[2010] UKFTT 202 (TC)

						TC00504		

Appeal number LON/2006/1588

Bad debt relief – Insolvency requirement before FA 1990 – Property requirement before FA 1997 – Whether compatible with fiscal neutrality – No – Whether repayment claim resulted in windfall contrary to EC law – No – Repayment claim – Retrospective time bar under FA 1997 s.39(5) disapplied as contrary to EC law – Appeal allowed in principle

FIRST-TIER TRIBUNAL
TAX CHAMBER

	GMAC UK PLC	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: 	 JUDGE THEODORE WALLACE
						 MISS S C O’NEILL

Sitting in public in London on 16-20 November 2009

Roderick Cordara QC and Jessica Wells, instructed by KPMG LLP, for the Appellant 

Paul Lasok QC, Ian Hutton and Fiona Banks, instructed by the Solicitor for the Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This appeal concerns the entitlement of the Appellant, to which we refer as “GMAC”, to relief for bad debts totalling £2,302,743 for the period 1978 to 1997 arising out of hire purchase contracts for motor vehicles terminated early on default without full payment and without the buyer becoming owner.

2.	The Appellant was formerly General Motors Acceptance Corporation (UK) Plc.  It is a finance company selling motor vehicles by hire purchase, buying the vehicles from dealers and selling them on to customers.

3.	Under Article 5(4) of the Sixth Directive, as implemented by Schedule 4, paragraph 1(2) of the Value Added Tax Act 1994, GMAC accounted for VAT on the full sale price excluding credit charges at the outset when customers took possession of the vehicles.

4.	GMAC’s claim relies on the direct effect of Article 11C(1) of the Sixth VAT Directive which provided for the reduction of the taxable amount in the case of total or partial non-payment.  The Directive took effect on 1 January 1978.  The claim covers supplies made up to 19 March 1997 after which date section 36(4)(b) of the 1994 Act, which precluded claims for bad debt relief where title was reserved, ceased to apply to claims. 

5.	The appeal lodged in December 2006 was against a ruling on 18 July 2006 that, while GMAC might have been able to make a claim under section 36 in relation to supplies made on or after 1 April 1989 provided that the eligibility conditions were met and the consideration for the supply became due before 1 May 1997, no other earlier claim could be made, and that the statutory eligibility conditions were not met (see paragraph 3 of the Re-Amended Statement of Case).

6.	The original appeal was against a decision in principle.  In response to a request by Customs on 16 January 2008 for a properly quantified claim for bad debt relief, the claim was quantified in a letter of 31 March 2008 at £2,302,743.  During the appeal hearing GMAC amended the grounds of appeal by leave specifying the claim for bad debt relief in that sum.

7.	The amended grounds of appeal covered four discrete periods as follows:

(1)	1978-1983 – that the property and insolvency conditions in the Finance Act 1978, s.12(2)(c) were contrary to EC law;
(2)	1983-1989 – that the property and insolvency conditions in the Value Added Tax Act 1983, s.22(2)(c) and, following amendment in 1986, in section 22(4)(b), were contrary to EC law;
(3)	1989-1994 – that the property condition in Finance Act 1990, s.11 was contrary to EC law;	
(4)	1994-1997 – that the property condition in Value Added Tax Act 1994, s.36(4)(b) was contrary to EC law.
8.	The grounds of appeal asserted that the difference in treatment between agreements with a reservation of title and other agreements (1) breached the principle of fiscal neutrality, (2) discriminated against businesses operating retention of title agreements, (3) interfered with the trader’s freedom of choice in the type of commercial transactions undertaken and (4) distorted competition between traders supplying goods or services subject to reservation of title agreements and other traders.  The amended grounds of appeal did not particularise the contentions in relation to the insolvency conditions prior to section 11 of the Finance Act 1990, which removed the insolvency conditions for supplies on or after 1 April 1989, however the Response to the Statement of Case pleaded that the insolvency conditions should be disapplied as contrary to the EC law principle of fiscal neutrality.

9.	In outline, Customs contended that the claim for bad debt relief in relation to supplies before 1 April 1989 was a claim under section 22 of the Value Added Tax Act 1983 and its predecessor section 12 of the Finance Act 1978 falling within section 83(h) of the Value Added Tax Act 1994 however, by reason of section 39(5) of the Finance Act 1987 no claim could be made under section 22 of the 1983 Act in respect of supplies before 1 April 1989; that part of the claim by GMAC would have to be pursued in the High Court, rather than in the Tribunal.  This timing point did not cover the period from 1 April 1989 to 19 March 1997.

10.	Customs next contended that the passing of title and insolvency requirements were not contrary to EC Law.

11.	Finally, Customs contended that GMAC’s claim for bad debt relief relying on EC law, in addition both (a) to the adjustments to its VAT account under regulation 38 of the VAT Regulations 1995 by reason of a decrease in the consideration for a supply after the period in which the original supply took place and (b) to enjoying the benefit of the de-supply provisions in article 4 of the Value Added Tax (Cars) Order 1992 and its predecessor on the sale of repossessed cars, would result in a windfall and a distortion contrary to the general principles of the Sixth Directive and would produce a situation inconsistent with fiscal neutrality and the non-distortion of competition.  Dr Lasok called this “the Windfall issue”. 

12.	It was decided by Field J in Customs and Excise Commissioners v General Motors Acceptance Corporation (UK) [2004] STC 577 (“GMAC No 1”), which concerned the period from March 1997, that GMAC was entitled to adjust its VAT account under regulation 38 and was entitled to the benefit of the Cars Order on sale of a repossessed car following breach by the customer.  A further Tribunal decision (No 19989) in 2006 (“GMAC No. 2) involving the same parties decided that the regulation 38 claims up to 31 December 1996 were not capped by section 80(4) of the 1994 Act; there was no appeal against that decision.

13.	We summarise the issues as follows: (1) whether the property and insolvency conditions were incompatible with EU law; (2) if so, whether GMAC’s claim would result in distortion and lack of fiscal neutrality contrary to EU law– “the Windfall issue”; (3) whether the claims in respect of supplies before 1 April 1989 could not be pursued in the Tribunal by reason of section 39(5) of the Finance Act 1997.  These issues were all quite separate.  The hearing was concerned with principle and did not address the quantum of the claim

The statutory conditions

14.	Bad debt relief was introduced by section 12 of the Finance Act 1978 where the debtor became insolvent after 1 October 1978.  Section 12(2) provided,

“(2)	A person shall not be entitled to a refund under this section unless –

(a)	he has proved in the insolvency and the amount for which he has proved is the outstanding amount of the consideration less the amount of his claim;
(b)	the value of the supply does not exceed its open market value;
(c)	in the case of a supply of goods, the property has passed to the person to whom they were supplied.”

15.	Section 22(2) of the 1983 Act was in identical terms until a new section 22 was substituted by the Finance Act 1985 in relation to any person becoming insolvent after 31 March 1986.  The substituted section 22(1) retained the requirement that the debtor had become insolvent, but section 22(4) which replaced section 22(2) omitted the requirement for proof in the insolvency and section 22(4)(b) replicated section 22(2)(c) with the addition of the words  “or to a person deriving title from, through or under that person.”

16.	Section 11 of the Finance Act 1990 replaced section 22 of the 1983 Act in relation to supplies after 26 July 1990.  The insolvency requirement was removed. The property requirement was unchanged, being contained in section 11(4)(b). The wording of section 36(4)(b) of the 1994 Act was identical to section 11(4)(b) of the Finance  Act 1990.

17.	Section 39(1) and (5) of the Finance Act 1997 which came into force on 19 March 1997 provides as follows,

“(1)	In section 36 of the Value Added Tax Act 1994, paragraph (b) of subsection (4) (condition of bad debt relief that property in the goods supplied has passed) shall not apply in the case of any claim made under that section in relation to a supply of goods made after the day on which this Act is passed.
…
(5)	No claim for a refund may be made in accordance with section 22 of the Value Added Tax Act 1983 (old scheme for bad debt relief) at any time after the day on which this Act is passed.”

Schedule 13, paragraph 9(1) of the 1994 Act, which was repealed by the Finance Act 1997, provided

“9(1)  Claims for refunds of VAT relating to supplies made before 27 July 1990 may continue to be made in accordance with section 22 of the 1983 Act notwithstanding the repeal of that section by the Finance Act 1990”.

Schedule 13, paragraph 9(2)(a), which was not repealed, provides, 

“(2) Claims for refunds of VAT shall not be made in accordance with section 36 of this Act in relation to – 
(a) any supply made before 1 April 1989.”

18.	These provisions may be summarised as follows.  From the introduction of bad debt relief in 1978 until the Finance Act 1990 there was a requirement that the debtor be insolvent with an additional requirement until 1986 that the person claiming bad debt relief should have proved in the insolvency.  From the introduction of the relief until the Finance Act 1997 there was a further requirement that property in the goods had passed, a requirement which was not satisfied where there was a retention of title provision.

19.	The jurisdiction of the Tribunal is set out in section 83 of the 1994 Act and so far as relevant is as follows,

“(1)	… an appeal shall lie to the tribunal with respect to any of the following matters –
…
(h)	a claim for a refund under section 36 or section 22 of the 1983 Act;
…
(t)	a claim for the … repayment of an amount under section 80 …”

20.	Article 11.1(a) of the Sixth Directive provided as follows:
“1.	The taxable amount shall be – 

(a)	In respect of supplies of goods and services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies …”

21.	Article 11C1 of the Sixth Directive provided as follows,

“1.	In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.
However, in the case of total or partial non-payment, Member States may derogate from this rule.”

It was common ground that Article 11C1 provided the vires for bad debt relief although there was a dispute as to whether the UK conditions were compatible with EC law.

The facts

22.	There was an agreed statement of facts which we summarise or paraphrase as follows in so far as they are not already covered. 
 
23.	The business of GMAC included the sale of motor cars on deferred payment terms to members of the public.  Its claim for bad debt relief did not cover contracts voluntarily surrendered either by exercise of a statutory right under the Consumer Credit Act 1974 or by exercise of a contractual right.  It was common ground that there was no bad debt where a customer had the right to return the vehicle; in such event the customer was not liable for any further payment.

24.	On 20 February 2006 GMAC wrote to Customs with a claim for bad debt relief to be applied in respect of hire purchase supplies made prior to 20 March 1997, this being the date when the current provisions relating to this relief were enacted by amendment to section 36 of the 1994 Act.

25.	Two witnesses gave evidence confirming witness statements and were cross-examined : Michael Bacon, ACA, CTA, regional tax counsel at General Motors, 1990-98, and Richard Tatford, Operations Director of GMAC since 2003 and an employee since December 1986, being a supervisor with responsibility for new business, wholesale and retail collection from 1989 to 1993, after which he was based abroad.

26.	We find the following additional facts from their evidence and the documents.

27.	The retail business of GMAC, trading as Vauxhall Finance, consisted of the sale of cars under HP agreements to the public.  GMAC purchased the cars from independent Vauxhall dealers, who had agreed sales with customers, and supplied them on to such customers under HP.  GMAC realised no margin on the supplies, its profit coming from the financing charges.  Almost 98 per cent of business was with individuals.  The vast majority of agreements were regulated under the Consumer Credit Act 1974 since the value did not exceed £25,000.  Most agreements were for 36 months or less.  Although most cars were new, some were second hand.

28.	The documentation used by GMAC was substantially the same throughout Mr Tatford’s career with GMAC which started in 1986, the consumer credit legislation having remained the same.  
29.	In GMAC No 1 [2004] STC 577 Field J decided at [21] that clause 9 of the agreement exhibited there, which was exhibited by Mr Tatford in this appeal, had the effect that on repossession and a further sale of the car the consideration for the supply to the hirer was reduced by agreement from the cash price to the cash price less any outstanding instalments and the resale proceeds.

30.	At [20] Field J included in his judgment an example produced by Mr Kenneth Parker QC for Customs to illustrate his argument.  

“A hire purchase company supplies a car to a customer at a total price of £15,000.  The customer defaults after paying only £5,000. The hire purchase company repossesses the car and sells it at auction for £6,500.

Commissioners’ analysis						VAT

	VAT on the original supply		£15,000 x 7/47 =		£2,234.04
	
Subsequent disposal of repossessed  	  
	Car (de-supplied under art 4(1)(a) Cars	  		
	Order)					  £6,500			£0.00

	Bad debt Relief on remaining amount
	(£10,000 - £6,500)		             (£3,500) x 7/47 =		(£521.27)

	Net VAT accounted for			                         =		£1,712.77

This reflects the total amount received in respect of the car £5,000 plus 
£6,500 = £11,500 x 7/47 = £1,712.77

Tribunal decision (which accepted				  VAT
GMAC’s argument)  

VAT on the original supply		£15,000 x 7/47	=            £2,234.04

Subsequent disposal of repossessed 
car (de-supplied under art 4(1)(a)	                                                                                                    
Cars Order				£6,500			£0.00

Reduction in consideration of £6,500	(£6,500) x 7/47    =	(£968.08)	
					
Bad debt relief on remaining amount             
(£10,000 - £6,500)			(£3,500) x 7/47      =	(£521.28)

Net VAT accounted for					                £744.68

Here VAT has only been accounted for on the amount received from the original customer, £5,000 x 7/47 = £744.68.  The further consideration of £6,500 is not subject to VAT.  And the commissioners submit that this is contrary to the over-riding principles of VAT”.

Field J affirmed the decision of the Tribunal.  The same example although presented slightly differently was produced as an example in the present appeal.

31.	GMAC made no bad debt claims on vehicles supplied before 19 March 1997 because of the UK legislation.  

32.	Before 2008 GMAC did not factor or sell its debts.

33.	Bad debts arose when the car was repossessed following a breach and was sold at a loss or when a customer defaulted and the car was not repossessed, including cases where the customer sold to a purchaser without notice.

34.	When a customer defaulted, he or she was contacted by telephone and after two months arrears a default notice was issued.  If the customer continued to default the agreement was terminated.  If the customer had not paid more than one third of the amount due or if the customer agreed, the car could be recovered without a court order.  Sometimes the customer returned the car, otherwise it was recovered by GMAC or an agent.  On recovery it went direct to a dealer for sale by an auctioneer.

35.	GMAC took a commercial view on the recovery of debts, often accepting a compromise payment from the customer to limit costs.  GMAC was very circumspect in seeking court orders for money judgments, only incurring the expense if there was a substantial debt involved and there were definite means of enforcement such as an attachment of earnings order.  Legal action was only taken in respect of around 10 per cent of the shortfall, in which cases GMAC would expect to recover around 40 per cent of the debt subject to such action over a two or three year period.

36.	It was never GMAC’s policy to institute bankruptcy or winding-up proceedings.  When a customer was made bankrupt, GMAC normally learned of this when the trustee in bankruptcy sought confirmation of GMAC’s title in the car.  In such cases GMAC enquired whether the trustee wished to retain the car and make the outstanding payments failing which GMAC repossessed the car.  GMAC did not normally recover the balance of the debt after sale, recovering at best only a small dividend along with other creditors.  Under 5 per cent of repossessions were from bankrupt customers.

37.	Other methods by which customers could obtain credit to buy a car were credit sale agreements and bank loans.  GMAC did not enter into credit sale agreements, however some competitors including Toyota Finance Ltd did.  Credit sale agreements have become more common for cars from 2000 onwards.  Car finance could also be obtained by a conditional sale agreement with a retention of title clause, which had no practical difference from HP finance in regulation under the Consumer Credit Act.

The Compatibility Issue

Submissions by GMAC

38.	Mr Cordara said that the property and insolvency conditions for bad debt relief in the UK legislation up to 1997 were incompatible with EC law.  The property condition discriminated against HP transactions and conditional sale agreements with retention of title as compared with conditional sale agreements.  The insolvency conditions were disproportionate and could not commercially be satisfied.  He said that the only implementation of Article 11C1 before the Finance Act 1997 was subject to incompatible requirements.

39.	He said that the power of member states to set conditions when implementing Article 11C1 or to derogate must be proportionate, must advance the aims of the Directive and must not conflict with the principle of fiscal neutrality.  He referred to Goldsmiths (Jewellers) Ltd v Customs and Excise Commissioners (Case C – 330/95) [1997] STC 1073 where the Court held that the power to derogate in Article 11C1 did not authorise limiting bad debt relief to supplies for cash excluding barter payments;  he relied on [14] to [26].  He said that the conditions went beyond what was strictly necessary to avoid evasion, see [22] and Ampafrance SA v Directeur des Services Fiscaux de Maine et Loire (Case C-177/99) [2000] ECR I – 7013.  HP transactions and conditional sales were economically and commercially speaking identical, see [23].  The Appellant was entitled to choose the form of contract most suited to its interests, see [25].  He stressed the importance of the principle of fiscal neutrality citing Elida Gibbs Ltd v Customs and Excise Commissions (Case C – 317/94) [1996] STC 1387 at [31], JP Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Commissioners (Case C – 363/05) [2008] STC 1180 at [22] and Finanzamt Gladbeck v Linneweber (Case C – 453/02) [2008]

40.	Mr Cordara said that the property condition resulted in different treatment of cases where the car was repossessed on failure to pay instalments or where the customer disappeared with the car, as compared with a sale by the customer to a purchaser without notice so that title did pass.  Effectively the property condition excluded bad debt relief in cases of HP default unless the customer sold to a buyer without notice.  These were additional arbitrary distinctions to those between credit sale and HP, for which there was no justification.  The claims covered by this appeal all involved breaches by customers of the agreements.

41.	As for the insolvency requirement, he said that in 90 to 95 per cent of repossessions there was no bankruptcy or insolvency.  The vast majority of customers were individuals.  Where a customer was insolvent there was the need to prove in the insolvency.  In very large part the insolvency conditions could not be satisfied as a matter of ordinary business practice.  The insolvency conditions were a serious inroad into the UK’s implementation of Article 11C1.

Submissions for Customs

42.	Dr Lasok submitted that the passing of title and insolvency requirements were not inconsistent with EC law.  Article 11C1 gave power to derogate in the case of total or partial non-payment.  He said the statutory requirements were directed to the purpose identified in Goldsmiths at [18] namely to establish that the non-payment has been established and is not temporary.  He accepted that the title and insolvency requirements were derogations, rather than conditions directed to the mechanisms of relief.  

43.	He said that there might be cases where the insolvency requirement was disproportionate, such as with a small trader for whom insolvency proceedings would be uneconomic.  Such cases could be met by reading in the formula in ICI v Colmer [1997] 1 WLR 2055 “without prejudice to the directly enforceable Community law rights”.  He said that GMAC was not in the situation of the impecunious small trader : there was no evidence that the insolvency requirement was the barrier which GMAC faced, rather it was the property requirement which was the obstacle.  

44.	He said that the passing of title requirement also fell within Goldsmiths at [18].  For a bad debt in the context of a sale there had to be a sale.  There was no evidence that the passing of title requirement discriminated between GMAC and its competitors before 1997.  Mr Tatford’s evidence was that credit sale agreements became more common from 2000 onwards.  In Revenue and Customs Commissioners v Rank Group plc [2004] STC 2304 there was evidence of disparity of treatment at a high level of generality between similar products and similar traders.  Here there was no evidence of competitors offering credit sale agreements.  If competitors did have credit sale agreements those might have contained a Romalpa clause.

45.	Dr Lasok said that credit sale agreements were obviously different in their nature to HP agreements with different legal results.  The Advocate General in Goldsmiths at paragraph 28 of his opinion referred to “unimportant and unjustified distinctions”.  The transfer of title was an objective difference.  GMAC chose to structure its arrangements to ensure that it retained title for commercial reasons and must take the consequences, see Customs and Excise Commissioners v Cantor Fitzgerald (Case C – 108/99) [2001] STC 1453 at [31] and BLP Group plc v Customs and Excise Commissioners (Case C – 4/94 [1996] 1 WLR 174 at [25]-[26].  He said that where transactions are genuinely different, there is no breach of fiscal neutrality if they are treated differently.

Response by GMAC

46.	Mr Cordara said that no justification had been given for restricting relief for bad debts to cases of insolvency; they were not the same.  The evidence was that 90 per cent of defaulters were not insolvent.  The concept of Article 11C1 was simply of total or partial non-payment, a very simple commercial concept.  Insolvency proceedings involved time and money which made the exercise of the Article 11C1 rights excessively difficult or impossible.
47.	He said that there was no logical connection between passing of title and establishing that non-payment was not merely temporary.  He said that bad debt relief was not limited to any particular form of supply and could cover any form of economic activity.  

48.	Mr Cordara said that Rank established that the burden was on Customs to demonstrate why there was no distortion of competition when similar transactions were treated differently.  Here the commercial marker was payment by instalments : HP and credit sale were simply different ways of buying by instalments.  There was no challenge to Mr Tatford’s evidence that some of GMAC’s competitors offered credit sale agreements; Mr Tatford was only asked about the terms offered.  He accepted that his evidence was at a high level of abstraction.

49.	He said that Cantor Fitzgerald concerned an exemption which must be construed strictly; it was no guide on the distortion point.  BLP was also very distant from this case.  

50.	Mr Cordora said that Colmer did not establish a one size fits all principle.  Where there is a directly effective right there is no need to apply Colmer.  Customs and Excise Commissioners v The Chinese Channel (Hong Kong) Ltd [1998] STC 347, was decided on Article 9 rather than the UK legislation.  Even where there is proper implementation of  the Directive that does not exhaust direct effect, see Marks & Spencer plc v Customs and Excise Commissioners (No 4) (Case C – 62/100) [2002] STC 1036.  Failure by a member State to implement the Directive does not prejudice the right to exercise a directly effective right.  Where there is black letter non-compliance with a directly effective right the domestic legislation simply falls away; it is not re-written to save it.  

51.	He said that ICI v Colmer, Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252 and Vodafone 2 Ltd v Revenue and Customs Commissioners [2009] STC 1480 were all concerned with domestic legislation which was not enacted to give effect to directly effective rights.

52.	Mr Cordara said that the bad debt legislation in the UK could not be cured by writing in words such as in Colmer because the incompatible conditions would have no work to do; such a construction would go against the grain of the UK legislation.

Conclusion on compatibility issue

53.	Article 11C1 of the Sixth Directive required the taxable amount of supplies to be reduced in the case of total or partial non-payment.  Bad debt relief was intended to give effect to this.  Although the insolvency and property requirements for bad debt relief were frequently referred to as conditions, it is clear that they constituted derogations within the second sub-paragraph of Article 11C1 rather than conditions within the first sub-paragraph.  The conditions referred to Article 11C1 are concerned with procedure and evidence, see the Advocate General at paragraph 74 in EC v Germany (Case C-427/98) [2003] STC 301.
54.	Goldsmiths [1997] STC 1073 is the leading case on derogation from Article 11C1.  The Court of Justice stated at [15] that Article 11A(1)(a) embodied a fundamental principle that the basis of assessment is the consideration actually received and at [16] that Article 11C1 required member states to reduce the VAT payable wherever after a transaction part or all of the consideration was not received.  At [17] and [18] the Court said this,

“[17] Nevertheless, the second sub-paragraph of Article 11C1 of the Sixth Directive permits the member states to derogate from the above mentioned rule in the case of total or partial non-payment.

[18] The power to derogate, which is strictly limited to the latter situation, is based on the notion that in certain circumstances and because of the legal situation prevailing in the member state concerned, non-payment of consideration may be difficult to establish or may be only temporary.  It follows that the exercise of that power must be justified if the measures taken by the member states for its implementation are not to undermine the objective of fiscal harmonisation pursued by the Sixth Directive.”

55.	Dr Lasok sought to justify the requirements by reference to the first sentence in [18].  We note however that he did not make any submissions as to the particular legal situation prevailing in the UK.  There is no reason to believe that non-payment of consideration is any more difficult to establish in the UK than in any other member state or that it is more likely to be temporary.

56.	It should be noted that, although default under an HP agreement for a car is a common situation in which a bad debt may arise, the need for such relief in order to comply with Article 11C1 arises in any case where a trader has supplied goods or services accounting for and paying VAT but where all or part of the consideration is unpaid.  Hire purchase is common with sales of many other goods such as televisions, white goods and furniture.  Bad debts can arise whenever goods are sold or services are performed on credit.

57.	The requirements in section 36 of the 1994 Act and its predecessors that the bad debt has been written off in the trader’s accounts and that six months have elapsed from the supply are clearly justifiable on the basis of [18] in Goldsmiths.

58.	The reply of the Court of Justice in Goldsmiths although not identically worded to that proposed by the Advocate General had no material difference.  The Advocate General emphasised at paragraph 19 the need for derogation to comply with the underlying principles of the Directive and at paragraph 26 the need for proportionality.  At paragraph 28 he referred to the need for fiscal neutrality avoiding “the drawing of unimportant and unjustifiable distinctions”.

59.	In our judgment both the property requirement and, up to the Finance Act 1990, the insolvency requirements went beyond what was appropriate or necessary to achieve the aims identified by the Court of Justice at [18] of Goldsmiths.

60.	Unless another creditor had instituted bankruptcy proceedings, the insolvency requirement involved GMAC taking action which it regarded as uncommercial.  It is a statement of the obvious that the institution of bankruptcy proceedings could frequently involve incurring costs exceeding the debt recovered, particularly if there was difficulty in tracing the defaulter.  It is also a statement of the obvious that if the insolvency requirement was a substantial obstacle for a large company such as GMAC recovering debts which could often be substantial, it was an even greater obstacle for a small trader such as a shopkeeper or a builder.

61.	The property requirement was more limited in its effect, being confined to goods where title did not pass on delivery.  However we accept the submission of Mr Cordara that it produced an unjustified difference in treatment of hire purchase transactions compared with credit sales.  It also resulted in irrational differences in treatment depending on the circumstances of the default.

62.	We do not accept Dr Lasok’s submission that in order to rely on the difference in treatment between hire purchase and credit sale transactions, GMAC needed to produce evidence that competitors had engaged in credit sales.  The transactions were essentially similar.  The submission mirrored that which was unsuccessfully advanced by Customs in Rank.  It would produce the anomalous result that the bad debt requirements would be compatible or not depending on a trader’s ability to adduce evidence as to transactions by other traders.  In any event it was legally possible to buy cars or other goods under credit sale agreements.

63.	We do not consider that the incompatibility could be cured by a purposive construction reading in a formula such as that in Colmer.  The insolvency requirement was a pre-condition of relief until removed in 1990.  It would clearly have gone against the grain of bad debt relief to read in words which were inconsistent with the pre-condition.  Although the property requirement was a condition rather than a pre-condition, it was an express requirement for relief and in our view it would go against the grain of the legislation to read in words which negated the requirement.  We consider that the suggested purposive construction would go well beyond either IDT or Vodafone 2.  The result is that the insolvency and property requirements for debt fall to be disapplied.

The Windfall Issue

Submissions for Customs

64.	Dr Lasok said that the effect of combining the bad debt relief claim with the regulation 38 adjustments and the de-supply under the Cars Order was that GMAC would recover more VAT than that attributable to its economic loss thus involving a breach of fiscal neutrality and distortion of competition.  GMAC’s claim would result in a windfall exceeding the amount properly recoverable under the Sixth Directive as interpreted by the Court of Justice.  When invoking EC law in relation to bad debt relief, GMAC must take all the consequences of EC law, see Becker v Finanzamt Munster-Innenstadt (Case 8/81) [1982] ECR 53.  GMAC No 1 would now be decided differently following IDT [94]-[95] in the Court of Appeal.  

65.	He said the sales of repossessed cars were not to be treated separately from the regulation 38 adjustments and bad debt relief.  In Halifax plc v Customs and Excise Commissioners (Case C – 255/02 [2006] STC 919 the Court of Justice looked beyond the individual transactions.  It was irrational to analyse each transaction in isolation because VAT is a tax applied to a chain of transactions with the tax being borne by the final consumer.  The position was different in EC Commission v Netherlands (Case 16/84) [1985] ECR 2355 which concerned traders selling goods bought second-hand from non-taxable consumers.  Here the hirers never bought the cars and made no supplies for value to GMAC; there was no break in the chain of transactions until the sales following repossession, the property remained with GMAC.  The second-hand goods cases were also not relevant since there was no desupply but rather a change in the taxable amount.

66.	He said that in a case where an HP contract was terminated early with a sale on repossession, the Sixth Directive reduced the original VAT but charged VAT on the sale after repossession.  The original Cars Order produced a similar practical result by a different technique; the original VAT was not reduced but the sale after repossession was de-supplied.  Leaving the Cars Order in place when the regulation 38 mechanism was introduced had a cumulative effect not envisaged by the Directive.  In GMAC No 1, GMAC was able to rely on domestic law.  Now GMAC wished to worsen the position by reducing further its liability to account for VAT through bad debt relief.  GMAC could not rely on EC law to increase its windfall.  Neutrality and the avoidance of distortion required that GMAC should not, in the event of repossession and subsequent sale, pay less output tax than an amount which was in proportion to the overall consideration received from the defaulting first customer and the second customer.

67.	Dr Lasok said that the intention of the UK legislation must be in conformity with the result intended by the Sixth Directive.  The UK legislation should be interpreted accordingly.  Here the bad debt relief should not be construed to give a windfall in addition to that following the decision in GMAC No 1.

GMAC’s submissions

68.	Mr Cordara said that Becker had been cited for the submission for Customs that GMAC could not access its Article 11C1 rights because of countervailing principles neutralising those rights : that was based on Becker at [44].  However there was no parallel in the Sixth Directive to the [44] situation and nothing in the Directive to cut down the rights under Article 11C1.  Customs had to rely on fundamental principles rather than the words of the Directive.  He said that there was nothing in Becker at [44] to suggest that it is part of the Tribunal’s obligation to cut down otherwise directly effective rights simply because if exercised some other domestic right will give in overall terms “too much money”.

69.	He said that the rights under regulation 38 and to bad debt relief arose from one transaction whereas the de-supply was a separate transaction in a different supply chain to a different customer.  Customs were fixated with the car rather than the transaction.  It was necessary to analyse matters transaction by transaction, see per Lord Hoffmann in Customs and Excise Commissioners v Robert Gordon’s College [1995] STC 1093 at 1099, citing BLP Group plc v Customs and Excise Commissioners (Case 4/94) [1995] STC 424.  He said that this was not a Halifax avoidance situation.

70.	Mr Cordara said that the UK met the problem arising when a repossessed car was sold without an intervening sale by the de-supply provision in the Cars Order which was originally introduced in 1973.  The case for Customs was effectively a complaint against the only possible effect of that provision.  The cash flow problem only arose when the Directive was properly implemented by regulation 38.  He said that in GMAC No 1 Customs sought to block the effect of regulation 38 because of its cumulative effect; the same argument was now advanced to block bad debt relief.  There was no dispute as to the bad debt relief in GMAC No 1 which has been repaid by Customs.  Field J indicated that the reliefs had different rationales and were not inconsistent.  The decision in GMAC No 1 which was not appealed is res judicata.  The interaction of the Cars Order with the other legislation was clearly before Field J.  Although IDT had not been decided it would have made no difference.  In EC Commission v Netherlands (Case C-338/98) [2003] STC 1506 the Court recognised that Article 17(2)(a) might not be fully consistent with fiscal neutrality; the Advocate General recognised that the system was not fully harmonised.  

71.	He said that Customs’ complaint arose from the working of the de-supply when combined with bad debt relief and regulation 38.  There was no contrivance or departure from usual arrangements, GMAC’s arrangements were standard industry practice.  

72.	IDT was not concerned with Article 11 of the Directive or with second-hand goods.  It was a case where the Directive was malfunctioning in a cross-border situation.  It involved distortion because of unusual arrangements, possibly tax planning with no VAT being charged.  The taxpayer there had no directly effective rights; there was a single chain of supply.  Because of the different views taken by Ireland and the UK as to the place of supply rules neither the supply of the phone cards in that case nor their use in paying for telecommunications services was charged to VAT.  The decision of the Court of Appeal was based on the interpretation of the word “due” in the anti-avoidance provision in Schedule 10A, paragraph 3(3) of the 1994 Act to which the principles of EC law were applied.  Without that hook in the domestic legislation, there would have been no basis for applying general EC law principles.  He accepted that it was uncontroversial that avoidance of non-taxation and double taxation and the prevention of distortion of competition were general principles of the Sixth Directive, see IDT at (95) but said that IDT was not a case about the general application of a principle of non-taxation, see [99]; it was simply a case of widening paragraph 3(3) of Schedule 10A, see [113].  The closer the legislation is to the target, the easier to write in a limitation based on EC law.

73.	Mr Cordara said that if Customs were asking the Tribunal to cut down GMAC’s access to the directly effective rights to bad debt relief under Article 11C1, that raised policy issues which could not easily be resolved short of a reference to the Court of Justice.

Conclusion on Windfall

74.	It is not in dispute that Article 11C1 gives rise to directly effective rights which encompass bad debt relief.  Since GMAC did not satisfy the requirements for such relief under domestic legislation during the relevant period and we have concluded that the domestic legislation cannot be purposefully interpreted to comply with EC law, GMAC is obliged to rely on its directly effective rights to disapply the incompatible requirements.

75.	The contention for Customs is that if the Appellant is to rely on its directly effective rights arising from Article 11C1 it must take all the consequences of EC law including the avoidance of non-taxation so that it should not pay less output tax than an amount which was in proportion to the overall consideration received from (1) the defaulting first customer and (2) the second customer (paragraph 27 of the skeleton).  

76.	Dr Lasok compared the net VAT accounted for in the example at paragraph 30 above, namely £744.68 on GMAC’s argument, with the VAT attributable to the £5,000 paid by the defaulter and the £6,500 auction proceeds, together £11,500, on which VAT at 7/47ths would be £1,712.77.  He characterised the difference as a windfall.

77.	The effect under the HP agreements of the sale of the repossessed cars was that the consideration payable by the original customer was reduced by the resale proceeds and the regulation 38 adjustment reflected this adjustment.  In the example this was £968.08.  Following the decision in GMAC No 1, against which there was no appeal, the regulation adjustments were made both for the periods covered by that appeal and for the earlier periods covered by the present appeal.  Those adjustments are not and could not be challenged in this appeal which is solely concerned with the entitlement to relief for the VAT attributable to the balance in the example of the £15,000 which was neither paid by the original customer nor recovered on the sale following repossession.

78.	As Mr Cordara emphasised, the argument by Customs as to the cumulative effect of de-supply, regulation 38 and bad debt relief was essentially the same as that advanced by Kenneth Parker QC for Customs in GMAC No 1.  The only differences are that in GMAC No 1 it was raised in relation to regulation 38 whereas here it is raised in relation to bad debt relief and that IDT has been decided since.  It is to be noted that the entitlement to bad debt relief was not in dispute in GMAC No 1 because it covered the period after removal of the incompatible requirements.  

79.	Mr Cordara accepted the statement of Arden LJ in IDT at [95] that,

“the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of distortion of competition are general principles of the Sixth Directive”.  

The principle of avoidance of non-taxation can of course only apply to transactions which are intended to be taxed under the Directive, so that those are taxable supplies by taxable persons.  

80.	In the present case the initial supplies under the HP agreements were intended to be taxed and were taxed.  Article 11C1 required reduction on partial non-payment.  That is achieved in the UK by bad debt relief disapplying the incompatible requirements.  In our judgment such reduction cannot of itself constitute non-taxation.  Any non-taxation can only apply to the amount of the reduction or to any reduction being made on the facts of the case.  It has already been decided that GMAC was entitled to regulation 38 relief and it was no part of Dr Lasok’s submissions that the de-supply on the Cars Order was incompatible with EC law.  The position is therefore that none of the reliefs or adjustments taken in isolation give rise to non-taxation contrary to EC law.  The contention is rather that taken together they result in non-taxation of part of the consideration of the original HP supply.  The amount of the non-taxation in the example is equal to the VAT on the sale of the repossessed car, namely £968.08, which is again equal to the regulation 38 adjustment pursuant to clause 9 of the agreement.

81.	The contention that the claim to bad debt relief would result in non-taxation under EC law is necessarily based on the proposition that the proceeds of the sale of the repossessed car must be taken into account in arriving at the tax which ought to be payable on the HP supply.  It was not however suggested by Dr Lasok that the sale proceeds were third party consideration for the HP supplies within Article 11A(1)(a).  His case rather was that the cars did not leave the economic chain.  That however ignores the fact the under Article 5(4)(c) there was a supply when the cars were handed over to the customers.  Article 11C1 provides for the reduction of the consideration rather than a retrospective cessation of the supply.

 82.	We do not accept the submission of Dr Lasok that the approach of Lord Hoffmann in Robert Gordon’s College that it is necessary to analyse matters transaction by transaction was overtaken by Halifax.  Halifax was an abuse of rights case involving a clear avoidance scheme.  The present case was in no sense an avoidance scheme or an abuse of rights, it arose out of perfectly normal basic practice, which under UK domestic law as it then stood resulted in materially adverse VAT treatment of GMAC.

83.	We accept Mr Cordara’s further submission that in this case Customs have no hook, equivalent to “due” in paragraph 3(3) in IDT, on which to base an interpretation limiting GMAC’s right to bad debt relief.

84.	We also accept Mr Cordara’s submission that there is no precedent in EC law for limiting the exercise of directly effective rights in the manner suggested.  If our decision depended on that it might well have necessitated a reference to the Court of Justice since it raises fundamental issues.

85.	We conclude that GMAC’s rights to bad debt relief are not defeated or curtailed by the end result of the combination of that relief with the other reliefs and adjustments.  We observe that if in one sense GMAC did receive a windfall, it is likely to have sustained a commercial loss on the transactions where HP customers defaulted.

The Time Limit Issue

Submissions for Customs

86.	Dr Lasok contended that the Tribunal had no jurisdiction over bad debt relief except under section 83(h) of the VAT Act 1994 which covers a claim for a refund under section 36 or section 22 of the VAT Act 1983.  He said that the claim relating to supplies before 1 April 1989 was excluded by section 39(5) of the Finance Act 1997.

87.	He said that if, contrary to Customs’ contentions, section 22 was not compatible with EC law on a black letter reading, but could be made compatible under the principle in Marleasing SA v La Commercial International de Alimentation SA (Case C – 106/89) [1990] ECR I – 4135, then there was jurisdiction under section 83(h), however the time limit applied.  If section 22 could not be made compatible, the Tribunal had no jurisdiction, see Wilkins (John) (Motor Engineers) Ltd v Revenue & Customs Commissioners [2009] STC 2485 and the remedy was a claim for restitution in the civil courts.  The Appellant could not avoid section 22 by relying on section 83(t) because there was no overpayment of tax.  Nor could the Appellant rely on section 83(b) because the principle of equivalence required the claim relying on direct effect of Article 11C1 to be dealt with in the same way as a comparable domestic claim : such claim would be under section 22.  He said that Customs were entitled to rely on the time limit as in Aprile SrL v Ammistrazione delle Finanze dello Stato (No 2) (Case C – 228/96) [1998] ECR I – 7141; [2000] 1 WLR 126.

Submissions for GMAC

88.	Mr Cordara said section 83(h) should be read purposively to cover bad debt relief claims generally.  Alternatively, section 83(b) covered the VAT chargeable on a supply including the amount chargeable and was not limited to the tax initially chargeable and extending to that due ultimately after bad debt relief.  He did not pursue an initial submission that section 83(t) might apply.

89.	He said that section 22 could not be made compliant with EC law by reading in words such as “without prejudice to the directly enforceable community rights” (see ICI v Colmer [1991] WLR 2035 per Lord Nolan) because that would go against the grain of section 22.

90.	He said that if he was wrong on this, nevertheless GMAC could rely on Fleming v Revenue and Customs Commissioners [2008] STC 324 since the extent of the rights of GMAC would not be known until this appeal was resolved and sufficient notice of the introduction of a time limit was required to enable traders with accrued rights to submit claims, see Lord Hope at [11] and [12] and Lord Neuburger at [107].  He said that there was no inconsistency with Aprile (No 2) which was cited in the House of Lords in Fleming Aprile SrL.  In Aprile (No 2) there was a long standing Italian time bar.  It was necessary also to consider Emmott v Ministry of Social Welfare and Attorney General (Case C – 208/90) [1991] ECR I – 4296 .

Conclusions on time limit

91.	We have already concluded that the insolvency requirement in the legislation before the Finance Act 1990 and the property requirement in the legislation before the Finance Act 1997 were incompatible with EC law and fell to be disapplied.  That does not mean that the entirety of section 12 of the Finance Act 1978, section 22 of the VAT Act 1983 as substituted in 1985 and section 11 of the Finance Act 1990 fell to be disapplied.  Disapplication only covers the incompatible provisions and, for example, left the regulations intact in so far as they did not depend on the incompatible provisions.

92.	We accept Dr Lasok’s submission that the Appellant’s right of appeal to the Tribunal is under section 83(h) via section 22 of the 1983 Act and for the period from 1 April 1989 is section 36.  We do not accept that section 22 can be circumvented via invoking section 83(b).  Claims for refund for bad debts are clearly covered by section 83(h).

93.	This however raises the question whether the time limit in section 39(5) of the Finance Act 1997 falls to be disapplied because at the same time as the incompatible property restriction was removed the right to claim a refund under section 22 was also removed.  Any accrued rights of GMAC under section 22 were thus subject to a time bar before these rights were recognised as a matter of domestic law.

94.	The right to bad debt relief under section 22 of the 1983 Act was preserved by Schedule 13, paragraph 9(1) of the 1994 Act.  That was repealed by Schedule 18 of the Finance Act 1997.  There was no time limit for making such claims, so that apart from Finance Act 1997 GMAC was entitled to a refund for bad debts on supplies going back to the start of GMAC’s claim in this case.

95.	Section 39(5) of the Finance Act 1997, which removed GMAC’s accrued rights to relief for bad debts including its directly effective rights under Article 11C1, contained no transitional relief.

96.	In Fleming [2008] 1 WLR 195 the taxpayer made a claim in October 2000 for repayment of input tax on the purchase of three cars in 1989 and 1990.  Customs refused the claim on the ground that the three-year time limit under regulation 29(A) of the VAT Regulations 1995 which was inserted in 1997 had expired.  The House of Lords held that regulation 29(1A) was incompatible with Community law because it had retrospective effect and lacked any transitional provision and that it was therefore the duty of the courts to disapply the regulation to the extent necessary to enable claims based on accrued rights to be brought within an appropriate period; it was held that to be compatible with Community law and to comply with the principle of effectiveness, taxpayers were entitled to be told in advance of transitional arrangements and to be given sufficient notice to familiarise themselves with this new regime.

97.	Lord Hope at [77] said that Fleming was a case, 

“where there was originally no time limit for the making of claims at all and no transitional arrangements have been included in the measure that introduces one.  In [such cases] the retrospective time limit is unenforceable as there is no adequate transitional period”.

At [9] Lord Hope said that the principle of legitimate expectations is infringed “by the retrospective introduction of a time limit for the making of claims retrospectively”.

98.	Dr Lasok did not suggest that any distinction can be drawn between the retrospective barring of a claim for input tax as in Fleming and the retrospective barring of bad debt relief.  In our judgment there is no distinction.

99.	Aprile (No 2) on which Dr Lasok relied involved a law passed in Italy in 1990 shortening the time limit for claims for the refund of charges paid in connection with customs operations in November 1990, such charges having been found by the Court of Justice 1989 to be contrary to the EC Treaty.  In 1994 the administrator of Aprile, which was declared insolvent in October 1992, claimed a refund of charges incurred outside the time limit which was three years at the time of the claim.  The rules providing for the charges were amended with effect from June 1991 and November 1992, which was after the time limit for claims was shortened.

100.	The Court of Justice decided that Community law did not preclude the introduction of a special time limit for claims for repayment of customs charges and that in the circumstances of that case the member state could rely on the time limit even though the rules for customs charges had not yet been amended.  At paragraphs [39] to [44] the Court said this,

[39] …… Community law does not in principle prohibit a member state from resisting actions for repayment of duties levied in breach of Community law by relying on a time limit under national law of three years 

[40]  It is true that in paragraph 23 of Emmott v Minister for Social Welfare (Case C – 208/90) [1991] ECR I-4269 the Court held that, until such time as a Directive has been properly transposed, a defaulting member state may not rely on an individual’s delay in initiating proceedings against it in order to protect rights conferred on him by the provisions of a Directive, and that a period laid down by national law within which proceedings must be initiated cannot begin to run before that time.  

[41]  However ….. the solution adopted in Emmott was justified by the particular circumstances of that case, in which a time bar had the result of depriving the plaintiff in the main proceedings of any opportunity whatever to rely on her right to equal treatment under a Community Directive ….
……

[43] In this case, it does not appear from the documents before the Court and the arguments presented at the hearing that the conduct of the Italian authorities, in conjunction with the existence of the contested time limit, had the effect, as it did in Emmott, of depriving the plaintiff company of any opportunity of enforcing its rights before the national courts.

[44] Moreover, it is clear from the case law of the Court …. that the solution adopted in Emmott is not applicable to claims for repayment not based on the direct effect of a Directive.  ….. [I]t is clear from the documents now before the Court that the incompatibility of the charges at issue with Community law derives not from failure to implement, or incorrect transposition of [a] Directive but from the infringement of the provisions of the Treaty or of other directly applicable Community instruments.” 

101.	It is to be noted that a specific ground in Aprile (No 2) for distinguishing Emmott, which was also a decision of the full Court, was that in Aprile (No 2) the claim was not based on the direct effect of a Directive.  Although that may seem a surprising distinction the whole of [44] addresses it.  The present case does of course concern the direct effect of Article 11C1 which was not correctly implemented.

102.	A further distinction between the present case and Aprile (No 2) is that at the time when the time limit in that case was shortened, the company had a considerable time to reclaim the refund before the time limit expired.  This had the same effect as a transitional relief.  Although the law regarding the changes had not been amended, Aprile had already established in earlier proceedings that the charges were contrary to Community law.  The present case involved the retrospective introduction of a time limit when before there was none.

103.	Although Dr Lasok said that Mr Cordara’s submission based on Fleming was covered by Aprile (No 2) at [35] to [43], he did not submit that Fleming was not correctly decided.  Since both Aprile (No 2) and Emmott were referred to in the opinions of the House of Lords in Fleming that would have been a brave submission.

104.	In our judgment the retrospective time bar in section 39(5) of the Finance Act 1997 which had no transitional relief must be disapplied as contrary to Community law.

Summary of Conclusions

105.		Bad debt relief was intended to give effect to Article 11C1 of the Sixth Directive in the event of total or partial non-payment.  Both the insolvency requirements for bad debt relief before the Finance Act 1990 and the property requirement prior to the Finance Act 1997 were incompatible with EC law.  The incompatible requirements in the UK legislation fall to be disapplied (paragraphs 53 to 63).

106.	It was not suggested that the Cars Order was incompatible with EC law.  Neither bad debt relief, nor the regulation 38 adjustments nor the de-supply under the Cars Order gave rise in isolation to non-taxation.  The payments obtained on the sales of the repossessed cars were not third party consideration for the HP supplies.  The sales of the repossessed cars were separate transactions and did not involve an abuse of rights as in Halifax.  The claims to bad debt relief did not result in a distortion and lack of fiscal neutrality contrary to EC law (paragraphs 74 to 85).

107.	The jurisdiction of the Tribunal in this appeal is under section 83(h), however the retrospective time bar under section 39(5) of the Finance Act 1997 falls to be disapplied in this appeal as incompatible with EC law (paragraphs 91 to 104).

108.	The appeal is allowed in principle.

109.	We direct that the Tribunal be notified if the quantum is not agreed within six months so that the appeal can be re-listed.

 

THEODORE WALLACE

RELEASE DATE:  6 May 2010