Abbey National PLC v The Commissioners of Customs & Excise, V 18236
| Jurisdiction | UK Non-devolved |
| Judge | A Edward SADLER |
| Judgment Date | 17 July 2003 |
| Respondent | The Commissioners of Customs & Excise |
| Appellant | Abbey National PLC |
| Reference | V 18236 |
| Court | First-tier Tribunal (Tax Chamber) |
18236
VAT bad debt relief – conditional sale agreement – allocation of instalment payments between goods and credit charge in the case of a mixed or composite supply – whether allocation made by terms of agreement – no – whether allocation to be made in accordance with taxpayer’s accounting treatment – no – whether statutory method of apportionment contrary to Sixth VAT Directive and Community law – no – VAT Act 1994 section 36 – VAT Regulations 1995 regulations 170 and 170A – Sixth VAT Directive Article 11 C (1) – appeal dismissed
ABBEY NATIONAL PLC Appellant
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Tribunal: Mr A E SADLER (Chairman)
Mr K C MANTERFIELD, FCA
Sitting in public in London 12, 13 and 14 May 2003
Dr David Southern of Counsel, instructed by the Corporate Solicitor of Abbey National plc, for the Appellant
Mr Kenneth Parker, QC and Mr Timothy Ward of Counsel, instructed by the Solicitor for the Customs & Excise, for the Respondents
© CROWN COPYRIGHT 2003
The appeal and the issues in summary
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The appeal of Abbey National plc (“the Appellant”) relates to a decision of the Commissioners contained in a letter dated 3 August 2000, in which the Commissioners stated their intention of raising an assessment for VAT of £91,439 for the Appellant’s VAT quarterly accounting period ended 30 June 2000. By their letter dated 11 November 2002 the Commissioners reduced the assessment to £18,096, and it is this reduced assessment which is the subject of this appeal. We were informed that a second appeal, against a substantially larger sum assessed, and which turns on the same issue as this appeal, has been stood over pending our decision in this case.
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The Appellant, as well as being the parent company of the well-known banking and financial services group, is the representative member of the VAT group which at all material times included its wholly-owned indirect subsidiary company, Wagon Finance Limited (“Wagon Finance”). The appeal relates entirely to the business of Wagon Finance and to transactions to which it was a party in the period 1 July 1995 to 31 December 1998. Throughout that period Wagon Finance carried on a business which consisted primarily of the provision of finance for the purchase of vehicles (for the most part motor-cars) by private individuals on credit terms, usually in the form of conditional sale agreements. Some of Wagon Finance’s customers defaulted under their agreements, failing to pay all the instalments due, and giving rise to a bad debt for Wagon Finance. As described below, under the VAT treatment applicable to instalment credit finance transactions (where there is a taxable supply of goods and also an exempt supply of credit), such default gives rise to an entitlement for Wagon Finance (or, strictly, the Appellant) to claim bad debt relief for VAT purposes in respect of the VAT which it has paid to the Commissioners in relation to the supply of the goods but which it has failed to recover from the customer because the customer has so defaulted.
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The issue between the parties in this appeal relates to the way in which, in these circumstances, and for the purposes of VAT, the aggregate amount received under a conditional sale agreement at the time of default should be allocated between the goods element and the credit element so as to determine the amount of VAT which (because it relates to the goods element) can be regarded as recovered from the customer and (in consequence) the balance which should be regarded as not so recovered by reason of the customer’s default: it is this unrecovered balance for which the Appellant can make a claim from the Commissioners under the VAT bad debt relief provisions.
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In summary, the Commissioners argue that there is specific legislation which applies to determine for VAT purposes, in these circumstances of a “mixed” supply of goods (taxable) and credit (exempt), the allocation of instalments received as between the goods element and the credit element and the consequent amount which (because it relates to the goods element) is to be treated as unrecovered VAT for which relief is available. (There is a complication in this appeal, explained below, in that the Commissioners have applied the legislation on a concessionary basis and the law has since been changed to reflect this concessionary basis.) The Appellant argues that such legislation (even as applied by concession) does not apply in its terms to Wagon Finance’s circumstances, and that such legislation is in any event inconsistent with the over-riding terms of the Sixth Directive on VAT – instead the allocation for VAT purposes of instalments received as between the goods element and the credit element should be determined by reference to implicit terms in the relevant instalment credit finance agreements and the accounting entries which Wagon Finance is compelled by relevant accounting standards to make when it accounts for those instalments.
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The Appellant argues that instalment payments received under the instalment credit finance agreements Wagon Finance enters into should be allocated between the goods element (principal or credit balance) and the credit element (interest or finance charge) on an amortisation, or sum of digits, basis where the constant rate of interest implicit in the agreement is applied to a reducing balance of principal so that the principal is reduced to zero at the end of the term of the agreement. The Commissioners argue that the relevant VAT legislation applies so that instalment payments received must be allocated between the goods element and the credit element by straight-line apportionment, each payment over the life of the agreement being so allocated in the proportions of the total cost of the goods and the total credit (interest element) cost.
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If the allocation of instalments received as between goods and credit is made on the basis for which the Appellant contends, then at the point when the customer defaults less has been allocated to the goods element than is the case if the legislative system of allocation (for which the Commissioners contend) applies. The result is that the amount of VAT regarded as unrecovered by reason of the bad debt (and therefore eligible for VAT bad debt relief) is greater applying the Appellant’s basis of allocation than is the case if the Commissioners’ basis of allocation is applied – the difference between the two amounts of VAT regarded as unrecovered as a result of applying the different bases of allocation gives the amount which is assessed and against which the Appellant appeals.
The VAT context and legislation
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As stated, Wagon Finance enters into transactions whereby it sells goods (mostly motor-cars) to its customers on instalment credit finance terms, usually by conditional sale agreements (the relevant terms of these agreements, and the relevant statutory framework which applies under the consumer credit legislation to most of the transactions entered into by Wagon Finance, is discussed below). The essence of the arrangement is that the car is sold on deferred payment terms, with Wagon Finance extending credit to the customer, and the total amount paid by the customer by instalment payments reflects both the price of the car and the credit which Wagon Finance has made available.
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It is necessary to understand first the VAT treatment of a sale made on instalment credit finance terms. Such a sale is regarded for VAT purposes as a supply of goods (the car) and also a supply of services (the provision of credit). In the present case the supply of goods is a taxable supply at the standard rate and the supply of services is an exempt supply (if the car is second-hand, special rules may apply to determine the extent of the standard-rated supply, but nothing turns on that in this appeal). The conditional sale agreement will specify an amount which is...
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