The High Court held that the VAT and Duties Tribunal ([2007] BVC 4,087) was entitled to decide that a motor dealer in administrative receivership was not entitled to the benefit of input tax attributable to supplies of vehicles which had been repossessed by the manufacturer when the receivership occurred and then resupplied to the receivers to enable them to continue running the business with a view to sale.

Facts

The taxpayer was the representative member for VAT purposes of a Ford vehicle main dealer. In 2002, the taxpayer went into receivership along with other members of the group. In October 2005, the group's accountants made a voluntary disclosure of £2,362,853 said to be VAT incorrectly repaid to Customs by the administrative receivers on the understanding that pre-receivership supplies in respect of which the taxpayer had claimed input tax had been cancelled. The receivers had believed that the input tax originally claimed should be repaid to Customs. However, it was now maintained that the taxpayer had, after all, been entitled to the input tax and that it should never have been repaid. The taxpayer appealed against Customs’ decision to refuse the taxpayer's claim.

The contractual relationship between the parties was governed by a supply agreement. A number of new Ford vehicles, for which payment was due to Ford under the supply agreement, had left the factory and other vehicles which had not been sold also fell due for payment on dates following the receivership. Under the supplyagreement, Ford could elect to have the vehicles returned. The tribunal was concerned with the vehicles returned to Ford, in respect of which credit notes were issued to the taxpayer.

The taxpayer argued that the credit notes had no effect, since the supplies had taken place. It considered that it had an entitlement to input tax credit and that Ford could have claimed bad debt relief had it chosen to do so. The taxpayer relied on various cases in support of its claim that the criterion for determining the validity of a credit note was that it must be issued to correct a genuine mistake or overcharge, or to give proper credit. The taxpayer argued that there was no basis on which it could be suggested that the disputed credit notes satisfied those conditions. The taxpayer submitted that there was no impediment to Ford making a claim for bad debt relief and that that was what would be expected to happen. Customs and Ford both submitted that the credit notes were properly issued and were valid for VAT purposes.

The tribunal rejected the claim for repayment on the basis that the credit notes issued by Ford to the taxpayer were valid for VAT purposes, thus obliging the taxpayer to repay to Customs the VAT shown on those credit notes ([2007] BVC 4,087; Decision No.20,107). The taxpayer appealed, arguing that notwithstanding the return of the vehicle the taxpayer remained liable to pay the price (in particular the VAT) under the terms of the supply agreement and that obligation was expressly preserved by clause 12. The taxpayer remained liable to pay the VAT as an input and was thus entitled to reclaim it or offset it against its output liability.

Issue

Whether the tribunal's findings of fact and conclusions were sustainable under the terms of the supply agreement and the factual matrix.

Decision

Peter Smith J (dismissing the appeal) rejected the argument that if Ford repossessed a vehicle, the VAT debt remained. If Ford repossessed a vehicle, there would only be a shortfall (i.e. the VAT) under clause 12 if Ford, upon resale of the vehicle, achieved a lesser price than the price charged to the taxpayer including VAT. As a matter of contractual liability as between the taxpayer and Ford, the VAT part of the debt was not to be ignored for the purpose of setting off the taxpayer's liability and the obligation on the part of Ford to give credit for the sale proceeds which it received on the subsequent sale. Further, clause 12 conferred on Ford benefits but not obligations. It was not obliged to seek to recover any shortfall upon repossession. When a dealer became insolvent and Ford repossessed its vehicles, it was unlikely to be in a position to expect to be able to recover anything in real terms as opposed to proving in the insolvency (as an unsecured creditor) of the relevant dealer. It was likely to be at the end of a long queue. There was nothing in the case to suggest that Ford could ever have made any recovery of any surplus debt due to it from the taxpayer consequent upon the realising of its assets and payment of its creditors.

The tribunal plainly made its decision based on what the parties did upon the appointment of the administrative receivers. They plainly did not operate clause 12 but the parties did operate a procedure whereby the following occurred: (1) the vehicles were returned; (2) Ford issued the credit notes; (3) the taxpayer acting by the administrative receivers no longer claimed the VAT on the invoices as input tax; (4) the administrative receivers paid the VAT to Customs in full without any such deduction; (5) Ford sold the vehicles to the administrative receivers at the same price (including VAT); (6) that enabled the administrative receivers to trade the company out for the benefit of the old creditors of the taxpayer; (7) both the taxpayer and Ford acted as if the supply agreement had been rescinded and there were no further obligations arising under it. The taxpayer objected that there was no evidence of an agreement expressly agreed between the administrative receivers and Ford so that the relationship fell to be covered entirely by the express terms of clause 12. The tribunal did not in so many words say that there was a particular agreement struck on a particular day but all of the above was done by all the parties. The parties (which they had the ability to do) simply operated, outside the supply agreement, a different regime for their own particular purposes. Ford wanted its vehicles back but wished to sell them. The administrative receivers wished to continue the business. It needed stock. All of that was a genuine transaction (not an artificial one for the purpose of extinguishing a VAT liability). The parties had in effect agreed that the supply agreement should come to an end on the basis that it was rescinded, no vehicles were ever supplied and no VAT was therefore payable and the credit notes were properly issued.

That was a finding of fact by the tribunal based on the evidence which could not be challenged on appeal but, had the matter come to the court afresh, it would have come to the same conclusion.

Chancery Division.

Judgment delivered 24 January 2008.