Regency Factors Plc v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 03 February 2022 |
| Neutral Citation | [2022] EWCA Civ 103 |
| Year | 2022 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 103
Lord Justice Underhill, Lord Justice Lewison and Lady Justice Macur
Court of Appeal (Civil Division)
Value added tax – Bad debt relief – VATA 1994, s. 36, VAT Regulations 1995 (SI 1995/2518), reg. 168, Principal VAT Directive, art. 73 and 90 – Requirement in reg. 168 for a refunds for bad debts account.
The Court of Appeal confirmed a decision of the UT that the appellant could not make a bad debt relief claim if it did not maintain a single refunds for bad debts account.
Regency Factors plc is a debt factoring company. It made a claim for bad debt relief (“BDR”) which HMRC rejected on two grounds. First, HMRC was of the opinion that there were no bad debts on which to make a claim and, second, HMRC was not satisfied that the records to support a BDR claim had been met.
Although the FTT [2019] TC 07010 had agreed with HMRC that there were no bad debts, the UT [2021] BVC 502 upheld the company's argument that there were bad debts on which it could, subject to the relevant conditions being met, make a BDR claim.
The record keeping requirements are contained in VAT Regulations 1995, SI 1995/2518, reg. 168. Reg. 168(2) lists the information claimants are required to keep and reg. 168(3) states that: “Any records created in pursuance of this regulation shall be kept in a single account to be known as the refunds for bad debts account.”
Regency did not keep all of the records required by reg. 168(2) in a single account. It argued that HMRC's refusal of its BDR claim was ultra vires EU law.
The Court of Appeal reviewed the jurisprudence of the ECJ on the conditions member states may lay down for making a BDR claim. It summarised them at para. 21 as follows:
- Although national legislation may pursue a legitimate objective and may not be excessively onerous, the member state concerned must still permit the taxable person to show that he is in fact entitled to bad debt relief; and that compliance with the requirement would have made no difference (SCT d.d. (in liquidation) v Slovenia (Case C-146/19) [2020] BVC 27SCT).
- If a legitimate requirement is impossible or excessively difficult to comply with, a member state must allow the taxable person to prove their entitlement to bad debt relief by other means (Minister Finansów v Kraft Foods Polska SA (Case C-588/10) [2012] BVC 372).
The Court of Appeal agreed with the UT that UK VAT law on this matter complied with EU law. This was for two reasons:
- The reg. 168(3) requirement that records be kept in a single account was not merely to establish an audit trail of some description but to establish an audit trail that HMRC investigators can easily check, and also to establish when and to what extent a debt had been written off. The court found that both of these were legitimate purposes (para. 35).
- Reg. 171(3) gives HMRC discretion to permit bad debt relief claims in cases where the requirements of reg. 168 have not been met. This is the safety valve required by Kraft Foods.
Having found that UK law was in compliance with EU law, the Court then considered the matter of Regency's BDR claims. It referred back to the FTT's decision and concluded that, first, the FTT had not made a finding of fact that Regency did have all the records required by reg. 168(2) and, second, the FTT found that, as a matter of fact, it was impossible to say whether or not the substantive conditions for a BDR claim to be made had been met (para. 41).
The court unanimously concluded: “In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT (just as SCT allows) but it failed to do so. It is not entitled to a second opportunity” (para. 42).
In a unanimous decision the Court of Appeal gave considerable weight to HMRC's argument that a single refunds for bad debts account does not just create an audit trail it ensures that bad debt relief claims can be easily checked and verified. The court noted that a box full of scraps of paper could be an audit trail – but it would not be an easily verifiable one (para. 35).
Michael Ripley (instructed by R G Legal Ltd Solicitors) appeared for the appellant
Suzanne Lambert (instructed by HMRC Solicitor's Office and Legal Services) appeared for the respondent
[1] The issue on this appeal is whether Regency Factors Ltd is entitled to bad debt relief in relation to VAT. The FTT (Judge Thomas) held that it was not (a) because there was no bad debt; and (b) because Regency had failed to comply with the procedural requirements for the making of such a claim. The UT (Bacon J and Judge Cannon) disagreed with the FTT on the first of those reasons, but upheld the second. The UT held, contrary to Regency's argument (which does not appear to have been advanced in the FTT), that the procedural requirements were compatible with EU law. The decision of the FTT is at [2019] TC 07010; and the decision of the UT is at [2021] BVC 502.
[2] Regency appealed against the decision of the UT on the second question; but HMRC also sought to reinstate the decision of the FTT on the first. At the conclusion of the argument on the appeal we announced that we would dismiss the appeal on the second question, with written reasons to follow. In consequence we did not hear argument on the points raised in HMRC's Respondent's Notice dealing with the first question. These are my reasons for joining in that decision.
[3] As is well-known, VAT is a tax created by EU legislation. The legislation in force at the relevant time was Council Directive 2006/112/EC (“the Principal VAT Directive” or “PVD”).
[4] Article 73 of the PVD relevantly provides:
In respect of the supply of goods or services … the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.
[5] Article 90 provides for bad debt relief. It says:
1. 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.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.
[6] Article 90 is a central provision of the VAT regime, as the ECJ explained in NLB Leasing doo v Slovenia (Case C-209/14) [2015] BVC 37 at [35]:
… it must be noted that article 90(1) of the VAT Directive, which relates to cases of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, requires the Member States to reduce the taxable amount and, consequently, the amount of VAT payable by the taxable person whenever, after a transaction has been concluded, that person has not received part or any of the consideration. That provision embodies one of the fundamental principles of the VAT Directive, according to which the taxable amount is the consideration actually received and the corollary of which is that the tax authorities may not collect an amount of VAT exceeding the tax which the taxable person received.
[7] The issue raised in the Respondent's Notice turned on the question whether Regency did not receive part or any of the consideration for its supply of services.
[8] Recital (59) to the PVD states:
Member States should be able, within certain limits and subject to certain conditions, to introduce, or to continue to apply, special measures derogating from this Directive in order to simplify the levying of tax or to prevent certain forms of tax evasion or avoidance.
[9] Since the relevant legislation is a Directive, it was addressed to member states, who had the duty to incorporate it into national law. But the Directive gave member states a certain latitude in its implementation. Thus article 273 provides:
Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.
The option under the first paragraph may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3.
[10] Thus article 273 enables a member state to lay down conditions and procedures for making a claim to bad debt relief. Article 273 gives member states a margin of discretion about the formalities that a taxable person must comply with in order to claim bad debt relief: Lombard Ingatlan Lízing Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatóság (Case C-404/16) [2017] BVC 48 at [42]. But that margin of discretion has its limits. Many of the decisions of the ECJ dealing with the limits of that freedom repeat what was said in earlier cases. So I do not think that I need to refer to them...
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