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way in which s.22 VATA 1983 (‘the Old Scheme’) was repealed.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.
Background
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GMAC also argued that Section 22 VATA 1983 was repealed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.
Contacts
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.
www.he-llp.com
0113 815 1315
15 Queens Square, Leeds, LS2 8AJ
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