Revenue and Customs Commissioners v GMAC (UK) Plc
| Jurisdiction | England & Wales |
| Judgment Date | 25 October 2016 |
| Neutral Citation | [2016] EWCA Civ 1015 |
| Date | 25 October 2016 |
| Court | Court of Appeal (Civil Division) |
Lady Justice Arden DBE, Lord Justice Floyd, and Mrs Justice Theis DBE
Kieron Beal QC and Eleni Mitrophanous (instructed by HMRC Solicitor's Office) appeared for the appellants
Roderick Cordara QC and Amanda Brown (instructed by KPMG LLP) appeared for the respondent
Value added tax – Bad debt relief – Cars sold on hire-purchase and subsequently repossessed – Whether Finance Act 1997 (“FA 1997”), s. 39(5) barred GMAC's claim for being out of time in respect of supplies made before 1 April 1989 – Whether EU law-based claim required to be exercised within a reasonable time – Whether the property and insolvency conditions consistent with EU law.
The Court of Appeal heard an appeal by HMRC against a decision of the Upper Tribunal (UT) concerning VAT bad debt relief in relation to debts which GMAC incurred in connection with its supplies of motor cars between 1978 and 1997. HMRC challenged the decision that VAT could be reclaimed, but succeeded only to the extent that claims prior to April 1989 were held to be time-barred. The court dismissed HMRC's appeal against findings of the UT that the conditions requiring debtors to be insolvent and title in the goods to pass to the debtor were incompatible with EU law.
GMAC carried on business as a finance company, buying motor vehicles from dealers and selling them to customers on hire purchase terms. At the outset of the transactions it accounted for VAT on the full price charged to the customers, excluding credit charges, in accordance with EC Directive 77/388, art. 5(4)(b) the sixth VAT directive. However, where customers subsequently defaulted on their payments and the vehicles were repossessed, GMAC considered that VAT on the unpaid amounts was recoverable as bad debt relief.
In the periods to which the appeal relates, the UK's bad debt relief provisions imposed one or both of two conditions which had to be satisfied before bad debt relief was available: that, on a supply of goods, the property had passed to the debtor (the property condition); and that the debtor was formally insolvent (the insolvency condition). Both conditions presented problems in the context of hire purchase agreements, firstly, because, in the event of a default by the customer, property would not pass and secondly, where the finance company did not take insolvency proceedings against the debtor, it could not satisfy the insolvency condition. GMAC contended that the property condition and the insolvency condition were incompatible with the sixth directive. The FTT and the UT held that these conditions were indeed incompatible with the Sixth VAT Directive, and accordingly, to that extent, should be disapplied.
The court was asked to consider four grounds of appeal:
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1) whether the FA 1997, s. 39(5) barred GMAC's claim for being out of time in respect of supplies made before 1 April 1989;
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2) whether GMAC's EU law based claim was no longer live because it had not been exercised within a reasonable time;
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3) whether the property condition was inconsistent with EU law; and
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4) whether the insolvency condition was inconsistent with EU law.
Addressing grounds 3 and 4 first, LJ Floyd agreed with HMRC that a member state may decline to implement a system of relief for non-payment altogether, notwithstanding that this would result in the refusal of relief for debts which were genuinely bad debts. It did not follow, however, that if a member state implemented a partial system of relief for non-payment its exercise of the power to derogate escaped scrutiny. The property condition did not only have the effect of excluding from relief all bad debts incurred in connection with hire purchase agreements; it went further and excluded relief in the case of any contract for the supply of goods which contained a Romalpa (retention of title) clause. The question that had to be asked was not, as HMRC suggested, whether there was something special about bad debts in the field of hire purchase which justified their exclusion from bad debt relief, but whether the exclusion of all supplies of goods could be justified where title was retained. Like the UT and the FTT, LJ Floyd did not understand how such an exclusion could be appropriate or necessary. It was no more difficult to establish that a hire purchase agreement had given rise to a bad debt than it was in the case of any other debt. LJ Floyd held, in agreement with both the FTT and the UT that the property condition was not in accordance with EU law and fell to be disapplied.
Turning to the insolvency condition, LJ Floyd observed that, through its definition of insolvency, the condition required legal proceedings to have been taken to obtain the bankruptcy of an individual debtor or the winding up of a company. Such proceedings would simply not be justified in the case of small debts, and would not be available at all for debts owed by individuals below the bankruptcy limit. The result was that entire classes of bad debt claims were excluded from relief when there was no reason to suppose that they were not genuine bad debts. The evidence was that the majority of GMAC's customers were individuals and up to 95% of its repossessions involved no bankruptcy or insolvency. Such wholesale inroads into the right to relief, which was intimately connected to the right to be taxed on the consideration actually obtained, could not be justified. The insolvency and property conditions could not satisfy the EU law requirements of appropriateness and necessity. Agreeing with the conclusions of the FTT and UT that the insolvency condition was not proportionate, the court unanimously dismissed HMRC's appeal on grounds 3 and 4.
Looking next at ground 1 of the appeal, the court considered whether the FA 1997, s. 39(5) barred GMAC's claim for supplies which took place before 1 April 1989. The principal legal issue, as seen by the UT, was whether s. 39(5) fell to be disapplied so as not to affect GMAC's exercise of its EU law rights. HMRC submitted that the reasoning and conclusions of the Court of Appeal in R & C Commrs v British Telecommunications plc VAT[2014] BVC 24 applied equally to GMAC's claim. LJ Floyd identified a number of reasons to accept this submission. Against that background, it needed to be asked whether the exercise of GMAC's EU law rights were rendered excessively difficult or virtually impossible by s. 39(5). LJ Floyd did not believe it was. GMAC had more than adequate time to exercise its EU law rights and was given sufficient notice of the withdrawal of the scheme. It followed that HMRC's appeal was allowed on this ground so that GMAC's claim was out of time in respect of supplies made before 1 April 1989.
Finally, the court considered ground 2 of HMRC's appeal, namely whether GMAC had a live EU law based claim or it had ceased to exist because the right had not been exercised within a reasonable time. HMRC submitted that when the taxpayer asserts EU law rights it is incumbent on him not merely to take the benefit of the rights but also the burden. The burden in the present case was to act within a reasonable period of time. HMRC submitted that the Court of Appeal had fallen into error in British Telecommunications plc in rejecting the application of the reasonable time principle. However, LJ Floyd expressed his agreement with the decisions of the UT and the Court of Appeal in British Telecommunications plc that there was no room in the context of the present case for the imposition of a time limit by reference to the EU reasonable time rule. Such time limits as applied to GMAC's claims to assert EU law rights through the mechanism of the domestic machinery were, as explained in the decisions, disapplied because they set the time by reference to the invalid insolvency condition. The domestic legislation was, therefore, to be read as being silent as to any time limit. HMRC's appeal in relation to ground 2 was, accordingly, dismissed. HMRC's appeal was unanimously dismissed in relation to grounds 2, 3 and 4, as was GMAC's cross-appeal. HMRC's appeal on ground 1 was allowed.
The latest decision in this long-running dispute came as no surprise in view of the previous judgment of the Appeal Court in the case of British Telecommunications plc, in which the facts were materially consistent with those in the present case. Unless HMRC seek leave to appeal the decision to the Supreme Court, the decision opens the way for similarly affected taxpayers with stayed appeals to enforce their post 1989 claims.
[1] This is an appeal from the decision of the Upper Tribunal, Tax and Chancery Chamber (“UT”) (Warren J and Judge Charles Hellier), released on 3 August 2012. The appeal raises issues concerning VAT bad debt relief in relation to debts which GMAC UK PLC, formerly General Motors Acceptance Corporation (UK) PLC (“GMAC”), incurred in connection with its supplies of motor cars between 1978 and 1997. The UT's decision was given on an appeal from the decision of the First-Tier Tribunal, Tax Chamber (“FTT”) (Judge Wallace and Miss S.C. O'Neill) released on 6 May 2010.
[2] The UT also dealt in its decision with the determination of three preliminary issues in a separate tax appeal by British Telecommunications PLC (“BT”) which raised some of the questions arising on GMAC's appeal. That part of the decision of the UT has already been the subject of an appeal to this court: R & C Commrs v British Telecommunications plc VAT[2014] BVC 24. I will refer to that decision as “BT CA”.
[3] In the GMAC appeal the UT decided to refer a question to the Court of Justice of the European Union (“CJEU”). The CJEU gave its ruling on that issue on 3 September 2014. The issue in question does not arise on this appeal: I mention it only as it will explain why, in 2016, we are hearing an appeal from part of a decision of...
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