More taxpayer success in the GMAC UK VAT BDR litigation

Yesterday the Court of Appeal gave its judgment in GMAC UK Plc , This is a long-running dispute which concerns the VAT bad debt relief (BDR) adjustments a taxpayer can claim. A win by the taxpayer means the refunds the taxpayer claimed for VAT BDR should be repaid for all periods after 1989. The case considered when VAT BDR adjustments could be made by finance companies when customers terminate finance agreements. Under VAT law, finance companies have to pay all of the VAT on the sale of the goods to HMRC at the time the goods are transferred, but termination of the contract by the customer means the finance companies don't get paid in full for the goods. The terms of the agreements vary to some extent as far as defining how the value of the original sale is to be adjusted, but in general the finance companies are entitled to reduce the sale value of the vehicle by reference to the amount for which the goods are resold and/or to claim VAT BDR. In this case, the taxpayer had submitted claims for BDR in respect of terminations which took place both before and after the VAT BDR rules were changed in 1997. HMRC sought to resist some of these claims on the basis that:

  • the UK BDR provisions to 31 March 1989 only permitted relief if the debtor was insolvent;
  • the UK BDR provisions to 19 March 1997 only permitted relief if ownership of the goods had passed to the debtor;
  • when changes were made in 1997, they precluded any BDR claim for debts occurring before 1989; and
  • the taxpayer had not submitted its claims until 2006 and HMRC sought to argue that the right to a claim, which relied directly on an EU entitlement (as these did), was lost if the taxpayer did not exercise that entitlement within 'a reasonable period' from when it arose - in this case when the termination occurred.

HMRC succeeded only on its third ground for appeal, i.e. the Court of Appeal held that, when HMRC removed access to pre-1989 claims in 1997, it gave taxpayers sufficient notice to enable a diligent taxpayer to ensure it had made those claims before the previous BDR scheme was closed down. Otherwise, the Court supported the taxpayer's claims. This means that the refunds the taxpayer claimed for VAT BDR should be repaid for all periods after 1989. Of course, this is subject to any appeal by HMRC to the Supreme Court, so taxpayers who have made similar claims that are stayed pending the outcome in this case may have to wait a little longer to find out whether their claims will be paid. The case is available on the BAILII website. If you'd like to discuss this in more detail, please contact Christine O'Malley.

Christine O'Malley

e: [email protected]

p: +44 (0)16 1245 2429