HM Revenue & Customs v GMAC (UK) Plc, Court of Appeal - Civil Division, October 25, 2016, [2016] EWCA Civ 1015

Resolution Date:October 25, 2016
Issuing Organization:Civil Division
Actores:HM Revenue & Customs v GMAC (UK) Plc

Case No: A3/2015/0785

Neutral Citation Number: [2016] EWCA Civ 1015




Warren J and Judge Hellier


Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 25/10/2016

Before :





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Kieron Beal QC and Eleni Mitrophanous (instructed by HMRC Solicitor's Office) for the Appellants

Roderick Cordara QC and Amanda Brown (instructed by KPMG LLP) for the Respondent

Hearing dates: 28 and 29 June 2016

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JudgmentLord Justice Floyd:


  1. This is an appeal from the decision of the Upper Tribunal, Tax and Chancery Chamber (``UT'') (Warren J and Judge Charles Hellier), released on 3 August 2012. The appeal raises issues concerning VAT bad debt relief in relation to debts which GMAC UK PLC, formerly General Motors Acceptance Corporation (UK) PLC (``GMAC''), incurred in connection with its supplies of motor cars between 1978 and 1997. The UT's decision was given on an appeal from the decision of the First-Tier Tribunal, Tax Chamber (``FTT'') (Judge Wallace and Miss S.C. O'Neill) released on 6 May 2010.

  2. The UT also dealt in its decision with the determination of three preliminary issues in a separate tax appeal by British Telecommunications PLC (``BT'') which raised some of the questions arising on GMAC's appeal. That part of the decision of the UT has already been the subject of an appeal to this court: The Commissioners for Her Majesty's Revenue and Customs v British Telecommunications PLC [2014] EWCA Civ 433. I will refer to that decision as ``BT CA''.

  3. In the GMAC appeal the UT decided to refer a question to the Court of Justice of the European Union (``CJEU''). The CJEU gave its ruling on that issue on 3 September 2014. The issue in question does not arise on this appeal: I mention it only as it will explain why, in 2016, we are hearing an appeal from part of a decision of the UT given in 2012.

  4. GMAC is a finance company which buys motor vehicles from dealers and then sells them on to customers on hire purchase terms. At the outset of the transaction GMAC accounts for VAT on the full sale price charged to the customer, excluding credit charges, as it is required to do as a result of Article 5(4)(b) of Directive 77/388 EEC (``the Sixth VAT Directive'' or ``the Directive'') which was implemented by paragraph 1 of Schedule 4 of the Value Added Tax Act 1994 (``VATA 1994''). That paragraph provides that, in general, any transfer of the whole property in goods is a supply of goods, whereas the transfer of the possession of goods is a supply of services. However, if the possession of goods is transferred under a hire purchase agreement, it is a supply of goods. As possession is transferred at the inception of a hire purchase contract, VAT on the supply is payable in full at that point.

  5. In the periods with which the appeal is concerned the UK's domestic VAT bad debt relief provisions imposed one or both of two conditions which had to be satisfied before bad debt relief was available. One condition was that, on a supply of goods, the property had passed (``the property condition''). The other condition was that the debtor was formally insolvent, reinforced for some of the time with a requirement that the taxpayer had proved in the insolvency of the debtor (``the insolvency condition''). Both these conditions for bad debt relief present problems in the context of hire purchase agreements. Firstly, if the customer defaults on the payments under the hire purchase agreement, property will not have passed. So in the very case in which bad debt relief might be claimed, the property condition cannot be satisfied. Similarly, where the finance company did not take insolvency proceedings, for example because the amount outstanding was less than the relevant bankruptcy or insolvency limit, or where the costs associated with such proceedings were not commercially justified, it could not satisfy the insolvency condition. GMAC contends that the property condition and the insolvency condition were incompatible with the Sixth VAT Directive which provided a directly enforceable right to relief for non-payment or partial payment of the consideration for a supply. The FTT and the UT held that the property condition and the insolvency condition were indeed incompatible with the Sixth VAT Directive, and accordingly fell, to that extent, to be disapplied.

  6. Some of the hire purchase supplies for which VAT bad debt relief was refused in the present case occurred before 1 April 1989. HMRC say that the part of GMAC's claim which relates to the period 1978 to 1989/1990 is time-barred by section 39(5) of the Finance Act 1997, and also because GMAC had no exercisable rights under EU law, given that, as a general proposition of EU law, such rights must be exercised within a reasonable time. The UT held that general propositions of EU law did not bar the claim, but that section 39(5) did. However section 39(5) fell to be disapplied because inadequate notice had been given to GMAC of the change in the law.

    The legislative framework

  7. The relevant legislative history is set out with great clarity in paragraphs [10] to [44] of BT CA. I have borrowed heavily on that account in what follows, with some amendment in recognition of the fact that the property condition was not in issue in that case.

    The EU legislation

  8. VAT was introduced into the UK by the Finance Act 1972. VAT became chargeable on supplies on or after that date on the coming into force of that Act on 1 April 1973.

  9. In 1977, the Community introduced the Sixth VAT Directive. The relevant provisions have since been consolidated in the Principal VAT Directive 2006/112/EC (``the PVD''), but it was the Sixth VAT Directive which was in force at the times material to these proceedings. Article 1 required member states to modify their VAT systems so that the systems as modified entered into force by 1 January 1978 at the latest.

  10. Article 11, in Title VIII, is entitled ``Taxable Amount''. Article 11A1(a) provides that 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 including subsidies directly linked to the price of such supplies;''

  11. Article 11C(1) explains that the taxable amount is to be reduced in certain cases. It reads:

    ``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.''

  12. Thus, if there is a post-supply non-payment or price reduction, the taxable amount, and in consequence the VAT previously accounted for on the supply, falls to be reduced correspondingly, although the member state may impose conditions on the ability to achieve this. The objective is obviously to reinforce the principle in Article 11A1(a) that the tax is to be charged on that which is actually obtained or to be obtained from the customer. The reduction is to be ``under conditions which shall be determined by the member states''. In Case C-588/10 Minister Finansow v. Kraft Foods Polska SA the CJEU said that:

    ``23. ... it must be held that these provisions give the Member States a margin of discretion, inter alia, as to the formalities to be complied with by taxable persons vis-à-vis the tax authorities of those States in order to ensure that, where the price is reduced after the supply has taken place, the taxable amount is reduced accordingly.''

  13. In addition, the second paragraph of Article 11C(1) confers a power upon member states to derogate from the provisions of the first paragraph in a case of total or partial non-payment. In Case C-330/95 Goldsmiths (Jewellers) Ltd v. Customs and Excise Commissioners [1997] STC 1073 (``Goldsmiths'') the CJEU explained at paragraph 18 that the exercise of the power to derogate needed to be ``justified'':

    ``The power to derogate, which is strictly limited to [the case of total or partial non-payment], 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 only be 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.''

  14. The relevant provisions in the Sixth VAT Directive reappear in the PVD. Although those provisions do not apply in this case, some of the authorities refer to the provisions of the PVD. Thus Article 11A(1) of the Sixth VAT Directive is to be found in Article 73 of the PVD; Article 11C(1) in Article 90.

    Finance Act 1978: the old scheme

  15. The UK first introduced a bad debt relief scheme, somewhat later than required by the Directive, in section 12 of the Finance Act 1978. It became known in due course (for reasons which will appear) as ``the old scheme'' and came into effect on 1 October 1978.

  16. The material provisions of section 12 are as follows:

    ``12 - (1). Where -

    (a) a person has supplied goods or services for a consideration in money and has accounted for and paid tax on that supply; and

    (b) the person liable to pay any outstanding amount of the consideration has become insolvent,

    then, subject to subsection (2) and to regulations under subsection (3) below, the first-mentioned person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of tax chargeable by reference...

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