Friday, 24 August 2012

Indirect Tax Update: Automobile Sector 2/12

Headlines – Bad Debt Relief (BDR)

Following last week’s breaking news of the Upper Tribunal’s Judgment please find below text of an alert sent to all readers subscribed to HELLP’s Indirect Tax Update.

GMAC 3 – Upper Tribunal Judgment

The case is about the vires for the restrictions to the UK Bad Debt Relief (BDR) rules which applied between 1978 and 1997, as well as the way in which s.22 VATA 1983 (‘the Old Scheme’) was repealed. Judgment has now been released by the Upper Tribunal.


Let us start with reminding our readers what the current bad debt relief (BDR) rule is: If you send an invoice to your customer on the 1st of January for say £100 plus £20 VAT you will immediately need to account for the output tax and pay the £20 VAT over in the next VAT return that covers the January period. Now if six months has passed from the due date of the invoice and your customer has not paid you, then you can claim BDR by requesting that HMRC pays back the £20 to you, subject to certain conditions; hence the term Bad Debt Relief.  

Prior to 1989, no BDR claims were possible unless the debtor became insolvent (‘the Insolvency Condition’). For the whole of the 1978 to 1997 period no BDR claim was possible if the contract of sale included a ‘Reservation of Title’ (ROT) provision (under which title to the goods did not pass to the customer until and unless all payments due under the contract had been made) (‘the Property Condition’).

In Section 39(5) of the Finance Act 1997, the UK sought to withdraw the right to bring claims under the Old Scheme by providing minimal notice (‘the Time Limit Issue’).

GMAC’s Position

GMAC argued that the Property and Insolvency Conditions were ultra vires and could not be relied upon.

GMAC also argued that Section 22 VATA 1983 was repealed without giving taxpayers sufficient notice, and that the repeal should be ineffective.

HMRC’s Position

HMRC opposed these arguments, and also argued that GMAC was trying to rely on a directly effective right in conjunction with domestic legislation to produce a result not intended by the Directive. HMRC said that GMAC would benefit from a windfall if it relied on both a directly effective BDR claim and on the domestic law de-supply of the subsequent sale of any repossessed vehicles. HMRC said that there could be no directly effective right to a windfall (‘the Windfall Issue’).

The Decision

The Upper Tribunal has found in favour of GMAC on the Property Condition, the Insolvency Condition and on the Time Limit Issue; however the Upper Tribunal found the Windfall Issue extremely complex, and has invited the parties to make further submissions before finally deciding whether or not to make a reference to Europe. It is currently hoped that further submissions will be made at a hearing in October.

Why is this important?

This is a positive decision for taxpayers. The Windfall Issue is relevant only in connection with BDR on repossessed hire purchase goods which are resold. Other taxpayers with historic BDR claims are unlikely to be affected by the Windfall Issue and based on the Judgment as it presently stands, other taxpayers should now be able to make domestic law claims under s.22 VATA 1983 (although it remains likely that HMRC will continue to reject such claims until the GMAC 3 litigation is finally determined one way or the other).

How it affects you

The outcome of the above case should give tax payers the motivation to lodge BDR claims which were previously denied, with HMRC as a precedent has now been set by the GMAC ruling.

Serious thought to lodging their claim, as HMRC may now seek to‘re-repeal’ s.22 VATA 1983.

Taxpayers who have already lodged claims, had them rejected, and appealed will not need to take any further action, save for keeping their claims up-to-date on a four year basis.


Feel free to contact one of our VAT advisers if you need to lodge a VAT claim or if you have any questions about this case and its implications for your business.
0113 815 1315
15 Queens Square, Leeds, LS2 8AJ

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