and established when and to what extent a debt was written off. Regency did not show that compliance was impossible or excessively difficult.
5. The proposed distinction between records created and records kept under regulation 168(3) was artificial. The Marleasing principle did not require an unnatural reading of the regulation. A pari passu claim had no foundation in the legislation, and the First-tier Tribunal had found that, even assuming the records required by regulation 168(2) existed, it was impossible to determine whether the substantive conditions were satisfied. Regency had failed to prove its claim at the appropriate stage and was not entitled to a second opportunity on appeal.

• Court of Appeal (Civil Division): dismissed Regency’s appeal and did not determine HMRC’s alternative substantive ground, [2022] EWCA Civ 103.
• Upper Tribunal (Tax and Chancery Chamber): rejected the First-tier Tribunal’s conclusion on the existence of a bad debt but upheld the procedural failure, [2020] UKUT 0357 (TCC).
• First-tier Tribunal: held that there was no bad debt and that the procedural requirements for relief had not been satisfied, [2019] UKFTT 0144 (TC).