VAT – repossessed goods and credit notes

Introduction

The taxpayer, a motor dealer, had acquired motor vehicles and claimed input tax attributable to the supply of the vehicles. The taxpayer was then put into receivership. As a result of specific terms, the Supply Agreement terminated automatically on the appointment of Administrative Receivers. The vehicles had been repossessed when the receiver had been appointed and credit notes issued to the taxpayer. The receivers repaid the VAT to Customs. The vehicles were subsequently resupplied to the receiver to allow him to continue running the business.

The taxpayer argued that the VAT repaid by the receiver was incorrectly paid and sought repayment of the VAT. The basis for this argument was that they were still liable to pay the price for the vehicles and hence the credit notes had no effect.

Customs argued that credit notes issued by the supplier obliged the taxpayer to repay the VAT shown on the credit notes.

The Facts

The taxpayer was the VAT representative member of the Quartic Motor Group. Quartic was an authorised main Ford Car Dealer pursuant to a Dealership Agreement. A subsequent agreement was signed which provided for the sale of certain Ford models to Quartic on what was called the “dealer sold” basis. This involved Ford invoicing the dealer on ‘gate release’ for the full price, though the obligation to pay was deferred on the basis that Ford retained title to the car until payment of the price in full.

A number of such models were sold and invoiced by Ford to Quartic. VAT on the sale, though not paid by Quartic to Ford, had been accounted for to HMRC by Ford as output tax and by Quartic as input tax.

In 2002 Quartic went into administrative receivership. The cars sold but not paid for were liable to be repossessed by Ford. Those cars having been repossessed by Ford, Ford then issued vehicle credit notes to Quartic in respect of each of those sales and tax invoices in respect of the same cars for the same price to Quartic under a new customer code. For the purposes of VAT it was necessary to reduce both the output tax paid by Ford and the input tax for which Quartic sought relief in respect of the original sales and replace them with equivalent liabilities or rights as at the dates of the second sales.

HMRC considered that the credit notes had been properly issued and in order to give effect to them repaid to Ford the amount of VAT paid in respect of the first sales and assessed Quartic as liable in the like sum for input tax wrongly credited to its VAT accounts in respect of the first sales. Quartic contended that the credit notes had not been properly issued so that its original claim to set off input tax had been properly made. HMRC rejected this contention.

Quartic appealed to the VAT Tribunal, that appeal was dismissed. Quartic then appealed to the High Court.

The High Court held that the Tribunal (which decided in favour of Customs) was entitled to decide that taxpayer was not entitled to a repayment of the input VAT which had been paid by the receiver. In addition, it was stated that had the matter come to the Court afresh it would have come to precisely the same conclusion.

The Issue

Whether the Tribunal's decision was wrong in law and the High Court Judge's conclusion was not open to him.

The Decision

The Court of Appeal allowed the taxpayer's appeal. However, it is important to note that this does not automatically mean that the credit notes were ineffective for all legal purposes including VAT. The case was remitted to the VAT and Duties Tribunal to be reheard and determined in accordance with the judgment of the Court of Appeal.

The taxpayer contended that both the Tribunal and the High Court judge were wrong because the repossession of the vehicles and the issue of the credit notes were the unilateral acts of Ford with no legal effect whether for the purposes of VAT or otherwise.

Ford (and HMRC [both were respondents in the case]) contended that the repossession of the vehicles and issue of the credit notes amounted to an offer by Ford accepted by the conduct of the Administrative Receivers to rescind the original supply and replace it by the later one.

It appeared to the Court of Appeal Judge that the Tribunal did not ask themselves the right question. They never considered the facts from the correct perspective. Hence the matter was remitted to the Tribunal and lower court.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2009/118.html.