VAT saga ends with defeat for HMRC at ECJ

A LONG-RUNNING VAT saga between GMAC and HM Revenue & Customs now looks to have reached its end game following a ruling at the European Court of Justice.

The case hinged on GMAC UK’s £2.3m claim for bad debt relief in relation to VAT which had been previously accounted for on higher purchase transactions undertaken between 1978 and 1997.

It argued that the UK rules on bad debt relief were not applied to the repossession of cars following partial or total non-payment, contrary to the requirements of the directive and therefore article 11C of the directive applied directly.

Essentially, GMAC’s case stated that when it supplied a car on hire purchase terms – where VAT is accounted for at the outset on the full sale price – but the customer subsequently failed to pay the full amount due under the HP agreement, it should be entitled to make an adjustment to the VAT already paid.

Typically, when a GMAC customer defaults, the car is repossessed and then sold at auction.

Reflecting on the ECJ ruling, Stuart Brodie, a VAT partner at Grant Thornton, said that in many cases, “the combined value of the customer payments and auction proceeds meant that GMAC was still out of pocket and, in such situations, GMAC argued that it was entitled to claim bad debt relief in relation to the outstanding balance. The upper tribunal ruled in favour of GMAC on this point in 2012, and moreover ruled that the time limits for making such claims are not capped. The ECJ’s judgement should now bring this litigation to an end.”

Brodie added: “It continues to surprise me the lengths that HMRC will go to avoid repaying amounts due to tax payers which have been overpaid due to HMRC’s own error. Any businesses previously prevented from claiming bad debt relief may now be entitled to revisit this and should seek to submit claims where appropriate”.

But Graham Elliott, Withers’ transaction tax consultant, said the case highlighted the fact that the government cannot set aside its own law in order to conform with EU law and that “one of these laws over-taxed a transaction, whilst the other under-taxed it, with a combined effect that something like the correct tax was paid over all”.

He argued that the specific question was “whether the tax payer could ‘cherry pick’ one law to disregard by deploying its directly effective rights, while ignoring the other defective law, even though the overall purpose of the EU law would not be fulfilled. HMRC argued that directly effective rights could not be used to produce an overall result that was contrary to EU VAT principles.”

The court’s decision meant that the tax payer was permitted to apply the EU law as regards one defective rule while at the same time relying on its rights to apply UK law in regard to another kind of transaction where that also gave rise to a lower tax burden.

Elliott concludes: “The ramifications of this for HMRC are difficult to under-estimate. It means that in any case where a fault in UK law making has been offset by a fault in a compensating direction, the combined effect can be ignored by tax payers who can then have the best of both worlds by choosing one to ignore and one to rely upon. HMRC will need to give careful consideration to any other laws that could be challenged as being non-compliant with EU law even where the cumulative effect of faulty law creates the same overall tax burden.

“This may strengthen voices that have long commented that the UK law should match more closely the principal VAT Directive rather than seeking to ‘interpret’ it. Tax payers now have carte blanche to seek out such inconsistencies and ruthlessly cherry pick to their advantage.”

An HMRC spokesman said: “We are carefully considering this judgment concerning the effect of former UK VAT legislation in force before 1997. This case only concerns the position of businesses that prior to 2006 repossessed and re-sold goods and benefitted from VAT relief on the resale.”