HM Revenue and Customs (“HMRC”) have issued Revenue and Customs Brief 1 (2017) setting out their position on claims for historical bad debt relief following the conclusion of part of the long-running litigation on this issue, in particular on the bad debt relief legislation that existed between 1978 and 1997.
Before 1 April 1989 the VAT bad debt relief scheme required the defaulting customer to be formally insolvent (“the Insolvency Condition”) and until 19 March 1997 there was also a condition that title in any goods must have passed to the customer (“the Property Condition”). The latter condition was more problematic than one might first think because it excluded relief in the case of any contract for the supply of goods which contains a retention of title (“Romalpa” clause).
The Court of Appeal held most recently in HM Revenue and Customs v GMAC (UK) Plc [2016] EWCA Civ 1015 that an EU Member State may decline to implement a system of relief for non-payment altogether, but if it does decide to implement a partial system of relief, its exercise of the power to derogate cannot escape scrutiny.
The Court had no hesitation in finding both the Insolvency Condition and the Property Condition to be disproportionate. However, this did not assist the taxpayer for supplies made prior to 1 April 1989 because the Court also held that such claims were time barred under section 39(5) Finance Act 1997: that provision did not render the exercise of the taxpayer’s EU law rights excessively difficult or virtually impossible because the company had more than adequate time to do so and was given adequate notice of the withdrawal of the scheme. By contrast, the Court rejected HMRC’s argument that the taxpayer, in asserting EU law rights, had to act within a reasonable period of time: the domestic legislation was to be read as being silent as to any time limit and therefore not imposing any, which was not incompatible with EU law.
Floyd LJ considered that this result might have been different if GMAC’s case had been that it was entitled to enforce its EU law rights without reference to any domestic mechanism.
HMRC will now pay claims relating to supplies of goods made between 1 April 1989 and 19 March 1997, but only subject to satisfactory evidence that the bad debts occurred and that the VAT had not previously been claimed. Because HMRC accepted, between 1989 and 1997, that title in goods would pass and therefore bad debt relief would apply where (1) goods had been sold on to a third party by the debtor or (2) the supplier chose to write to the customer and give up title in the goods to the customer, some businesses may previously have claimed relief. To ensure that they have not, HMRC will require claims to meet the requirements set out in conditions 1 to 5 in paragraph 2.2 of Notice 700/18. However, HMRC will consider alternative evidence as to amount and methodology, provided claimants can demonstrate (1) that they suffered bad debts on supplies of goods made under retention of title term (2) that they didn’t previously claim relief and (3) that the amount claimed is correct.
