“In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States. However, in the case of total or partial non-payment, Member States may derogate from this rule.”
“Purpose of this brief This brief sets out HM Revenue and Customs’ (HMRC) position on claims for historical bad debt relief following the Court of Appeal’s judgments in British Telecommunications of11 April 2014 and GMAC UK Plc on25 October 2016 . Readership VAT registered businesses that suffered bad debts on supplies they made between1 January 1978 and19 March 1997 and that didn’t adjust the VAT on such debts. Background The UK VAT Bad Debt Relief scheme was introduced in 1978. Since then the conditions of the scheme have changed: · before1 April 1989 , the scheme required the defaulting customer to be formally insolvent · until19 March 1997 , there was also a condition that title in any goods must have passed to the customer The litigation concerned the bad debt relief legislation that existed between 1978 and 1997 and doesn’t affect the current scheme set out in Notice 700/18 Relief from VAT on bad debts. The Court of Appeal found that the above former conditions were disproportionate. However, it also decided that it was too late to make claims under the scheme that existed before1 April 1989 . The outcome of the litigation is, therefore, that: · claims relating to bad debt relief on any supplies made prior to1 April 1989 will be refused · claims relating to supplies of goods made between1 April 1989 and19 March 1997 will be paid subject to satisfactory evidence that the bad debts occurred and that the VAT hasn’t been previously reclaimed - claims not subject to capping Evidence In addition to where title in goods passed on supply, between 1989 and 1997, Notice 700/18 made clear that title in goods would pass, and therefore bad debt relief would apply, where either of the following occurred: · goods in question had been sold on to a third party by the debtor · supplier chose to write to their customer and give up title in the goods to them It’s therefore possible that businesses may have previously claimed relief during this period under these terms. HMRC considers this unlikely to be the case in circumstances where businesses routinely repossessed high value goods following default by the customer. It is more likely that VAT bad debt relief may have been claimed where, for example, goods were supplied to customers who purchased the goods for resale. To ensure that any businesses making claims in the light of the GMAC case haven’t previously claimed relief, claims will need to meet the requirements set out in conditions 1 to 5 in paragraph 2.2 of Notice 700/18. If a business can’t meet these requirements it will need to satisfy HMRC by other means that it didn’t previously obtain bad debt relief. HMRC will consider alternative evidence for amount and methodology. The responsibility is on the claimant to show: · that they suffered bad debts on supplies of goods made under retention of title terms · they didn’t previously claim relief · the amount claimed is correct Claims already with HMRC will be dealt with in line with this brief although we may need to contact claimants for further information. New claims should be made in writing, quoting Revenue and Customs Brief 1 (2017), and sent with full supporting evidence …”
“[80] The property condition does not only have the effect of excluding from relief all bad debts incurred in connection with hire purchase agreements. It goes further and excludes relief in the case of any contract for the supply of goods which contains a Romalpa (retention of title) clause (see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd[1976] 2 All ER 552 ,[1976] 1 WLR 676 ). So the question one has to ask is not, as Mr Beal [HMRC counsel] suggested, whether there is something special about bad debts in the field of hire purchase which justifies their exclusion from the scheme, but whether one can justify the exclusion of all supplies of goods where title is retained.”
“28. [HMRC’s advocate] submitted that WMG had not shown that it was more likely than not that the input tax on the Group’s travel and subsistence expenditure had been incurred and not recovered; the information and documentation produced did not support its assertions. 29. The burden of proving that the two companies have not recovered the input tax on employee’s travel and subsistence expenses falls on the taxpayer in appeals such as the present one. And whilst only the civil standard proof is involved, the tribunal cannot be expected to make decisions simply on the basis that a claim covers a period long ago for which a taxpayer cannot be expected to hold any records, so that its claims should be accepted without question and without evidence. It is simply not good enough for the two companies to say to the Commissioners, “You accepted our claims for input tax recovery for the period 1999 on 2002 on the basis of our records for that period. We say that we made no input tax recovery for earlier periods for which we hold no records whatsoever, but for which we say we operated in exactly the same way and made no input tax recovery claims. You must accept our claims and repay the input tax concerned.” 30. The two companies have not satisfied me on the balance of probability that they failed to make claims for the period concerned, and I therefore reject the claims. It follows that I dismiss the appeals.”
“The issue we have to decide is purely one of fact to be determined from such evidence as there is about matters which occurred twenty or more years ago and the inferences which can be drawn from that evidence. The burden of proof lies on the Appellant, and we are required to determine whether, on the balance of probabilities, it can establish: (1) that the input tax in question was not recovered when it was incurred; and (if it was not so recovered) (2) that a reliable estimate has been made of the amount of input tax claimed as under-recovered.”
“In all cases the standard of proof remains the balance of probabilities: that applies equally to historic claims for unrecovered input tax. There is no rule of law or procedure restricting the exercise of the right of recovery in such cases; proof by means of estimates, assumptions and extrapolations was open to it as it is in all cases. The problem for the appellant was that the tribunal was not satisfied that the material placed before it was of sufficient value to enable any reliable conclusions to be drawn, whether by way of estimation, assumption, extrapolation or otherwise. Section 121 [FA 2008] re-opened entitlement to make repayment claims potentially going back to 1973, but it did not purport to address any of the practical difficulties that might be encountered in attempting to substantiate old claims. Responsibility for such difficulties must ultimately rest with those who, for whatever reasons, failed to make the claims when they first arose.”
“I am also clear that the FTT did not misdirect itself as to its jurisdiction. It proceeded on the basis that in demonstrating that an amount was due reasonable and sustainable estimation or approximation by the appellant might be legitimate. It approached the appeal - correctly - on the basis that it was for the appellant to satisfy it on the balance of probabilities that the appellant was entitled to repayment of an amount of input tax. In my opinion the FTT correctly identified the jurisdiction conferred on it by s.11(1) TCEA, and it had proper regard to the terms of s.80 VATA and reg. 37 VATR.”
“46. From these authorities I derive the following propositions: (a) The situation in which the court finds itself before it can despatch a disputed issue by resort to the burden of proof has to be exceptional. (b) Nevertheless the issue does not have to be of any particular type. A legitimate state of agnosticism can logically arise following enquiry into any type of disputed issue. It may be more likely to arise following an enquiry into, for example, the identity of the aggressor in an unwitnessed fight; but it can arise even after an enquiry, aided by good experts, into, for example, the cause of the sinking of a ship. (c) The exceptional situation which entitles the court to resort to the burden of proof is that, notwithstanding that it has striven to do so, it cannot reasonably make a finding in relation to a disputed issue. …”
“3. The property in the goods shall not pass to the Buyer until the Buyer has paid to the Seller the whole price thereof. If, notwithstanding that the property in the goods has not passed to the Buyer, the Buyer shall sell the goods in such manner as to pass to a third party a valid title to the goods, the Buyer shall hold the proceeds of such sale on trust for the Seller. The Buyer agrees that prior to the payment of the whole price of the goods the Seller may at any time enter upon the Buyer's premises and remove the goods therefrom and that prior to such payment the Buyer shall keep the goods separate and identifiable for this purpose, Nothing herein shall constitute the Buyer the Agent of the Seller for the purpose of any such sub-sale, Notwithstanding that property in the goods shall not pass to the Buyer save as provided above, the goods shall be at the risk of the Buyer from the time of collection by or delivery to him of the goods or after the expiration of any agreed rent-free period whichever is the earlier. Any delay caused by the unreasonable act or default of either party to rail or road transport or craft furnished by the other to be for the account of the party causing the delay. Notwithstanding the preceding provisions of this clause, the Seller may, at his sole option and at any time by notice in writing to the Buyer, transfer the property in the goods to him.”
“Since Romalpa clauses may take many forms, and since the case law on their validity and interpretation has become progressively complex and refined, this area of the law is, in the words of Staughton J., “presently a maze if not a minefield”.”
“… where goods are sold to a manufacturing or trading company, and particularly where a period of credit is allowed, it can scarcely be supposed that the buyer company is meanwhile to have no right to consume the goods in manufacture or to resell the goods in the ordinary course of its business. Accordingly, a term may be implied to that effect in order to give business efficacy to the contract. An implied, or even express, provision of this nature will not, however, invalidate the seller’s retention of ownership of the goods until such time as they are so consumed or sold.”
“Goods agreed to be sold subject to a reservation of title provision may be incorporated into other goods owned by the buyer or be subjected to the buyer’s manufacturing processes to make other products. The effect of such acts on the title of the seller has been considered in a number of cases.”
“In Borden (UK) Ltd v Scottish Timber Products Ltd , a seller supplied resin for the manufacture of chipboard by the buyer company, reserving ownership of the resin until all goods supplied by him to the buyer company had been paid for in full. The Court of Appeal held that, once the resin was used in the manufacturing process, it ceased to exist, and with it the seller’s title thereto; that, once the resin had lost its identity in the chipboard, it could no longer be traced into the chipboard or the proceeds of its sale; and that no term could properly be implied in the contract that the seller should have any interest in or charge over the chipboard.”
“On the other hand, in Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd , diesel engines were sold to the buyer company subject to a retention of title clause and were incorporated into diesel generating sets. The process of incorporation did not in any way alter or destroy the substance of an engine, and it could be removed from the set, if necessary, within several hours. Staughton J. held that the proprietary rights of the seller were not affected by the incorporation: the engines remained engines, albeit connected to other things.”
“These cases move into very difficult and uncertain areas of law relating to the creation of a new product from materials owned by another or the attachment of one person’s chattel to that of another. They appear to establish that, in the absence of an express provision to the contrary, the seller’s property in the goods will be lost and vest in the buyer if the identity of the goods is destroyed in the manufacturing process or if they are transformed by manufacture into different goods, but may be retained if the goods are in their original state and can easily be removed from the finished product. But other intermediate possibilities exist. The question whether or not goods which are still identifiable, but have to a greater or less extent been worked on by the buyer or incorporated in other articles, remain the property of the seller would seem to depend upon what intention is to be imputed to the parties, having regard to such factors as the nature of the goods, the product, the degree and purpose of incorporation, and the manufacturing or other process applied.”
“You can claim relief from VAT on bad debts for goods or services that you supplied, if all the following conditions are met: … in the case of a supply of goods, ownership has passed to the customer or through him to a third party. You cannot claim bad debt relief if, for example, you supplied the goods under a contract which reserves title until they have been paid for, unless you follow the procedure [below] … If you supplied goods under a contract with a clause reserving title until they have been paid for (a “Romalpa” clause), and the goods have not been passed on, with good title, to a third party, you must send to the person in charge of the insolvency a statement formally giving up your rights under the clause.”
“The Property Condition was particularly relevant to the Building Distribution division as, throughout the relevant period, the standard credit terms of its businesses included a clause stipulating that ownership of goods did not pass to customers until the supplier had received payment in cleared funds of all sums due in relation to those goods. As a result, the companies comprising the Building Distribution division were … unable to recover VAT on any unpaid debts relating to supplies made during this period.”
“No claim has been made since the Balance Sheet Date [defined as31 December 1996 ] by any Group Company [defined to include Harcros] for bad debt relief under section 36 VATA 1994.”
“ Value Added Tax Bad debt relief claimed since the Balance Sheet date: Quarter to 31/03/97£182,427.78 Quarter to 30/06/97£138,847.09 ”