British Telecommunications Plc v The Commissioners for HM Revenue and Customs

Hearing dates: 1 – 3 November 2023

Approved Judgment

This judgment was handed down remotely at 10.00am on 4 December 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction and procedural history

On 30 March 2009 the appellant, BT, wrote to HMRC claiming VAT bad debt relief in respect of amounts unpaid by its customers for the period from 1 January 1978 to 31 March 1989. The original claim was for £91,822,303 (excluding interest), but the claim has now been restricted to debts owed by retail customers and the quantum of the claim has been agreed at £65.2m plus interest.

In outline, the claim relates to a failure properly to implement Article 11C(1) of EC Council Directive 77/388 of 17 May 1977 (the “Sixth Directive”), which as explained below dealt both with adjustments to and non-payment of consideration for supplies made for VAT purposes. (The Sixth Directive has since been replaced by the Council Directive 2006/112/EC, known as the Principal VAT Directive.)

No domestic scheme for bad debt relief was enacted at all for the first nine months after the Sixth Directive was required to be implemented, namely from 1 January to 30 September 1978 (the “9-month period”). A scheme was put in place by s.12 Finance Act 1978 (“FA 1978”) with effect from 1 October 1978 (the “Old Scheme”), but its conditions included a requirement that the debtor had become formally insolvent (the “insolvency condition”). Debts owed to BT would typically be below the minimum threshold for the presentation of a bankruptcy petition.

A new scheme was introduced by s.11 Finance Act 1990 (“FA 1990”) with effect for supplies made after 31 March 1989 (the “New Scheme”). The New Scheme replaced the insolvency condition with a timing condition, namely that the debt had to have been unpaid for at least two years following the date of the supply (now reduced to six months). However, the Old Scheme remained in place for prior periods, such that claims could continue to be made under the Old Scheme in respect of supplies made in the period up to 1 April 1989 (and indeed from that point up to 26 July 1990, during which claims could be made under either scheme).

A budget announcement in late November 1996 explained that the government was proposing to “cancel” the regulations that permitted claims under the Old Scheme. This was enacted with effect from 19 March 1997 by s.39(5) of the Finance Act 1997 (“FA 1997”), which provided that claims for refunds under the Old Scheme could not be made at any time after that Act was passed.

As already mentioned, BT made its claim in 2009. HMRC's refusal of it led to two sets of proceedings, both commenced in 2010. First, BT pursued a statutory appeal to the First-tier Tribunal (“FTT”). Secondly, it commenced a common law claim in the Chancery Division of the High Court. The Chancery Division proceedings were stayed pending disposal of the statutory appeal.

The FTT referred three preliminary issues in the statutory appeal to the Upper Tribunal (the “UT”), to be heard alongside an appeal by HMRC in proceedings brought by GMAC (UK) plc (“GMAC”). In its decision ( [2012] UKUT 279 (TCC), “ GMAC/ BTUT”) the UT determined:

a) that the domestic legislation could be “moulded” to comply with EU law by disapplying both the insolvency condition and another condition relevant to GMAC which required property in goods supplied to have passed (the “property condition”); and

b) that s.39(5) FA 2007 fell to be disapplied.

Both parties to the BT proceedings appealed the UT's decision to this court, which handed down judgment in April 2014: British Telecommunications plc v Revenue and Customs Commissioners[2014] EWCA Civ 433, [2014] STC 1926 (“ BTCA”). Following a reference to the CJEU in the GMAC proceedings, an appeal in that case was heard later, in 2016: GMAC v Revenue and Customs Commissioners[2016] EWCA Civ 1015, [2017] STC 1247 (“ GMACCA”).

In summary, BTCA relevantly decided as follows:

a) the insolvency condition infringed BT's directly effective EU law rights and was unlawful;

b) the Old Scheme could be “moulded” to exclude the insolvency condition, so BT could have made claims under that scheme for the period from 1 October 1978 to 31 March 1989 (the “main period”);

c) however (and reversing the Upper Tribunal on this point), that moulding did not extend to the disapplication of s.39(5) FA 1997;

d) the result of this was that a statutory claim for bad debt relief in respect of the main period was out of time;

e) any statutory claim in respect of the 9-month period was “blighted by the same problem”; and

f) BT's alternative claim for a refund under s.80 Value Added Tax Act 1994 (“ VATA 1994”) failed because s.80 applies to amounts paid that are not due by way of tax, whereas the VAT originally accounted for on the supplies was properly due.

BTCA obviously did not decide BT's common law claim.

BT's application for permission to appeal to the Supreme Court was refused. Subsequently, in GMACCA this court again concluded that the Old Scheme should be “moulded”, in that case to disapply both the insolvency condition and the property condition, that s.39(5) FA 1997 should not be disapplied and that s.80 VATA was not engaged.

Following BT's failed attempt to obtain permission to appeal to the Supreme Court HMRC applied to strike out BT's statutory appeal. That application was successful before the FTT in 2020. In 2023 the UT dismissed an appeal against that decision ( [2023] UKUT 122 (TCC), [2023] STC 1091) (“ BTUT 2023”). Permission to appeal the UT's decision to this court was refused by Newey LJ on 28 September 2023. In reaching its conclusion the UT held that BTCA had determined, among other things, that neither s.80(1) nor s.80(1B) VATA 1994 can be utilised to claim relief for bad debts.

The stay in the Chancery Division proceedings was lifted in 2020. HMRC then made an application for strike out or reverse summary judgment in respect of BT's common law claim, which came before Miles J in 2021. By that stage BT had amended its claim to confine it to a claim for restitution of around £65.2m (so similar to the statutory claim), dropping a claim in respect of an earlier period and claims for damages and compound interest.

Miles J granted HMRC's application in respect of the main period and refused it in respect of the 9-month period. It is that decision with which we are concerned.

BT's appeal against Miles J's decision in respect of the main period was itself stayed pending the decision of the UT referred to in paragraph [11.] above, although HMRC were required to file any Respondent's notice by 7 February 2022. HMRC did so, seeking to uphold Miles J's decision in relation to the main period on alternative grounds and also seeking to cross-appeal the decision to allow the claim for the 9-month period to go to trial. Following the stay being lifted HMRC filed a skeleton argument on 1 August 2023. Newey LJ granted permission to cross-appeal on 28 September 2023 and BT filed a supplemental skeleton argument on 23 October 2023.

Relevant legislation

Miles J's judgment includes a helpful and detailed summary of the history of the relevant legislation and published guidance (at [8] to [50]). It is not necessary to reproduce that in full, and I will limit what follows to the most material elements.

Article 10 of the Sixth Directive dealt with chargeability to VAT. The basic rule is (and remains) that tax is chargeable at the time when goods are delivered or services are performed. However, member states are permitted to derogate from that and provide for tax to become chargeable when an invoice is issued. The UK has taken advantage of this derogation (see now s.6(4) VATA 1994). There are also special rules for continuous supplies of services, but it was clear from the submissions made by Mr Cordara KC, for BT, that BT accounts for VAT by reference to the time when bills are issued, and that there is no challenge to the lawfulness of being required to do so.

Under Article 11A(1) of the Sixth Directive the general rule was that the “taxable amount” in respect of supplies of goods and services was “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”.

Article 11C(1) provided:

“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.”

Section 12 FA 1978 provided:

“ 12. Bad debt relief

(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,...