BRITISH CREDIT TRUST LIMITED v Her Majesty's Revenue & Customs, TC 03863
| Jurisdiction | UK Non-devolved |
| Judge | Guy BRANNAN |
| Judgment Date | 01 August 2014 |
| Neutral Citation | [2014] UKFTT 0744 (TC) |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | BRITISH CREDIT TRUST LIMITED |
| Reference | TC 03863 |
| Court | First-tier Tribunal (Tax Chamber) |
[2014] UKFTT 0744 (TC)
TC03863
Appeal number: TC/2012/08675
VALUE ADDED TAX – hire-purchase agreements – whether input tax on
repossession costs fully allowable – subsequent adjustment to appellant's
VAT account – whether a decrease in consideration leading to an
adjustment for the purposes of regulation 38 VAT Regulations 1995 –
whether an entitlement to bad debt relief under section 36 VATA 1994 –
whether valid claim or amendment to claim - appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
BRITISH CREDIT TRUST LIMITED Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S Respondents
REVENUE & CUSTOMS
TRIBUNAL:
JUDGE GUY BRANNAN
JULIAN STAFFORD
Sitting in public at Bedford Square on 28 and 29 April 2014
Kevin Prosser QC, counsel, instructed by Macfarlanes LLP, for the Appellant
Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2014
DECISION
Introduction
1. This is an appeal against a decision by the Respondents (“HMRC”) dated 10th 5 August 2012 refusing British Credit Trust Limited’s (“BCT”) claim for input tax not
previously claimed and for output tax over declared, amounting in total to
£1,301,395.06 plus interest. The claim was initially made by way of a voluntary
disclosure in a letter dated 23 December 2010.
Background facts and issues in dispute 10
2. The facts in this appeal were not in dispute. Our outline of the relevant facts is
taken largely from the parties’ helpful skeleton arguments, supplemented as necessary
by relevant extracts from the bundle of documents provided to us. In addition, we
refer to the evidence of Mr James Irvine, Head of Operations of BCT. Mr Irvine
provided a witness statement and briefly gave oral evidence in chief but was not 15 cross- examined.
3. At all material times, BCT carried on a motor vehicle finance business which
included entering into hire-purchase (“HP”) agreements with individual, non-
business, customers who were introduced to BCT by car dealers. BCT would make an
assessment whether to enter into a HP agreement with the customer after making 20 credit checks with credit reference agencies such as Experian, confirmation that the
customer had regular employment income etc. The HP agreements were in standard
form and although two versions of the agreements were used over the periods relevant
to this appeal nothing turned on these slight variations in wording. The HP
agreements were governed by the Consumer Credit Act 1974. 25
4. For example (using the sample figures provided in the bundle of documents), in
relation to a vehicle which the dealer had offered to sell to the customer for a cash
price of £6,095 including VAT, BCT purchased the vehicle from the dealer for £6,095
and at the same time entered into a HP agreement with the customer under which the
vehicle was hired for 5 years, at the end of which the customer had an option to 30 purchase the vehicle for £90, and in return the customer paid an initial deposit of £300
and, over the life of the hiring, aggregate rentals of £9,300, made up of the £6,095
cash price (there was no mark up on the vehicle made by BCT), interest of £2,905 and
an arrangement fee of £600.
5. By paragraph 1(2) of schedule 4 to the Value Added Tax Act 1994 (“VATA”), 35 that transaction was at the outset a supply of goods, the vehicle; the consideration for
that supply was the £6,095 cash price. In addition, over the period of the hire BCT
provided the customer with credit of £3,595, treated as exempt supplies of services
under item 2 of group 5 of Schedule 9 to the 1994 Act.
6. Thus, BCT received a taxable supply of goods from the dealer for a 40 consideration of £6,095 and made an onward taxable supply of the goods to the
3
customer for a consideration of the same amount. Those transactions were therefore
neutral for VAT purposes: the input tax allowable matched the output tax due, so that
BCT was not liable to recover or pay any VAT in respect of the transactions.
7. The HP agreement was in the usual form. BCT supplied the vehicle to the
customer but retained legal title until all outstanding instalments had been paid. When 5 all payments had been duly made the customer had the option to purchase the vehicle
by paying BCT an option fee. At this point title to the vehicle was transferred to the
customer. If the customer did not exercise the option then the vehicle would be
returned to BCT for onward sale.
8. At the time, BCT did not account for the matching input tax and output tax on 10 its acquisition and sale of the vehicles by entering them in its VAT account, or in its
VAT return. However, BCT subsequently made the entries in its VAT account, and
gave details to HMRC by a letter dated 31st January 2012. We shall return to this
point later because the effect of these later entries in BCT's VAT account is a point of
contention between the parties. 15
9. If BCT terminated the HP agreement because the customer was in breach, the
customer was then obliged to return the vehicle, and if he failed to do so, BCT
repossessed the vehicle using a specialist repossession company, as well as a solicitor
where necessary (usually, where the customer had paid at least one third of the
instalments, the Consumer Credit Act 1974 would require a court order to repossess 20 the vehicle). The customer was contractually obliged to pay BCT’s repossession
costs.
10. Those costs represented taxable supplies of services from the repossession
company and (where necessary) a solicitor to BCT, and the first issue in this appeal
(“the repossession issue”) is whether the input tax charged on those supplies is fully 25 allowable. Essentially, BCT argued that the input tax is attributable to taxable supplies
made by it and is therefore wholly recoverable. HMRC contend that the input tax is
attributable to both taxable and exempt supplies and therefore constitutes "residual"
input tax of which only a proportion would be allowable in accordance with BCT's
partial exemption special method. "Residual" input tax is sometimes referred to as 30 "non-attributable input tax" in order to contrast it with input tax which is directly
attributable to taxable supplies. For a helpful explanation of these and other related
terms reference should be made to the judgment of Carnwath LJ in Mayflower
Theatre Trust Limited v HMRC [2007] STC 880 at [24 – 27].
11. The total amount of VAT at stake in connection with the repossession issue, for 35 the period from 1st January 2007 to 30th September 2010, is £552,242.32.
12. In consequence of the early termination of the HP agreement, there would in
certain circumstances be a decrease in the outstanding balance payable by the
customer. In particular, having recovered the vehicle from the customer, BCT would
sell it at auction, and under the HP agreement the customer was credited with the sale 40 proceeds against the outstanding balance. For VAT purposes, BCT argued that there
was therefore a “decrease in consideration” for BCT’s supply of the vehicle to the
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