VAT relief for bad debts.

The appeal concerned the entitlement of the company to relief for bad debts totalling in excess of £2.3 million for the period 1978 to 1997 arising out of hire purchase (HP) contracts terminated early without the buyer becoming owner of the goods.

The company's business included the sale of motor vehicles on HP to the public – the company purchased cars from independent Vauxhall dealers, who had agreed sales with customers, and it supplied these on to the customers under HP agreements.

The specific issues were:

1. Whether the UK bad debt relief conditions were compatible with Community law – the compatibility issue;
2. If the conditions were compatible, whether the claim would result in distortion and lack of fiscal neutrality contrary to Community law – the windfall issue; and
3. Whether the claims for supplies prior to 1 April 1989 could not be pursued in the tribunal by virtue of Section 39(5) FA 1997 – the time-limits issue.

Under Article 5(4) of the sixth directive, the company accounted for VAT on the full sale price of the car at the time of the customer taking possession. The bad debts arose when a car was repossessed following a breach and was then sold at a loss or when a customer defaulted and the car was not repossessed.

Relief for bad debts was introduced in the UK by virtue of section 12 FA 1978 and this allowed claims where the property passed to the recipient and the debtor became insolvent. The insolvency requirement was subsequently removed by FA 1990 and the property requirement removed by FA 1997.

The Tribunal allowed the company's appeal on all three points.

Taking each point in turn:–

1. The compatibility issue – the company had contended that the property and insolvency requirements of bad relief when first introduced in the UK were incompatible with Community law.
2. In particular the company argued that the property condition discriminated against HP transactions and conditional sale agreements with retention of title conditions. The company further contended that the insolvency condition was disproportionate and could not be commercially satisfied by the company as, in up to 95% of repossessions, there was no insolvency and therefore the bad debt relief conditions could not be complied with as a matter of common business practice.
3. The Tribunal agreed and thus stated that these incompatible requirements in the UK legislation fell to be disapplied.
4. The windfall issue – the Commissioners submitted that the effect of combining the bad debt relief claim with adjustments under the VAT Regulations 1995 and the de-supply under the VAT (Cars) Order 1992 was that the appellant would recover more VAT than was attributable to its economic loss thus breaching fiscal neutrality and distorting competition.
5. The company counter argued that it was not part of the tribunal's obligation to ‘cut down’ otherwise directly effective rights simply because, if exercised, some other domestic right would give too much money.
6. The tribunal agreed with the company. Even if the company received a windfall, it was likely to have sustained a commercial loss as a result of the customer defaulting on the payment. None of the bad debt relief provisions gave rise in isolation to non-taxation and thus the claims did not result in a distortion and lack of fiscal neutrality contrary to Community law.
7. The time limits issue-the Commissioners contended that the tribunal had no jurisdiction over bad debt relief except under section 83(h) VATA 1994 which covered a claim for refund under sections 22 or 36 or under the 1983 Act. The Commissioners viewed the claim for supplies prior to 1 April 1989 to thus be excluded by section 39(5) FA 1997.
8. The Tribunal held that the company's right of appeal was under section 83(h) VATA 1994 via section 22 of the 1983 Act and for the period from 1 April 1989 was under section 36. However it did not accept that section 22 could be circumvented by invoking section 83(b).
9. The question was then whether the time limit in FA 1997 fell to be disapplied because at the same time as the property restriction was removed, so too was the right to claim a refund under section 22. Therefore there was no time limit for making such claims, so that apart from FA 1997, the company was entitled to a refund for bad debts on supplies going back to 1978. As section 39(5) FA 1997 did not contain any transitional relief it should be disapplied as contrary to community law.
   • The Tribunal allowed the company's appeal on all three points.

The full text of the judgment is available at http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00504.html