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The Court of appeal has issued a unanimous judgment in favour of HMRC in relation to British Telecommunications PLC's (BT) claim for a refund of VAT on bad debts dating back over 40 years. The claim – agreed between the parties at some £65 million – arose because, according to BT, UK law infringed its directly effective EU law rights. One of the fundamental principles of EU VAT law is that VAT must not be levied by a Member State on a sum greater than that actually paid. BT's case was founded on the basis that the UK's enactment of the bad debt relief scheme - which imposed an insolvency condition – offended that principle and, as a consequence, BT had accounted for (and the State had collected) an amount of VAT in excess of that paid by the customer. BT submitted a claim in 2009 which HMRC rejected and BT appealed that decision. The appeal was heard by the Upper Tribunal and BT was successful. The Upper Tribunal held that, as the old bad debt relief scheme was introduced without an adequate transitional period, BT could rely on its directly effective EU law rights and was entitled to make the claim. HMRC appealed that decision to the Court of Appeal.
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Court of Appeal
British Telecommunications PLC
The Court of appeal has issued a unanimous judgment in favour of HMRC in relation to British Telecommunications PLC's (BT) claim for a refund of VAT on bad debts dating back over 40 years. The claim – agreed between the parties at some £65 million – arose because, according to BT, UK law infringed its directly effective EU law rights.
One of the fundamental principles of EU VAT law is that VAT must not be levied by a Member State on a sum greater than that actually paid. BT's case was founded on the basis that the UK's enactment of the bad debt relief scheme - which imposed an insolvency condition – offended that principle and, as a consequence, BT had accounted for (and the State had collected) an amount of VAT in excess of that paid by the customer. BT submitted a claim in 2009 which HMRC rejected and BT appealed that decision. The appeal was heard by the Upper Tribunal and BT was successful. The Upper Tribunal held that, as the old bad debt relief scheme was introduced without an adequate transitional period, BT could rely on its directly effective EU law rights and was entitled to make the claim. HMRC appealed that decision to the Court of Appeal.
The Court of Appeal agreed with the Upper Tribunal on most of the issues. However, fundamentally, it disagreed with the Upper Tribunal on the question of the effect of section 39(5) of the 1997 Finance Act which curtailed BT's ability to claim bad debt relief under the old scheme. In essence, the Court agreed with HMRC that, on the facts, the termination of the old bad debt relief scheme was foreseeable and, as a result, BT did not have any legitimate expectation on which it could rely on in order to avoid the application to it of section 39(5). The Court considered that BT had had adequate opportunity in which to pursue its directly effective EU law rights from the dawn of the old bad debt relief scheme in 1978 but did not do so. The fact that it did not pursue its rights at the time may well have been due to the fact that it was unaware of those rights but, the Court concluded, such unawareness is not a relevant consideration. BT had every opportunity to obtain the most expert advice as to its rights and it cannot therefore now succeed with its claim. The manner of the introduction of section 39(5) did not infringe BT's directly enforceable EU law rights.
Comment – Given the sums involved, an appeal to the Supreme Court cannot be ruled out. This case emphasises the point that taxpayers cannot 'sit on their hands'.
For further information in relation to any of the issues highlighted in this Case Alert please contact:
The Regions Stuart Brodie [email protected]
London/South East Karen Robb [email protected]
The Midlands Mike Sheppard [email protected]
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