Hbos Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 September 2021 |
| Neutral Citation | [2021] UKFTT 307 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 307 (TC)
Zachary Citron
Ms A Brown QC, instructed by KPMG Law, appeared for the appellants
Ms E Mitrophanous QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Bad debt relief claims – Property transfer condition – Claims originally refused by HMRC – Interest due on refunds eventually paid – Whether interest should be paid from date of entitlement or date of claim – Whether error by HMRC – VATA 1994, s. 78 – Invalid property transfer condition was not an error of HMRC – Appeal dismissed.
The First-tier Tribunal (FTT) found the invalid property transfer condition in relation to bad debt relief claims before 1997 was not an error of HMRC so that VATA 1994, s. 78 was not engaged until the date of the claims and the appeal against HMRC's decision to pay interest from the date of the claim was therefore dismissed.
Before 1997, entitlement to bad debt relief for a supply of goods had been conditional on property in the goods passing to the person to whom they were supplied. This condition was not satisfied under HP arrangements for motor vehicles that included a retention of title (or Romalpa)clause.
The Court of Appeal, in R & C Commrs v GMAC (UK) plc [2016] BVC 39, found this property transfer condition was invalid under EU principles. Until this decision, HMRC had considered it to be legally valid and included the condition in Public Notice 700/18 but they announced a change of position in a brief issued in 2017 which stated that claims relating to supplies of goods in the relevant years would be paid subject to satisfactory evidence the bad debts had occurred and VAT hadn't previously been reclaimed.
The appellants' group businesses included provision of motor vehicles to customers under HP agreements. If customers defaulted, the agreement could be terminated, the vehicle repossessed and sold. Where the net sales proceeds were less than the sums due under the original agreement, the appellant suffered a “bad debt”.
Bad debt refund claims were submitted by each of the appellants, under VATA 1994, s. 36, on 14 February 2007 and 31 March 2009 respectively. Initially refused by HMRC they were paid in February 2019, and interest was later paid from the dates of the claims.
The appellants were representative members of large, publicly listed UK banking groups with tax departments that included VAT specialists. They had not claimed the bad debt refunds at any time prior to the claims because they thought it would be “non-compliant” since they did not satisfy the property transfer condition. They had assumed the UK enacted the EU directives correctly but changed their minds in part due to learning of the claims being made by GMAC and other taxpayers in similar positions to their own.
The appellants contended there had been an error on the part of HMRC in enacting, or enforcing, or providing guidance, upholding the property transfer condition. That error had caused the appellants to pay VAT that was not due, and to suffer delay in receiving payment of the bad debt refunds. They were entitled to refunds earlier, but the property transfer condition represented a “statutory bar” on their making claims. Under VATA 1994, s. 78, therefore, interest on the bad debt refunds should run from the earlier dates on which they paid the VAT that was not due (by not submitting a claim) or on which HMRC would reasonably have authorised payment of the refunds were it not for their erroneous position on the property transfer condition.
HMRC accepted they made an error in respect of their position on the property transfer condition but the error did not cause the appellants to pay amounts that were not due because, under VATA 1994, s. 36, the bad debt refunds only became due on submission of a claim. They acknowledged the appellants had suffered a delay in receiving the refunds once they became due hence s. 78 interest became payable from the dates of the claims. This was the date on which, apart from the error, HMRC might reasonably have been expected to authorise payment of the amount on which interest was payable. They could not have authorised payment prior to the claims being made.
The FTT found HMRC had made two errors;
- they had included the property transfer condition in their guidance; and
- they had rejected and declined to pay the bad debt refund claims until 2019.
The enactment of the property transfer condition, however, was an act of parliament and not an error of HMRC.
The second error caused the appellants to suffer delay in receiving payment, beginning on the date of the claim. The question, therefore, was whether the first error had caused the appellant to pay an amount that was not due, or caused them to suffer delay in receiving payment of an amount due to them because they had not claimed the refunds at the earlier dates.
The FTT concluded the appellants had not claimed the bad debt refunds earlier because they believed the property transfer condition was legally valid. It was the condition itself, rather than the guidance, that caused the omission of the claim. Although the bad debt refunds were due to the appellants from the earlier dates, and they therefore suffered delay in receiving amounts due to them, any overpayment or delay prior to the claims being made was not due to HMRC as required by s. 78. The true cause of the delay, up to the dates of the claims, was the appellants belief the property transfer condition was legally valid. It had not been practically impossible for them to make a claim from the earlier dates. They could have claimed but omitted to do so because they did not appreciate they had a right to do so.
The FTT found this was in keeping with all relevant EU law principles and dismissed the appeal.
Inherent in this decision must be a question mark over the degree to which a taxpayer is entitled to rely on the information contained in the public notices issued by HMRC, although witnesses for the taxpayer did consistently refer, in their evidence, to the legislation rather than the guidance in Notice 700/18 underlining the impression is was the statute rather than the guidance that had caused the error.
There is also a useful summary, contained in the decision, of some 11 previous cases referred to by the parties which others seeking to claim interest under VATA 1994, s. 78 may find useful.
[1] The brief background to this hearing was that
- until 1997, the UK legislation providing VAT refunds for bad debts contained a condition of entitlement that, in a Court of Appeal decision in 2016, was found to be invalid under EU law principles;
- in 2007 and 2009, the appellants made claims for bad debt refunds on supplies made in the period 1989–1997 – the condition in question was not satisfied and for that reason HMRC initially rejected the claims;
- HMRC eventually paid those bad debt refunds to the appellants, in 2019;
- HMRC also paid interest on those refunds from the dates the refunds were claimed, on the basis that there had been an error on HMRC's part in not paying the refunds upon the making of the claims;
- the issue in the hearing was whether HMRC should also have paid interest from earlier dates, being the dates when all conditions for the refunds, apart from the invalid condition, had been satisfied.
[2] References in this decision
- to sections (or s) are to sections of Value Added Tax Act 1994 (unless otherwise indicated);
- to regulations are to Value Added Tax Regulations 1995 SI 1995/2518 (unless otherwise indicated);
- to Articles are to articles of Council Directive 2006/112/EC; and
- include the statutory predecessor of the provision referred to (as explained in the summary of legislation in the appendix to this decision).
[3] The appeals were brought in respect of HMRC's decisions to refuse to pay refunds considered due to the appellants relating to bad debts on supplies made in the period 2 October 1978 to 19 March 1997 in the case of the second appellant and for the period 1 April 1989 to 19 March 1997 in the case of the first appellant.
[4] Claims for the period 2 October 1978 to 31 March 1989 related to the “old regime” for bad debt refunds enacted, first, under s12 Finance Act 1978 and, subsequently, from 26 October 1983, under s22 Value Added Tax Act 1983. The “old regime” was repealed by s39(5) Finance Act 1997. These periods were not in issue in this hearing.
[5] Claims for supplies made in the period 1 April 1989 to 19 March 1997 were covered by the “new regime” for bad debt refunds enacted under s11 Finance Act 1990 and re-enacted with amendments under s36.
[6] I was told that other issues in the appeals, apart from the interest issue summarised above, had either been agreed or were stayed behind other cases.
[7] Relevant legislation is set out or summarised in the appendix to this decision.
[8] The “agreed” issue was whether interest was due from
- (as HMRC contended) the respective dates of claim (such interest having already been paid); or
- (as the appellants contended) earlier dates (the earlier dates), being the dates on which the relevant returns (the earlier returns) were made for the first prescribed accounting period following the date on which, in relation to a given supply (i) the statutory waiting period (this term is explained in the appendix) expired or, if later (ii) the consideration is likely to have been written off in the accounts (which the parties, if necessary, would seek to agree in the first instance on the basis of extrapolated data).
[9] Expressed in terms of statutory provisions, this issue was:
- were s78(1)(c) or (d) satisfied on the facts of this case (it was common ground that s78(1)(a) and (b) were not satisfied)?
- if so, when did the applicable...
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