The Court of Appeal has mainly allowed the taxpayer’s appeal in this case concerning the UK’s historic Bad Debt Relief rules.
This case concerns claims for Bad Debt Relief (BDR) in relation to defaults of hire purchase agreements from 2 October 1978 to 19 March 1997. During this period, the UK VAT bad debt provisions required that the title in the property must have passed to the debtor (the property condition). Up until 1 April 1989, BDR was also only available if the debtor was formally insolvent (the insolvency condition). GMAC successfully argued that the property and insolvency conditions were unlawful, and also that there is no general time limit in European law which prohibited a claim for BDR. The Court of Appeal (CoA) however, supported HMRC in concluding that claims for periods before 1 April 1989 are time barred. As a result, GMAC has valid claims for the period between 1 April 1989 and 19 March 1997.
In February 2006, GMAC made a claim relying on its directly effective EU law right to claim BDR on the basis that the property condition and insolvency condition were disproportionate and therefore domestic courts should mould UK legislation so as to conform with EU law and provide GMAC with a remedy. This included disapplying s39(5) FA 97 in relation to claims for periods before 1 April 1989, which brought an end to all BDR claims under the ‘old scheme’.
GMAC was successful in its appeal before the First-tier Tribunal and the Upper Tribunal for all periods to which the claim relates. However, in 2014, the CoA considered the same issues as arose in the current GMAC appeal (save as for in relation to the property condition) in the case of British Telecommunications (BT CoA) and found BDR claims for periods before 1 April 1989 were no longer in time to be claimed by taxpayers.
The grounds of appeal before the CoA in GMAC’s current case were:
Ground 1: Does section 39(5) bar GMAC’s claim for supplies which took place before 1 April 1989? (Time limit issue 1)
Ground 2: Is GMAC’s EU law based claim no longer live because it has not exercised its EU law right within a reasonable time? (Time limit issue 2)
Ground 3: Is the property condition inconsistent with EU law?
Ground 4: Is the insolvency condition inconsistent with EU law?
GMAC also brought a cross-appeal contending that there was an alternative method for giving effect to its claims, namely Section 80.
The CoA started with Grounds 3 and 4. They supported GMAC’s arguments on both the property and insolvency conditions. Agreeing with the decision of the UT and FTT and, in relation to the Insolvency Condition, the decision in BT CoA, that the property condition and insolvency condition are not appropriate or necessary derogations to restrict BDR.
The CoA did however, allow HMRC’s appeal on Ground 1, finding that there had been adequate notice that the old scheme would be withdrawn. As such, claims should have been made before the old scheme was finally withdrawn in 1997.
Finally, in relation to Ground 2, the CoA agreed with the decision of the UT and BT CoA. Although GMAC is seeking to enforce its directly effective EU law rights, it is doing so through the mechanism of domestic machinery. Disapplication of a time limit provision in domestic law, the result of which is that no time limit exists, is not incompatible with EU law.
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