In a preliminary ruling [Case C-589/12 GMAC UK v HMRC] the CJEU has held that, a member state may not prevent a company from invoking its directly effective European rights under the Sixth VAT Directive, and a domestic law provision that puts the taxpayer in an advantageous position does not affect those rights.
General Motors Acceptance Corporation UK, or GMAC, sold cars under hire purchase (HP) agreements, meaning that customers paid for the vehicle in instalments over an agreed time period. If one of the customers was unable to make the payment, and defaulted, GMAC repossessed the car, where it would be sold at auction.
Once the car was sold, the amount obtained was used to reduce the outstanding balance for the customer. At the time of default, GMAC accounted for VAT on the full purchase price of the vehicle. The dispute arose over the company’s entitlement to VAT bad-debt relief on the vehicles it purchased.
Under the Cars Order and article 38 of the VAT Regulations [1995], when a car is sold at auction, the taxpayer benefits from only paying VAT on the gain, or profit margin, therefore, GMAC paid less VAT than the vendor of the car under an outright sale. As a result, HM Revenue & Customs (HMRC) felt this resulted in a windfall repayment, which is not intended by EU VAT law.
“Clearly, 'windfall' was the issue before the court. However, the court has held that that point was not determinative of the correct legal analysis,” said David Anderson of PwC Legal. “The CJEU said that the UK had chosen to de-supply (for VAT purposes) the onward sale of the car. By inference it appears to be saying, therefore, that it is for the UK to amend its domestic legislation if it considers the windfall unwarranted.”
“This is an important point and case, providing confirmation as to taxable persons that their directly effective rights are not compromised or limited simply because of the financial results they achieve,” added Anderson.
Under UK law, for a company to receive bad-debt relief it must meet these conditions:
· property of the goods must pass under the relevant supply; and
· the debtor must be legally insolvent.
Though, GMAC failed to satisfy these conditions, it contended that under article 11C(1) of the Sixth VAT Directive that its VAT liability be reduced where it received partial non-payment.
“UK VAT law never really dealt adequately with HP transactions and there have been progressive changes to the regime to ensure it complies fully with EU law,” said David Jamieson of Baker McKenzie. “This result in GMAC means the suppliers, for relevant past periods [1978 to 1997], will not account for VAT on an amount proportional to its income, that is, VAT is accounted only by reference to the HP revenue rather than the total revenue), so it is easy to see why HMRC characterised this as a windfall.
“However, I'm not sure that this characterisation is the full story. The supplier would have paid the full amount of VAT upfront at the start of the process, so HMRC would have had the cash flow benefit of collecting tax earlier under a HP agreement than under a lease arrangement.”
“It appears that HMRC was attempting to develop a new principle of 'preventing a windfall, [which is] a potentially wide and uncertain principle in which to interpret VAT legislation, so the court's rejection of these arguments will be welcomed by many tax advisers,” added Jamieson.
The First-tier Tribunal permitted the taxpayer’s appeal, where it was challenged by HMRC in the Upper Tribunal, which decided to refer the case to the CJEU for a preliminary ruling. The CJEU effectively ruled that the taxpayer was entitled to claim VAT repayments on repossessed HP cars, which it later resold free of VAT.
“This case highlights the perennial issue of conflicts between community VAT law and domestic implementing legislation. The decision is one for tax payers generally – and not just those involved in selling repossessed vehicles – to take note of because it indicates that taxpayers can be entitled to VAT advantages arising from these conflicts,” said Ben Brown of Allen & Overy. “Interestingly, whilst the case deals with a very specific set of facts it touches on an extremely important general principle: namely, that an EU member state cannot set aside its own laws or deny a taxpayer’s directly effective rights under the VAT Directive by arguing that those rights, in combination with domestic implementing legislation, lead to an unfairly advantageous position for the taxpayer.”
“The decision might well fortify tax payers in efforts to seek out and benefit from such inconsistencies throughout the UK’s domestic VAT legislation,” added Brown.
