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In HMRC v GMAC (UK) [2016] EWCA Civ 1015 (25 October 2016), the Court of Appeal found that GMAC’s bad debt relief claims relating to periods post April 1989 were valid.

GMAC was a finance company which bought motor vehicles from dealers and sold them on to customers on hire purchase terms. At the outset of the transaction, GMAC would account for VAT on the full sale price charged to the customer (excluding credit charges) under VATA 1994 Sch 4 para 1 (implementing the Principal VAT Directive art 5(4)(b)).

In the relevant periods, VAT bad debt relief provisions imposed two alternative conditions for bad debt relief: the property had to have passed (‘the property condition’); and the debtor must be formally insolvent (‘the insolvency condition’). These conditions were difficult to satisfy in the context of hire purchase agreements. First, if the customer defaulted on the payments under the hire purchase agreement, property would not have passed. Second, where the finance company did not take insolvency proceedings, for example because the amount outstanding was less than the relevant bankruptcy or insolvency limit, or where the costs associated with such proceedings were not commercially justified, it could not satisfy the insolvency condition. GMAC therefore contended that both the property condition and the insolvency condition were incompatible with the Principal VAT Directive. Both the FTT and the UT had found in favour of GMAC and held that the conditions fell to be disapplied.

The Court of Appeal observed that the property condition did not only have the effect of excluding from relief all bad debts incurred in connection with hire purchase agreements; it also excluded relief in the case of any contract for the supply of goods which contains a Romalpa (retention of title) clause. The question was therefore whether the exclusion of all supplies of goods where title is retained could be justified. The Court of Appeal considered that such an exclusion was neither appropriate nor necessary.

As for the insolvency condition, the Court of Appeal noted the evidence that in 90-95% of repossessions by GMAC, there was no bankruptcy or insolvency. This was because, in the vast majority of cases, customers were individuals so that formal insolvency proceedings were not commercially sensible. The result was that entire classes of bad debt claims were excluded from relief. The Court of Appeal therefore confirmed that both conditions should be disapplied.

The Court of Appeal found, however, that the exercise of GMAC’s EU law rights was not rendered ‘excessively difficult or virtually impossible’ by FA 1997 s 39(5). Therefore, GMAC’s claim for supplies which had taken place before 1 April 1989 was barred, as GMAC had adequate time to exercise its EU law rights.

Finally, the Court of Appeal found that the time limits applied to GMAC’s claims to assert its EU law rights through the mechanism of the domestic machinery were disapplied because they set the time by reference to the invalid insolvency condition. The domestic legislation should therefore be read as not imposing any time condition and GMAC’s claim was not out of time.

Read the decision.

Why it matters: The Court of Appeal confirmed that the pre 1997 bad debt relief regime did not comply with EU law. It noted that a wholesale derogation from a particular scheme was easier to justify than a restriction on the right to claim in a particular class of cases. The court has also confirmed that GMAC’s post April 1989 claims were valid. It remains to be seen whether this is the end of the road for GMAC.

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