England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
Mr Justice Warren and Judge Charles Hellier
Appeal No: FTC/05/2012

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/04/2014

Lord Justice Rimer :

Introduction

1. On 30 March 2009, British Telecommunications plc ('BT') wrote to The Commissioners for Her Majesty's Revenue and Customs ('HMRC') making a claim for hitherto unclaimed VAT 'bad debt relief' for the period 1 January 1978 to 31 March 1989 – thus for a period ended 20 years before the claim. The claim was for £91,822,303 plus interest. It was said to be in relation to BT's business and private customers. It arose because, although BT had accounted for the standard rate of VAT on its supplies to customers, in some cases the customers had failed to pay BT either in part or at all for its supplies. The claim was for a refund of the VAT for which BT had accounted in respect of the amount unpaid by its defaulting customers.
2. The domestic legislation relating to claims for VAT bad debt relief in respect of supplies made during the period to 31 March 1989 was section 22 of the Value Added Tax Act 1983 ('VATA 1983'), which (in materially identical terms) replaced section 12 of the Finance Act 1978 and required particular conditions to be satisfied before a claim could be made, including a condition that the customer was insolvent. BT's letter suggested that it had, during the currency in force of section 22, made claims for relief in cases in which such conditions were satisfied. Its March 2009 claim was for relief in respect of cases where they were not. Its case was advanced on the basis that it had a directly enforceable European Union ('EU') law right to relief in such cases, with which the section 22 conditions, in particular the insolvency condition, were said to be incompatible. Whilst BT apparently recognised (although it misdescribed the relevant statutory provisions) that section 39(5) of the Finance Act 1997, which came into force on 19 March 1997, had finally precluded the making of its bad debt relief claims under section 22 in respect of supplies made before 1 April 1989, it asserted (or can be read as having intended to assert) that section 39(5) should be disapplied as denying BT its EU law right, leaving it free to make its claims 12 years later.
3. By a decision of 11 January 2010, HMRC gave their reasons for rejecting BT's claim; and on 1 April 2010, following the carrying out of BT's requested review of that refusal, HMRC wrote to BT upholding its decision.
4. BT appealed before the First-tier Tribunal (Tax Chamber) ('the FTT') against HMRC's decision. By a direction released on 26 January 2012, BT's appeal was transferred to the Upper Tribunal (Tax and Chancery Chamber) for the determination of three preliminary issues. They were heard by the Upper Tribunal (Warren J and Judge Charles Hellier) in February 2012, together with an appeal by HMRC against a decision of the FTT allowing an appeal of GMAC UK PLC ('GMAC', formerly General Motors Acceptance Corporation (UK) PLC) against HMRC's refusal of GMAC's claim for VAT bad debt relief in relation to supplies of cars between October 1978 and 1997.
5. The preliminary issues in the BT appeal before the Upper Tribunal addressed the question whether, if BT had at some time had a directly enforceable EU law right to claim bad debt relief, that right was still exercisable on 30 March 2009. It was agreed that BT's claim could not succeed as a matter of domestic law: it could only succeed if EU law permitted it to do so. The issues were set out as follows in the Upper Tribunal's judgment released on 3 August 2012.

'237. The three Preliminary Issues all relate to the time within which claims must be made and are as follows:

a. Issue 1: On the assumption that BT could otherwise have relied on an EU law right to bad debt relief, in respect of bad debts allegedly arising in the prescribed accounting periods running from 1 January 1978 to 31 March 1989, by virtue of Article 11C(1) of the Sixth VAT Directive, was the exercise of that right in 2009 barred in accordance with the general principles of EU law and/or subject to section 39(5) of the Finance Act 1997?

b. Issue 2: If the answer to Question 1 is in the negative in relation to the general principles of EU law, but affirmative in relation to section 39(5), does section 39(5) fall to be disapplied, or construed, under EU law, in such a way as not to affect the exercise of BT's right under EU law?

c. Issue 3: Do section 80 of the Value Added Tax Act 1994 and section 121 of the Finance Act 2008 apply to BT's claim irrespective of the answer to Question 1?'

6. The Upper Tribunal answered the first two issues in favour of BT and the third in favour of HMRC. Its answers were as follows:

'244. The answers to the Preliminary Issues are therefore as follows:

a. Issue 1: On the assumption that BT could otherwise have relied on an EU law right to bad debt relief, in respect of bad debts allegedly arising in the prescribed accounting periods running from 1 January 1978 to 31 March 1989, by virtue of Article 11C(1) of the Sixth VAT Directive, the exercise of that right in 2009 was not barred in accordance with the general principles of EU law but was no longer available as a result of section 39(5) FA 1997.

b. Issue 2: Section 39(5) falls to be disapplied, or construed, under EU law, in such a way as not to affect the exercise of BT's right under EU law. This conclusion turns on our view that inadequate notice of the termination of the Old Scheme was given. Accordingly, BT's claims were not time-barred when they made them in the claim letter dated 30 March 2009.

c. Issue 3: Section 80 of the Value Added Tax Act 1994 and section 121 of the FA 2008 have no relevance to BT's claim on the footing that its claims arise under section 22. If its claims arise, instead, under section 80, those claims were not made before 1 April 2009 and are now time-barred.'

7. BT's claim was therefore held to fail as a matter of national law, a conclusion which HMRC do not dispute. What they do dispute is that, on the assumption made, EU law entitled BT to bring its claim in March 2009. HMRC challenge the Upper Tribunal's conclusion on four grounds of appeal, for which the Upper Tribunal gave permission. They are:

'1. That the Upper Tribunal erred in holding that the general principles of EU law did not bar any claim by BT, in particular by rejecting the submission that there was an obligation under those general principles to act within a reasonable time.

2. That the Upper Tribunal erred in holding that section 39(5) Finance Act 1997, which brought the "Old Scheme" of bad debt relief to an end, falls to be disapplied or construed in such a way as not to affect the exercise of any rights that BT might have, in particular that it erred in holding that inadequate notice of the termination of the Old Scheme was given.

3. That, on the basis of the Upper Tribunal's own expressed view, BT did not have any directly effective rights and the Upper Tribunal ought therefore to have taken that into consideration.

4. That the Upper Tribunal erred in holding that the Insolvency Condition was disproportionate, unreasonable or otherwise unjustified so as to infringe directly effective EU law rights.'

Grounds 1 and 2 challenge the Upper Tribunal's answers to the first and second preliminary issues. Ground 3 goes to the validity of an assumption upon which the answers to those issues were based. Ground 4 challenges a conclusion of the Upper Tribunal that was essential to its answers to issues 1 and 2.

8. To understand how the issues arise, it is necessary first to explain the history of the 'bad debt relief' legislation. Before doing so, I should first mention two matters of which Mr Lasok QC, for HMRC, informed us. First, the parties have reached an agreement on the quantification of BT's claim, originally put at just under £92m, plus interest. The agreed figure is £65.2m excluding interest although, were BT ultimately to succeed, that figure would need to be adjusted to take account of the fact that BT had claimed bad debt relief in respect of the VAT when accounting for corporation tax. Second, this appeal is not a 'one off' one in which only BT is interested. Others are also interested in its outcome, including GMAC; and, as the Upper Tribunal ruled that there is no time limit for making these claims, other like claims may still be waiting to be made.
9. Finally, and by way of introduction to the legislative story, this appeal is centrally about (a) the alleged incompatibility of elements of the national legislation with what is said to be BT's entitlement to enforce its directly effective EU law rights under an EU directive, and (b) how, in the case of any such incompatibility, the court must deal with the problem. One authority relevant to the arguments is the decision of the House of Lords in Fleming (t/a Bodycraft) v. Her Majesty's Revenue and Customs [2008] UKHL 2; [2008] 1 WLR 195. As an opening guide to the relevant principles, Lord Walker of Gestingthorpe said this:

'24. … it is a fundamental principle of the law of the European Union, recognised in section 2(1) of the European Communities Act 1972, that if national legislation infringes directly enforceable Community rights, the national court is obliged to disapply the offending provision. The provision is not made void but it must be treated as being (as Lord Bridge of Harwich put it in R v. Secretary of Sate for Transport, ex p Factortame Ltd [1990] 2 AC 85, 140) "without prejudice to the directly enforceable Community rights of nationals of any member state of the EEC". The principle has often been recognised [by] your Lordships' House, including (in the context of taxes) Imperial Chemical Industries plc v. Colmer (No 2) [1999] 1 WLR 2035, 2041 (Lord Nolan) and recently Autologic Holdings plc v. Inland Revenue Commissioners [2006] 1 AC 118, paras 16-17 (Lord Nicholls of Birkenhead).

25. Disapplication is called for only if there is an inconsistency between national law and EU law. In an attempt to avoid an inconsistency the national court will, if at all possible, interpret the national legislation so as to make it conform to the superior order of EU law: Pickstone v. Freemans plc [1989] AC 66; Litster v. Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546. Sometimes, however, a conforming construction is not possible, and disapplication cannot be avoided so as to conform with EU law. Only in the most formal sense (because of the terms of s 2(4) of the European Communities Act 1972) can disapplication be described as a process of construction. …'

The legislation

(a) The Sixth VAT Directive

10. The Finance Act 1972 was passed on 27 July 1972. It introduced VAT to the UK. It came into force on 1 April 1973, following which VAT became chargeable on supplies on or after that date.
11. In 1977, the Community introduced the Sixth VAT Directive (1977/388) ('the Directive'). The relevant provisions have since been consolidated in the Principal VAT Directive 2006/112/EC, but it is the Directive that was in force at the times material to these proceedings and to which I shall refer. Article 1 required Member States to modify their VAT systems and to 'adopt the necessary laws, regulations and administrative provisions so that the systems as modified enter into force at the earliest opportunity and by 1 January 1978 at the latest.' That is the start date for BT's bad debt relief claim, because it was as from then that the implementation of the Directive was mandatory. Article 2, 'Scope', provided that 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such' should be subject to VAT.
12. The key provisions are in article 11, in Title VIII, 'Taxable Amount'. Article 11A.1(a) provides materially that the taxable amount shall be:

'(a) in respect of supplies of goods and services …, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;'

The provisions of more direct importance are in article 11C(1), 'Miscellaneous provisions', which read:

'1. 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.'

13. The thrust of the first paragraph of article 11C(1) is that if there is a post-supply non-payment or price reduction, the taxable amount, and in consequence the VAT previously accounted for on the supply, falls to be reduced correspondingly 'under conditions [to] be determined by the Member States'. The Court of Justice said of the first paragraph, in Minister Finansow v. Kraft Foods Polska SA (Case C-588/10) (unreported, 26 January 2012), that:

'23. … it must be held that these provisions give the Member States a margin of discretion, inter alia, as to the formalities to be complied with by taxable persons vis-à-vis the tax authorities of those States in order to ensure that, where the price is reduced after the supply has taken place, the taxable amount is reduced accordingly.'

14. The second paragraph confers a power upon Member States to derogate from the provisions of the first paragraph in a case of total or partial non-payment. It is, on the face of it, a power to refuse to allow a reduction of the taxable amount even in cases where the circumstances might be regarded as justifying one. The power necessarily involves a margin of discretion. The only European decision on the power is Goldsmiths (Jewellers) Ltd v. Customs and Excise Commissioners (Case C-330/95) [1997] STC 1073 where the Court of Justice said:

'18. The power to derogate, which is strictly limited to the latter situation [that of total or partial non-payment], is based on the notion that in certain circumstances and because of the legal situation prevailing in the member state concerned, non-payment of consideration may be difficult to establish or may only be temporary. It follows that the exercise of that power must be justified if the measures taken by the member states for its implementation are not to undermine the objective of fiscal harmonisation pursued by the Sixth Directive.'

15. Mr Lasok placed primary reliance on that paragraph in his submissions, although Mr Cordara QC, for BT, drew more widely upon what the Court said in its judgment in Goldsmiths. As I shall explain, I regard it as improbable that that paragraph was intended to provide a definitive exposition of the power to derogate, but it at least makes clear the fairly obvious point that the power is exercisable for the purpose of identifying circumstances in which bad debt relief is not to be available.

(b) The Old Scheme: Finance Act 1978

16. Following the promulgation of the Directive, the UK introduced its first VAT bad debt relief scheme. It was in section 12 of the Finance Act 1978. It became known as 'the Old Scheme' and came into effect on 1 October 1978. That was nine months later than was required by article 1 of the Directive, during which period there was no bad debt relief scheme in place. Mr Lasok said that meant that during that period there was a total derogation from the requirements of the first paragraph of article 11C(1) as to bad debt relief for total or partial non-payment. I would respectfully question the correctness of that. If, as BT claims and the Upper Tribunal held, BT had a directly effective right to bad debt relief under the first paragraph of article 11C(1), it could have enforced that right domestically during the nine-month period and it could hardly have been said against it that the United Kingdom's omission to implement the article amounted to an implied derogation of such right under the second paragraph. If, however, as HMRC contend, BT did not have a directly effective right, I consider that it would follow that, during that nine-month period, BT would have had neither an EU nor a domestic law right to bad debt relief. That could be regarded as practically equivalent to a total de facto derogation of the rights that the Directive intended it to have, but so to characterise it would in my view be inaccurate.
17. The material provisions of section 12 are as follows:

'12 – (1). Where –

(a) a person has supplied goods or services for a consideration in money and has accounted for and paid tax on that supply; and

(b) the person liable to pay any outstanding amount of the consideration has become insolvent,

then, subject to subsection (2) and to regulations under subsection (3) below, the first-mentioned person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of tax chargeable by reference to the outstanding amount.

(2) A person shall not be entitled to a refund under this section unless –

(a) he has proved in the insolvency and the amount for which he has proved is the outstanding amount of the consideration less the amount of his claim;

(b) the value of the supply does not exceed its open market value; and

(c) in the case of a supply of goods, the property in the goods has passed to the person to whom they were supplied.

(3) Regulations under this section may –

(a) require a claim to be made at such time and in such form and manner as may be specified by or under the regulations …

(4) For the purposes of this section –

(a) an individual becomes insolvent if –

(i) In England, Wales, Northern Ireland or the Isle of Man, he is adjudged bankrupt or the court makes an order for the administration in bankruptcy of his estate; or …

(b) a company becomes insolvent if, in the United Kingdom or the Isle of Man, it is the subject of a creditors' voluntary winding up or the court makes an order for its winding up and the circumstances are such that it is unable to pay its debts; …

(5) In section 40(1) of the Finance Act 1972 (appeal to VAT tribunal [now the FTT]) after paragraph (k) there shall be inserted –

"(l) a claim for a refund under section 12 of the Finance Act 1978.'

(6) This section applies where the person liable to pay the outstanding amount of the consideration becomes insolvent after 1^st October 1978.' (Emphases supplied)

18. Subsections (2)(b) and (c) had no application to BT's supplies: in BT's case, the only applicable condition of its right to a refund of VAT paid by it on a supply for which it did not receive the full payment upon which it had originally accounted for VAT was the insolvency condition in subsection (2)(a). In GMAC's case, however, the property condition in subsection (2)(c) was also applicable. The insolvency condition meant that BT could make an application for a bad debt refund of any VAT paid by it only in cases in which its customer (if an individual) had been adjudicated bankrupt (or, if dead, his estate was being administered in bankruptcy); or (if a company) was in a creditors' voluntary or compulsory winding up 'and the circumstances are such that it is unable to pay its debts'. The words just quoted were presumably intended to convey that the compulsory winding up was on the ground of the company's insolvency rather than, for example, following a 'just and equitable' winding up petition, when it would ordinarily be necessary to show a surplus of assets for contributories before the order could be made. In short, in order to meet the insolvency condition, it was necessary (a) for there to be a relevant insolvency, and (b) for BT to have proved in it for the VAT-exclusive part of its unpaid debt. Upon satisfying that condition, BT's right to bad debt relief arose and it could apply to HM Customs and Excise (HMRC's predecessors) for a refund of the VAT it had paid that was referable to the unpaid debt.
19. The practical difficulty that the insolvency condition presented for companies like BT was, however, that its supplies are typically high volume and low value. The bad debts that were in practice likely to arise for BT were debts below the minimum 'bankruptcy level' for the presentation of a bankruptcy petition against the defaulting customer, which is now £750 but was £200 for part of the relevant period. That meant that it was not open to BT to petition for the customer's bankruptcy so as to achieve the customer's 'insolvency' for the purposes of section 12 and then claim bad debt relief. If such a customer was adjudicated bankrupt on the petition of another creditor, BT could (and we were told would) prove in the bankruptcy and then make a VAT bad debt relief claim. But in many cases, neither option was open to it; and in those cases, BT proceeded on the basis that there was no scope for it to claim bad debt relief at all: that was of course the effect of the insolvency condition under the Old Scheme.
20. As regards company customers, a petition for a compulsory winding up can be presented on the basis that the company is unable to pay its debts (section 122(1)(f) of the Insolvency Act 1986); and such inability can be shown in one or more of the ways identified in section 123. They include (i) a failure to comply with a statutory demand in a sum exceeding £750; (ii) proof of an unsatisfied execution of a judgment debt in any amount; (iii) proof otherwise that the company is unable to pay its debts as they fall due (which can include proof of unsatisfied demands for payment of debts of any amount); and (iv) proof that the value of the company's assets is less than that of its liabilities. In theory, therefore, it would have been open to BT to achieve a winding up, and therefore a relevant insolvency, of a defaulting corporate customer even in cases where its debt was less than £750, by pursuing alternatives (ii) or (iii), and perhaps, at least in some cases, (iii). But as the Upper Tribunal pointed out:

'84. … it has never been a cost-free exercise to present a petition against either an individual or a company. Quite apart from court fees, there are the costs of instructing professionals and the inherent risk that these fees and costs will never be recovered. A creditor, it is obvious, is bound to consider very carefully whether to take proceedings in respect of any debt. This is so where the debt exceeds the statutory limit for personal insolvency or for a corporate statutory demand; a fortiori in the case of a company debt of an amount below that limit. It is entirely unsurprising and entirely reasonable that an entity such as GMAC should have clear policies about its approach to the enforcement of unpaid debts through the courts and to take a commercial view about the cost-effectiveness of attempting to do so. Even if it is thought to be reasonable and indeed proportionate to require that a judgment be obtained for the debt (eg in the small claims court) it is an entirely different question whether it is proportionate or even reasonable to require the invocation of insolvency procedures and the proof of debt before bad debt relief can be claimed in respect of small debts.'

The Upper Tribunal there referred specifically only to GMAC. That is because it dealt first with the GMAC appeal (over 234 paragraphs), and then applied its conclusions in that appeal to the BT preliminary issues (in [235] to [244]). No suggestion was made to us that the commercial considerations applied by GMAC in relation to the recovery of small debts were not similarly applied by BT and it is implicit in their answers to the BT preliminary issues that the Upper Tribunal regarded like considerations as applying also to BT.

21. Reverting to the legislative history, section 12(3) of the Finance Act 1978 provided for the making of regulations. The Value Added Tax (Bad Debt Relief) Regulations 1978 (1978/1129) came into force on 2 October 1978. Regulation 2 defined a 'claimant' as a person making a claim for a tax refund to which he was entitled by virtue of section 12 of the Finance Act 1978. Regulation 3 provided that 'save as the Commissioners may otherwise allow', the claim for a VAT refund was to be made by including the amount in box 8 of the claimant's VAT return for the accounting period during which he received the 'document' prescribed by regulation 4(a). Regulation 4(a) described such document as one issued to the claimant 'by the person with whom he proves in the insolvency of the debtor' (either a trustee in bankruptcy or a liquidator) specifying the total amount for which the claimant had proved. Regulation 5 required the claimant to keep that and the other documents referred to in regulation 4 for a period of three years: that was no doubt so that HM Customs and Excise could verify the claim if they wished to. The regulations imposed no time limit for making the refund claim save by reference to the accounting period during which the regulation 4(a) document was received. Theoretically that could be months or years after it had become apparent to BT that a debt was bad: that is because BT might not itself have been able, or else for sound commercial reasons chose not, to initiate the debtor's insolvency itself but had, or chose, to wait until others did so, if ever.
22. In addition to the regulations, HM Customs and Excise produced Guidance (Leaflet No. 8/78/VAT) on claiming relief from VAT on bad debts. Paragraph 2 summarised the entitlement to make a claim for relief under the Finance Act 1978, and explained that if the claimant received any dividend in the insolvency, he did not have to pay any part of it back to HM Customs and Excise. Paragraph 6 set out the procedure for claiming relief and relaxed the requirements of regulation 3 of the 1978 Regulations: sub-paragraph (b) permitted the claim to be made either in the return specified in regulation 3 or else in the return for any subsequent accounting period.
23. On 1 October 1981, The Value Added (General and Bad Debt Relief) (Amendment) Regulations 1981 (SI 1981/1080) came into force. Regulation 4(1) made a slight change to the way in which the refund claim was to be made on the claimant's VAT return, by requiring it to be included in Box 6, 'Overdeclarations of tax made on previous returns …', and the claimant also had to tick another box that explained that Box 6 included bad debt relief.
24. On 1 September 1983, HM Customs and Excise published more guidance on 'Relief from VAT on bad debts' (VAT Leaflet No. 700/18/83). It did not include any materially new guidance.
25. The next step in the story was the passing of VATA 1983, which came into force on 26 October 1983. That repealed section 12 of the Finance Act 1978 but replaced it with its own section 22, which was in material respects identical.
26. The changes in insolvency law introduced by the Insolvency Act 1985, later consolidated in the Insolvency Act 1986, led to the making by section 32 of the Finance Act 1985 of amendments to section 22 of VATA 1983: it did so by substituting a new section 22 into VATA 1983, which resulted, so far as is material, in the following changes. In the case of an individual in England and Wales, it extended the definition of insolvency to cover the case in which he was a person for whom a deed of arrangement was made for the benefit of his creditors, a composition or scheme proposed by him was approved under Chapter I of Part III of the Insolvency Act 1985 or, after his death, his estate fell to be administered in accordance with Part IV of that Act. As for a company, its insolvency was extended to include cases in which (a) an administrator was appointed for it under the new administration procedure, or (b) an administrative receiver issued a certificate of his opinion that, if the company went into liquidation, its assets would be insufficient to cover the payment of any dividend in respect of debts which were neither secured nor preferential. The prospect of a dividend of 1p in the £ for unsecured, non-preferential creditors would, therefore, take a case such as that out of relevant insolvency, whereas the prospect of a like dividend (or even a prospect of a dividend of 99p in the £) for unsecured creditors on an actual insolvent liquidation would not. Save in the case where the creditor had such a certificate from an administrative receiver, it was still a condition of the right to bad debt relief on the insolvency ground that the creditor should have proved in the relevant insolvency. A creditor could not in those days prove for his debt in a company administration, but section 32(6) was to the effect that regulations could make provision as to what steps a creditor had to take in order to be able to qualify for a refund under section 32 as if he had proved in the insolvency.
27. On 1 April 1986, a new set of regulations came into force, which revoked both the 1978 Regulations and the 1981 amendment Regulations. They were The Value Added Tax (Bad Debt Relief) Regulations 1986 (SI 1986/335). Regulation 4 maintained the same procedure as before for making a claim in the VAT return but, save as the Commissioners might allow or direct (and subject to an exception I need not mention), it prescribed that the return had to be that for the accounting period during which the claimant had received the prescribed document required to make good that he had proved in the insolvency, which (a) by regulation 5, was a document issued to him 'by the person with whom he proves in the insolvency', and (b) by regulation 6, an appropriate certificate, as defined, from the administrator or administrative receiver of a company. The regulations do not appear to have dealt with the case in which an individual debtor had become the subject of a scheme of arrangement or an individual voluntary arrangement.
28. More guidance was issued in 1986 by VAT Leaflet 700/18/86, 'Relief from VAT on bad debts'. Whilst paragraph 3 recognised that relevant insolvency included the entry by an individual into an individual voluntary arrangement, the guidance provided no explanation as to how the claimant was to make good his claim in such a case – that is, it did not identify what document he had to produce (unless the reference in paragraph 5 to 'trustee or liquidator' is to be read as including the supervisor of an IVA). Paragraph 7 provided that the claim for the refund had to be made in the return for the accounting period referred to in regulation 3 of the 1986 Regulations (save that now the relevant box was Box 5), but also provided that it could be made in any subsequent return, as was the case under the prior regulations and guidance.
29. At this point in the story, I must digress to section 24 of the Finance Act 1989. This ended up as section 80 of the Value Added Tax 1994 ('VATA 1994'). It is an important provision in the context of BT's cross-appeal against the Upper Tribunal's answer to preliminary issue 3 and so it is convenient also to follow the story that begins with section 24. Section 24 is in Chapter II, 'Value Added Tax' of the Finance Act 1989. It is BT's case on its cross-appeal that section 24 and the subsequent versions of it provided an alternative jurisdictional basis upon which it was entitled to apply for VAT relief in respect of the bad debts it had suffered during the 11.25 year period expiring on 31 March 1989. Section 24 provided, so far as material as follows:

'24. Recovery of overpaid VAT

(1) Where a person has paid an amount to the Commissioners by way of value added tax which was not tax due to them, they shall be liable to repay the amounts to him.

(2) The Commissioners shall only be liable to repay an amount under this section on a claim being made for the purpose. …

(4) No amount may be claimed under this section after the expiry of 6 years from the date on which it was paid, except where subsection (5) below applies.

(5) Where an amount has been paid to the Commissioners by reason of a mistake, a claim for the repayment of the amount under this section may be made at any time before the expiry of 6 years from the date on which the claimant discovered the mistake or could with reasonable diligence have discovered it.

(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.

(7) Except as provided by this section, the Commissioners shall not be liable to repay an amount paid to them by way of value added tax by virtue of the fact that it was not tax due to them.

(8) The preceding provisions of this section apply to an amount paid before, as well as to an amount paid after, the day on which this section comes into force, except where the Commissioners have received a claim for repayment of the amount before that day.

(9) The following paragraph shall be inserted at the end of section 40(1) of [VATA 1983] (appeals) –

"(s) a claim for the repayment of an amount under section 24 of the Finance Act 1989 (recovery of overpaid tax)." …'

30. By way of anticipation of the arguments on the cross-appeal, Mr Lasok's responsive submission was that section 24 and its successors have nothing to do with claims for bad debt relief. They were and are concerned only with cases in which an overpayment of tax had been made to the Commissioners and provide a restitutionary basis for the recovery of the excess. In a bad debt case, there was no payment of VAT that was not due, or therefore any overpayment of VAT. A failure to make a bad debt relief claim in a subsequent return still did not mean that there was any overpayment in the tax actually paid. If no relief claim was made, the tax paid was the tax due.

The New Scheme: the Finance Act 1990

31. The Finance Act 1990, which received Royal Assent on 26 July 1990, introduced an important development, namely a new scheme of bad debt relief ('the New Scheme'). It was contained in section 11, with a side heading of 'Bad debts', and provided materially as follows:

'11. (1) Subsection (2) below applies where –

(a) on or after 1^st April 1989 a person has supplied goods or services for a consideration in money and has accounted for and paid tax on the supply,

(b) the whole or any part of the consideration for the supply has been written off in his accounts as a bad debt, and

(c) a period of two years (beginning with the date of the supply) has elapsed.

(2) Subject to the following provisions of this section and to regulations made under it the person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of tax chargeable by reference to the outstanding amount.

(3) In subsection (2) above "the outstanding amount" means –

(a) if at the time of the claim the person has received no payment by way of the consideration written off in his accounts as a bad debt, an amount equal to the amount of the consideration so written off;

(b) If at that time he has received a payment or payments by way of the consideration so written off, an amount by which the payment (or the aggregate of the payments) is exceeded by the amount of the consideration so written off. …'

32. Subsection (4) imposed two conditions on the entitlement to a refund which are of no present materiality. Subsection (5) provided for the making of regulations under the section. The New Scheme was different in kind from the Old Scheme: it was now essentially time-based. Importantly, although the 1990 Act (see Part 111 of Schedule 19) repealed section 22 of VATA 1983 (as substituted by section 32 of the Finance Act 1985) in relation to supplies made after the day on which the 1990 Act was passed (26 July 1990), section 11 did not repeal section 22 of VATA 1983, or therefore the Old Scheme, in respect of supplies of goods and services before 1 April 1989 or between then and 26 July 1990. In respect of the latter period, bad debt relief claims could be made under either the Old or New Scheme, but of course not both. Section 11(9) provided that section 22 of VATA 1983 was not to apply to any supply made after 26 July 1990: in respect of such supplies, bad debt relief claims could only be made under the New Scheme. There was, however, the potential for a continuing life in the Old Scheme as regards supplies to which it still applied. This was explained in VAT Notes No 2 1990, which were published at the time. The present appeal does not concern supplies made by BT between 1 April 1989 and 26 July 1990: it relates only to supplies made before 1 April 1989. The importance of the New Scheme introduced by the FA 1990 was that it did away with the insolvency condition that was at the heart of the Old Scheme.
33. I should refer also to section 11(11) of the Finance Act 1990, which amended section 40(1)(f) of VATA 1983. Prior to such amendment, section 40(1)(f) provided for an appeal against a refusal of a refund under section 22 of VATA 1983 to lie to (what is now) the FTT. The amendment extended such right of appeal to a refusal of a refund under section 11 of the Finance Act 1990, i.e. under the New Scheme. Anticipating the later arrival of VATA 1994, Mr Lasok drew to our attention that in that Act section 40(1)(f) of VATA 1983 became section 83(1)(h), but that appeals against refusals of claims under section 24 of the Finance Act 1989 (which became section 80 of VATA 1994) were separately provided for by VATA 1994 in section 83(1)(t).
34. Following the enactment of the Finance Act 1990, new regulations came into force on 1 April 1991: they were The Value Added Tax (Refunds for Bad Depts [sic]) Regulations 1991 (1991/371). These regulations did not revoke the 1986 Regulations, which continued to apply to the making of claims under the Old Scheme. The 1991 Regulations applied to refund claims under the New Scheme.
35. On 1 April 1991, HM Customs & Excise also issued their 'Relief from VAT on Bad Debts (Leaflet 700/18/91)', which explained how to make a refund claim under both the New Scheme and the Old Scheme. As regards the Old Scheme, paragraphs 17 to 24 explained how bad debt relief under the Old Scheme might be claimed in respect of supplies made before 26 July 1990, but emphasised that a condition of such relief was that the 'customer has become formally insolvent'. Paragraph 24 explained that any such claim had to be made in the VAT return for the tax period in which the claimant received 'the acknowledgment of receipt of your claim or the letter from the administration or administrative receiver confirming that a certificate of insolvency has been issued.' It no longer provided, as had the prior guidance, that the claim could also be made in the return for any subsequent accounting period.
36. The current bad debt relief scheme is contained in VATA 1994, which came into force on 1 September 1994. Schedule 15 repealed VATA 1983 and sections 10 to 16 of the Finance Act 1990. Section 36 re-enacted the New Scheme, save that the two-year period prescribed by section 11(1)(c) of the Finance Act 1990 was, by section 36(1)(c), reduced to a six-month period. Paragraph 9(1) of Schedule 13, 'Transitional Provisions and Savings', provided that:

'Claims for refunds of VAT relating to supplies made before 27^th July 1990 may continue to be made in accordance with section 22 of [VATA 1983] notwithstanding the repeal of that section by [the 1990 Act].'

And paragraph 9(2) provided that claims for refunds of VAT relating to supplies made after 31^st March 1989 and before the commencement of VATA 1994 may be made in accordance with section 36, but so that a claim 'shall not be made under section 36 in relation to any supply as respects of which a claim is made under section [22 of VATA 1983]'; and, in relation to supplies made before 1 April 1992, that section 36(1)(c) 'shall have effect with the substitution of "one year" for "six months".'

37. Section 80 of VATA 1994 re-enacted section 24 of the Finance Act 1989, with subsection (4) repeating section 24(4). Section 80(4) was, however, amended by the Finance Act 1997, with retrospective effect to 4 December 1996, so as to substitute a new provision providing that the Commissioners were 'not [to] be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.'
38. The Value Added Tax Regulations 1995 (S1 1995/2518) set out, in Part XVIII, the regulations relating to making of claims for bad debt relief under the Old Scheme, namely under section 22 of VATA 1983. Regulation 157 provided that, save as the Commissioners might otherwise allow or direct, the claim must be made in the return for the accounting period during which the claimant received the document proving the amount for which he had proved in the liquidation (or other specified document in the case of an administration or administrative receivership).
39. HM Customs & Excise VAT Notice 700/18/96, 'Relief from VAT on bad debts', issued in January 1996 similarly stated, in paragraph 23, that an Old Scheme claim for repayment had to be made in the return for the accounting period prescribed by the 1995 Regulations. As from the introduction of the 1991 Regulations, it was no longer possible for an Old Scheme claim to be made in the return for an accounting period subsequent to that in which the claimant received the relevant document.

The final termination of the Old Scheme

40. A Budget Notice, 'VAT: Bad Debt Relief', BN 48/96, was published on about 26 November 1996. It answered its question 'Who is likely to be affected?' by saying that all traders will be affected 'except those on the cash accounting scheme, who get automatic bad debt relief.' Under the next heading, 'General description of the measure', it stated that 'a number of measures are being introduced to amend the current scheme for relief from VAT on bad debts.' Paragraph 3, headed 'The changes', itemised proposed changes against nine bullet points. The ninth bullet point read 'cancel the VAT Regulations covering the old (pre-1990) scheme for bad debt relief'.
41. A Budget News Release dated 26 November 1996 was headed 'Budget 1996: VAT' and sub-headed 'Bad Debt Relief Scheme to be Tightened'. An introductory paragraph referred to the introduction of measures directed at preventing the bad debt relief 'scheme from being manipulated for tax avoidance and raise £120 million next year'. The details were set out under three numbered paragraphs. The relevant one is paragraph 3, which said that:

'Other changes to the bad debt relief scheme are designed to help businesses and clarify the law. These will be effective from the time the Finance Bill receives the Royal Assent. These changes will …'

do various (mostly not relevant) things including, however, the last identified change, which was to 'cancel the VAT Regulations covering the old (pre-1990) scheme of Bad Debt Relief'. That was poorly drawn because the intention was presumably to repeal the substantive law that enabled the continuing ability to claim Old Scheme bad debt relief in respect of pre-26 July 1990 supplies, but the sense was no doubt clear to the interested reader. There followed 'Notes for Editors', which identified certain perceived problems with the New Scheme (including the making of claims for relief where the debt was not truly 'bad', and it cited as an example cases in which bad debt relief was sought after the supply takes place but where payment had not yet become due, the sale being either a credit sale or one permitting deferred payment).

42. The bill intended to achieve the promised changes was published on 3 December 1996. It became the Finance Act 1997, which came into force on 19 March 1997. The relevant provision is section 39, of which subsection (5) provided:

'(5) No claim for a refund may be made in accordance with section 22 of [VATA 1983] (old scheme for bad debt relief) at any time after the day on which this Act is passed'.

Section 39(5) therefore brought the shutters finally down on any Old Scheme claim for bad debt relief in respect of supplies prior to 26 July 1990.

43. VATA 1994 was amended as from 19 March 1997 so that paragraph 9(2) of Schedule 13 then provided:

'(2) Claims for refunds of VAT shall not be made in accordance [with] section 36 of this Act in relation to –

(a) any supply made before 1^st April 1989; or

(b) any supply as respects which a claim is or has been made under section 22 of [VATA 1983].'

44. Finally, I should refer to section 121 of the Finance Act 2008, enacted in the wake of the House of Lords decision in Fleming, which concluded the story that started with section 24 of the Finance Act 1989 by making an amendment to the time-limit provisions of section 80(4) of VATA 1994, as amended in 1997. The further amendment provided that:

'(1) The requirement in section 80(4) of VATA 1994 that a claim under that section be made within 3 years of the relevant date does not apply to a claim in respect of an amount brought into account, or paid, for a prescribed accounting period ending before 4 December 1996 if the claim is made before 1 April 2009.'

The cut-off date of 1 April 2009 prescribed by section 121 explains why BT made their refund claim on 30 March 2009. HMRC's response is that section 121 is irrelevant because BT's claim is not a claim for repayment of VAT that was not due when paid.

The Upper Tribunal's judgment: factual matters

45. As I have said, there were two matters before the Upper Tribunal: the GMAC appeal and the three preliminary issues in BT's appeal, which was otherwise proceeding in the FTT. They were heard together because the BT preliminary issues raised some of the same questions that arose in the GMAC appeal. The first 234 paragraphs of the Upper Tribunal's impressive, comprehensive and thoughtful judgment are devoted to the GMAC appeal, after which it dealt shortly with the preliminary issues in the BT case in [235] to [244]: it could do so shortly as it regarded its decisions in the GMAC appeal as also providing the answers to them.
46. There are, however, factual differences between the GMAC and BT cases, which are said to be of relevance to HMRC's challenge to the Upper Tribunal's answer to preliminary issue 2, which was that section 39(5) of the FA 1997 fell to be disapplied, or construed, under EU law so as not to affect BT's directly effective rights under EU law, the existence of which was assumed before the Upper Tribunal.
47. GMAC's claim for bad debt relief was in respect of the supply of cars made on hire purchase ('hp') terms between 1978 and 1997. On the GMAC facts, the Upper Tribunal held that some of the hp agreements could give rise to obligations running over several years and also to the possibility of a bad debt arising for the first time shortly before, or even after, 19 March 1997, including in respect of GMAC supplies made before 1 April 1989 (see [190] and [192]). These were material considerations in the Upper Tribunal's conclusion that section 39(5) should be disapplied in the GMAC case, one which it then applied in answering the BT preliminary issue 2 without, however, expressly adverting to the different factual circumstances of the BT supplies.
48. As to that, BT's case is confined to bad debt relief in respect of supplies made before 31 March 1989. HMRC's case was advanced to us on the basis (not challenged by BT) that the agreed documents showed that BT supplied its services and billed on a quarterly basis unless, in certain circumstances, it instead issued a monthly call bill. It follows that the latest debts falling within its claim would have emerged at most a few months after March 1989 and years before 19 March 1997. On the face of it, by 19 March 1997 all debts owed to BT in respect of its pre-31 March 1989 supplies would have been either paid or statute-barred. The only possible (and hypothetical) exceptions would be any unsatisfied, but enforceable, judgment debts obtained by BT against customers in relation to whom the insolvency condition had not been satisfied. In anticipation of HMRC's arguments, their case is not, however, that statute-barred debts were not bad debts; it is that section 39(5) of the FA 1997 could not in practice have affected anything other than a stale bad debt relief claim that would, on BT's case, have arisen several years before 19 March 1997, when the subsection came into force.

The appeal

(a) Ground 3

49. I deal first with HMRC's third ground of appeal, since logically it comes first, although Mr Lasok argued it third. That ground is that:

'… on the basis of the Upper Tribunal's own expressed view, BT did not have any directly effective rights and the Upper Tribunal ought therefore to have taken that into consideration.'

If HMRC are right about that, it is agreed that BT could only have had rights exercisable under domestic law, being rights that did not entitle it to claim bad debt relief under the Old Scheme in respect of the debts the subject of its disputed claim. What is said to have provoked this ground of appeal was what the Upper Tribunal said in [190]:

'190 … So far as domestic law is concerned, it is clear when the claim [under the Old Scheme] would first arise, namely when the Insolvency Condition was fulfilled. In the case of a directly enforceable claim, it is less clear when the claim would first arise. It would, we suppose, be when the facts first fell within Article 11C(1) absent any derogation by the Member State concerned but it is not at all clear to us when that would be. It is, of course, a factual question in any particular case, but what would be sufficient in order for a taxpayer to establish a directly enforceable claim is not, at least to us, obvious. A few things are, however, clear. The first is that many of GMAC's bad debts giving rise to a directly enforceable claim (assuming the invalidity of the Property Condition and the Insolvency Condition) arose many years before the passing of the FA 1997. …'

50. Mr Lasok referred us to Becker v. Finanzamt Munster-Innenstadt (Case-8/81) [1982] 1 CMLR 499, in particular to [25] in the part of the judgment of the Court of Justice headed 'Effect of directives in general':

'Consequently, in the absence of duly adopted implementing measures, individuals may invoke the provisions of a directive which, from the viewpoint of content, are unconditional and sufficiently precise, against all national legislation which does not conform with it. Individuals may also invoke those provisions if they lay down rights which can be enforced against the State.'

So, the question is whether, on the premise that, under the Old Scheme, article 11C(1) had either not been implemented at all or had not been implemented in a conforming way, the provisions of the first paragraph of article 11C(1) of the Directive were 'unconditional and sufficiently precise' such as to entitle BT to enforce them directly before the national court.

51. Mr Lasok submitted that the Upper Tribunal's expressed reservations as to when any directly effective claim would arise show that the 'unconditional and sufficiently precise' test is not satisfied. He referred us to Goldsmiths case, in particular to [18] of the judgment of the Court of Justice (quoted in [14] above), which he said shows that there is an underlying lack of certainty in the first paragraph of article 11C(1) of the Directive as to what does or does not amount to total or partial non-payment. The intention of the Directive was that such uncertainty would be resolved by each Member State. If so, the Directive lacks the precision requisite for direct enforcement, a precision that will only be provided upon its proper domestic implementation.
52. In response, Mr Cordara opened by referring us to article 11A(1)(a) of the Directive (quoted in [12] above). The function of that subparagraph is to define the 'taxable amount' in respect of the supply of the goods and services referred to; and he emphasised that it shows that the VAT is only levied on the value, whether in cash or kind, that a supplier actually receives in the course of his VAT registered business. The provisions of article 11C(1) are, he said, by way of support for the achieving of the over-arching objective in 11A(1)(a): if the supplier receives less for his supply than he should, and has accounted for VAT on what he has not received, he is entitled to an appropriate refund.
53. Mr Cordara referred us to HJ Glawe Spiel-und Unterhaltungsgeräte Aufstellungsgesellschaft mbH & Co KG v. Finanzamt Hamburg-Barmbeck-Uhlenhorst (Case C-38/93) [1994] STC 1387. The judgment of the Court of Justice, at [8] and [9], supports his submission that the 'taxable amount' referred to in article 11A(1)(a) is 'the consideration actually received'. He also cited Elida Gibbs Ltd v. Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387, in which, at [27], the Court of Justice repeated that the 'taxable amount' for the purposes of article 11A(1)(a) is the 'value actually received', the Court then explaining that:

'30. That interpretation is borne out by art 11C(1) of the Sixth Directive which, in order to ensure the neutrality of the taxable person's position, provides that, 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 is to be reduced accordingly under conditions to be determined by the member states.

31. It is true that that provision refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently. The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral. It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.'

54. Mr Cordara said those paragraphs reflect the court's weaving together of articles 11A(1)(a) and 11C(1) into a seamless policy objective, namely that tax is not to be levied on a sum greater than that actually paid. In support of the same theme, he also relied on Goldsmiths case. I have already cited [18] of the judgment, upon which Mr Lasok relied, but Mr Cordara referred also to earlier and later parts of the judgment, and in the following citation I shall repeat [18]:

'14. … it should be borne in mind that art 11A(1)(a) of the Sixth Directive provides, with a view to harmonising the taxable amount, that within the territory of the country the amount chargeable in respect of supplies of goods is everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party.

15. That provision embodies one of the fundamental principles of the Sixth Directive, according to which the basis of assessment is the consideration actually received … and the corollary of which is that the tax authorities may not in any circumstances charge an amount of VAT exceeding the tax paid by the taxable person …

16. In accordance with that principle, the first paragraph of art 11C(1) of the Sixth Directive defines the cases in which the member states are required to ensure that the taxable amount is reduced accordingly under conditions which are to be determined by the member states themselves. That provision therefore requires the member states to reduce the taxable amount and, consequently, the amount of VAT payable by the taxable person whenever, after a transaction has been concluded, part or all of the consideration has not been received by the taxable person.

17. Nevertheless, the second sub-paragraph of art 11C)1) of the Sixth Directive permits the member states to derogate from the abovementioned rule in the case of total or partial non-payment.

18. The power to derogate, which is strictly limited to the latter situation, is based on the notion that in certain circumstances and because of the legal situation prevailing in the member state concerned, non-payment of consideration may be difficult to establish or may only be temporary. It follows that the exercise of that power must be justified if the measures taken by the member states for its implementation are not to undermine the objective of fiscal harmonisation pursued by the Sixth Directive.

19. With regard to s. 11 of the 1990 Act, the United Kingdom seeks to justify the refusal to refund the tax on the ground that there is a greater risk of evasion where the unpaid consideration is not expressed in money.

20. That justification is unacceptable for two reasons.

21. First, it is clear from EC Commissioners v. Belgium (Case 324/82) [1984] ECR 1861 at 1882, para 29, that measures intended to prevent tax evasion or avoidance may not in principle derogate from the basis for charging VAT laid down in art 11 of the Sixth Directive, except within the limits strictly necessary for achieving that specific aim.

22. By excluding, generally and systematically, all transactions alike in which the consideration is not expressed in money from the refund of VAT, legislation of the kind at issue in the main proceedings alters the taxable amount for that class of transactions in a manner which goes beyond what is strictly necessary in order to avoid the risk of tax evasion. That is all the more obvious because in the circumstances of the case, as the United Kingdom government acknowledges in its written observations, there was no risk of evasion.'

55. Those paragraphs show, said Mr Cordara, that what is at stake here is the fundamental principle of fiscal harmonisation. The concepts are simple and apply to all taxpayers. There are not two classes of taxpayers – low volume high value suppliers (like GMAC) or high volume low value suppliers (like BT). The member state has to treat all tax payers alike. In addition, the tax is a self-assessed tax and it is up to the taxpayer to make the assessment accurately and honestly. The derogation power may legitimately be deployed if directed specifically at tax evasion and avoidance, and may also be deployed for wider purposes (essentially akin to anti-avoidance) of ensuring that refund claims are not made in a case in which the non-payment of the consideration is difficult to establish (whatever that may mean) or is only temporary. Ultimately, however, all that the power of derogation is directed at is ensuring that refund claims are not made when they are not justified: it is not a power to deprive a class of taxpayers of the right to a refund when a genuine non-payment is of only a small amount, although the member state may legitimately impose conditions as to the time after which a payment can be regarded as written off for refund purposes.
56. Mr Cordara referred us to Marks and Spencer plc v. Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036. The judgment of the Court of Justice shows, at [29] and [40], that the rights conferred by article 11A(1)(a) are directly effective. Mr Cordara submitted that the intimate connection between articles 11A(1)(a) and 11C(1) illustrated by Goldsmiths case leads inexorably to the conclusion that the rights conferred by the first paragraph of the latter must also be directly effective: it is simply part of the machinery of article 11, of which the primary objective is that identified in article 11A(1)(a).

Conclusion on ground 3

57. The first paragraph of Article 11C(1) identifies five circumstances in which, following a supply of goods or services for a consideration, 'the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States'. They are (i) cancellation, (ii) refusal, (iii) total non-payment, (iv) partial non-payment, and (v) post-supply price reduction. The second paragraph confers a power of derogation upon Member States in cases (iii) and/or (iv). There is a superficially easy argument that, because the reduction provided for by the first paragraph is to be 'under conditions which shall be determined by Member States', it must follow that until a Member State prescribes such conditions, the right conferred by the first paragraph is too imprecise, uncertain or inchoate for it to be directly effective.
58. It is an easy argument but I regard it as wrong. First, the word 'accordingly' in the first paragraph indicates that the prescribed reduction is to be arithmetically proportionate to the price reduction resulting from whichever is the applicable circumstance. As regards any post-supply 'reduction' in consideration, Mr Cordara showed us regulation 38(1) of the 1995 Regulations, which provides for such an adjustment, although we were not shown any domestic provisions purporting to deal expressly with either 'cancellation' or 'refusal', whatever they might respectively embrace, and we were told that there are none. Second, I consider it follows that the 'conditions' referred to are not conditions that can be directed at achieving any different arithmetical result, but are intended only to be directed to identifying the formalities required to be complied with when claiming the refund. In the case of a claimed total or partial non-payment, these conditions might, for example, prescribe that the claimed default will only be recognised after the lapse of a specified period after the payment was due: the tax authorities are entitled to be satisfied the debt is bad. Even so, the conditions upon which the first paragraph is to be implemented are in my view intended to go merely to matters of form (as to proof of the claim) rather than to matters of substance.
59. The second paragraph of course allows for a limited power of derogation from the refund rights conferred by the first paragraph, but only in the cases of total or partial non-payment. Goldsmiths case shows that the power is narrowly circumscribed. It is not to be used to undermine the objective of fiscal harmonisation that is pursued by the Directive. It can be used in the two circumstances referred to in the first sentence of [18] in the Court of Justice's judgment, although quite what the former circumstance might cover is not clear to me. It can perhaps, within limits strictly necessary for such an aim, also be used for preventing tax evasion and avoidance (see Goldsmiths case, at [21]). It cannot, in my view, be used in a way that is intended to deprive, or objectively has the effect of depriving, a taxpayer or a class of taxpayers of his or their right under the first paragraph to a refund to which he or they are objectively entitled.
60. The question whether the provisions of the first paragraph are directly effective is most easily answered by reference to circumstances in which the Member State has not implemented article 11C(1) at all. In my judgment, essentially for the reasons submitted by Mr Cordara, the answer is that they are directly effective. The Marks and Spencer case shows that the taxpayer's rights under article 11A(1)(a) are directly effective and Goldsmiths case shows that article 11C(1) is directly linked to the achieving of the policy objective in article 11A(1)(a). Since, as I consider, the purpose of the conditions referred to in the first paragraph of article 11C(1) is to deal with matters of form rather than substance, it cannot be that the absence in place of any such conditions can prevent a taxpayer from asserting directly in the national courts the clear entitlement that the first paragraph confers upon him. He will of course have to prove his case, and it would be open to the tax authorities to argue that he has not done so, or that his case is one that cannot be regarded as falling within the intendment of article 11C(1). But I would hold that the taxpayer has a directly effective right under that article.
61. I would dismiss ground 3 of HMRC's appeal.

(b) Ground 4

62. I take next ground 4 of HMRC's appeal, which although argued fourth logically comes second. It is that the Upper Tribunal erred in holding that the insolvency condition was disproportionate, unreasonable or otherwise unjustified so as to infringe BT's directly effective EU law rights. This ground arises on the basis that HMRC are wrong, as I would hold they are, on ground 3. It is relevant primarily to that part of BT's claim covering supplies in the period 2 October 1978 to 31 March 1989, since bad debt relief claims in respect of such supplies were indisputably covered only by the Old Scheme.
63. The Upper Tribunal dealt comprehensively with this question under what it called 'The Compatibility Issue' – that is, whether the insolvency condition and the property condition (the latter also applying in the GMAC case) were incompatible with the Directive and fell to that extent to be disapplied. It did so between [39] and [91]. I have quoted [84] (see [20] above), which relates to the question of achieving a compulsory winding up of a corporate creditor in a small debt case, and the Upper Tribunal concluded this section of their judgment as follows:

'85. We do not consider that it was justifiable to exclude from bad debt relief debts owed by an individual which do not exceed the statutory minimum [i.e. for presenting a bankruptcy petition]. That conclusion was not a proportionate response to the aim identified in [18] of the judgment in Goldsmiths or, indeed, of any other admissible aim. Further, we find it hard to categorise the derogation as reasonable on any possible meaning of that word. There is no material of which we are aware which would go anywhere near justifying the total exclusion from bad debt relief where the debt was less that the statutory limit in force at the relevant time. This, we add, has nothing to do with discrimination between cases which fall below the limit as compared with cases which fall above the limit (although there is such discrimination) but has everything to do with the scope of the power to derogate.

86. Further, we do not consider that it was a proportionate response, either, to require proof in an insolvency as a condition for relief in all cases which are not altogether excluded as a result of the statutory limit. This we consider is manifestly so in the case of a small debt, say, £100 or even less, owed by a company debtor. We do not consider that a regime of that sort is justifiable as a proportionate response to the legitimate aims of the UK government. There is nothing in the findings of the Tribunal, and, as far as we are aware, there was no evidence before them on the basis of which such justification could be established. Further, we do not, as in the case of debts below the statutory limit owing by an individual, even consider that it could be reasonable let alone proportionate to impose such a stringent requirement.

87. Having said that, it may be the case that where there is a large debt, it would be both reasonable and proportionate to require proof in insolvency. Where the line could be drawn could be a matter of dispute but it is not one we need to address and we decline to say anything about what could be said to be "large". The point here is that the domestic legislation does not attempt to draw the line. As we see it, we must rule on whether the Insolvency Condition as a whole is valid or invalid. We have no doubt on that basis that it is invalid. It is certainly not a proportionate response to the legitimate aims of the UK; we do not even consider that it is a reasonable response. …

90. For completeness, we should deal with the suggestion made by Mr Cordara that because the UK later modified and then removed the relevant requirements, those requirements cannot have been necessary in the first place and were therefore not proportionate. Mr Lasok submitted that if this argument was accepted, it would effectively destroy the discretion which was intended to be given to Member States by the Directive and was therefore not a permissible approach. We agree with Mr Lasok. As with so many aspects of the law generally, there is a range within which a person or body of persons or even a State can operate reasonably. So far as concerns proportionality, the test appears to be that the national measure must, as Lord Hoffmann puts it [in C.R. Smith Glaziers (Dunfermline) Ltd v. Customs and Excise Commissioners [2003] UKHL 7, at [25]], be necessary "in the sense that the purpose could not have been achieved by some other means less burdensome to the persons affected". But this cannot be seen as an absolutely rigid, black line, test. The word "necessary" is not to be construed strictly so as to be given the meaning which a logician or mathematician might ascribe to it. There is, we think, even in relation to necessity, a spectrum, albeit it is narrowly confined, within which different reasonable and objective minds can take different views about what is or what is not necessary. And, of course, there may be two different ways in which a permissible objective can be achieved, each of which carries a different detriment for the persons affected. It could not be said that necessity entailed the selection of one of them. Accordingly, we see nothing wrong with the proposition that a Member State could take the view that a particular measure was necessary, but nonetheless modify, or replace, that measure in the light of experience.

91. This chimes with the fact that the power to derogate is precisely that: it is a discretionary power to refuse bad debt relief where there is in fact a bad debt in the sense that the debt will never be paid, something which the Advocate General recognised at [15] of his opinion in Goldsmiths. As Mr Lasok puts it, the whole point about the discretion is that bad debt relief schemes can be organised in different ways with different trade-offs between their advantages and disadvantages.'

64. Mr Lasok made five points in support of this ground of appeal: (1) the second paragraph of article 11C(1) of the Directive confers a discretionary derogation power on Member States under which they have a margin of appreciation (Goldsmiths case); (2) Member States are therefore at liberty to configure bad debt relief schemes in different ways, achieving different trade offs, which may exclude bad debt relief either entirely or in part; (3) a particular bad debt relief scheme can be challenged under EU law in relation to its proportionality, on the grounds that it does not have a permitted objective or is manifestly inappropriate, but it is not challengeable on the ground that it may mean that bad debt relief will not be obtained in all cases; (4) the Old Scheme had a purpose that was consistent with the permitted purposes of the derogation; (5) the Old Scheme, taken as a whole, was proportionate.
65. There is no dispute as to Mr Lasok's first proposition. As for his second and third propositions, I did not understand Mr Cordara to dispute that, in configuring a bad debt relief scheme, the derogation power enables a Member State to exclude relief in certain cases where perhaps other schemes might permit it; nor, in consequence, did I understand him to submit that a scheme can be challenged on the basis that it does not permit relief in all cases of bad, or allegedly bad, debts, although he emphasised (mainly in his submissions on ground 3) how circumscribed the power of derogation is.
66. The real question under this ground is whether the imposition of the insolvency condition in the Old Scheme was consistent with the permitted purpose of the power of derogation and/or whether the Old Scheme, taken as a whole, was proportionate. As to the requirement of proportionality, Mr Lasok referred us to the judgment of the Court of Justice in Viamex Agrar Handels GmbH and Another v. Hauptzollamt Hauptzollamt- Jonas (Joined Cases C-37/06 and C-58/06) [2008] ECR I-69:

'35. The principle of proportionality requires that measures adopted by Community institutions do not exceed the limits of what is appropriate and necessary in order to attain the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures, recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued (see, to that effect, Case C-331/88 Fedesa and Others [1990] ECR I-4023, paragraph 13,and Jippes and Others, paragraph 81).

36. Finally, as regards judicial review of compliance with that principle, bearing in mind the wide discretionary power enjoyed by the Community legislature in matters concerning the common agricultural policy, the legality of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate in terms of the objective which the competent institution is seeking to pursue (see Fedesa and Others, paragraph 14, and Jippes and Others, paragraph 82). Thus, the criterion to be applied is not whether the measure adopted by the legislature was the only one or the best one possible but whether it was manifestly inappropriate (Jippes and Others, paragraph 83).'

67. Drawing on an analogy that he attributed to Lord Diplock, Mr Lasok submitted that the essence of the principle of proportionality is that in a case in which legislative purpose is the cracking of a walnut, you do not use a sledgehammer. For that purpose, the sledgehammer and the nutcracker are so obviously different that it is easy to conclude that the use of a sledgehammer when you are in possession of a nutcracker is disproportionate. In the language of Viamex, at [36], it is manifestly inappropriate. By contrast, the position would be different if the issue were not between a sledgehammer and a nutcracker, but between different types of nutcracker: in such a case, the choice of type A rather than type B (or vice versa) might not be so inappropriate.
68. Mr Lasok's criticism of the Upper Tribunal's conclusion in relation to the validity of the insolvency condition is that, whilst the Upper Tribunal was firmly of the view that it was a sledgehammer, it made no attempt to identify the nutcracker. That was a flaw in their reasoning because the key to the answer to a proportionality question is the ability to identify the disparity between the means selected to achieve the permitted objective and an alternative less onerous method of achieving the same objective. If the insolvency condition is removed from section 22 of VATA 1983, there is no remaining definition of a 'bad debt' that gives rise to a right to VAT relief. The question is whether there was something less onerous than the insolvency condition that could have been used instead, whereas BT's case in the Upper Tribunal was based simply on what was said to be the fallacious proposition (rejected by the Upper Tribunal) that because the New Scheme was more liberal than the Old Scheme, that necessarily meant that the Old Scheme was disproportionate.
69. The answer to the question of proportionality does not, however, said Mr Lasok, lie in comparing two different schemes, which is to compare apples and pears. The Old Scheme involved a particular configuration, with a particular balance of advantages and disadvantages. The heart of its configuration was that the insolvency condition enabled a clear identification of a bad debt: it was simple and enabled the objective ascertainment of whether a debt was bad. By contrast, the New Scheme involved a different configuration. It was time based, and so even in a case when the defaulting customer went promptly into insolvency, relief is not available until the requisite period has expired (originally two years, reduced to six months). The Upper Tribunal recognised, in [90] and [91], that the introduction of the New Scheme did not, by itself, prove the manifest inappropriateness of the Old Scheme. What, however, they did not identify, as they had to, was the nutcracker that should have been used in the Old Scheme. It was no answer to say that the Old Scheme did not deal with small debts, because it did: if BT could not initiate the insolvency itself, it could prove in an insolvency initiated by others. Small debts are admittedly a problem, but not just from the creditor's viewpoint; they also present administrative problems to those administering bad debt relief schemes, who are entitled to be satisfied that the debt is bad. The solution was to adopt insolvency as the bench mark for the proof of a bad debt. Proof of insolvency was therefore adopted as being equal to proof that the debt was bad, and that applied whether the debt was large or small. In assessing the proportionality of the Old Scheme, it is not enough to muse upon how the Old Scheme might have been differently designed. The UK government had a margin of legislative discretion in the scheme it was proposing to implement, and its particular choice can only be held to be disproportionate if it decided upon that which was manifestly inappropriate.
70. Mr Cordara's submissions in support of the Upper Tribunal's conclusion on the proportionality issue were largely covered by those he advanced in relation to ground 3 of HMRC's appeal, although he also helpfully referred us to C.R. Smith Glaziers (Dunfermline) Ltd v. Customs and Excise Commissioners [2003] UKHL 7, in particular to what Lord Hoffmann said at [25] to [27] and to what Lord Hope of Craighead said at [52]. The thrust of his submissions was that the derogation power could not be used, as in practice it was, so as to debar taxpayers from claiming VAT bad debt relief in the case of small bad debts, whereas the reach of the first paragraph of article 11C(1) was intended to extend to all bad debts, both large and small.

Conclusion on ground 4

71. I can deal with this shortly. I have no doubt that the Upper Tribunal were correct that the insolvency condition was disproportionate, unreasonable and unjustified and so infringed BT's directly effective EU law rights. I did not, with respect, find Mr Lasok's sledgehammer and nutcracker analogies helpful. Nor, even if they were apposite, did the Upper Tribunal have to identify the nutcracker. The problem with the insolvency condition in the Old Scheme was that the Scheme was identifying a bad debt by reference to the status of the debtor rather than by reference to a test under which the debt could reasonably be regarded as bad.
72. That no doubt provided a simple, if crude, test for the identification of a bad debt. Its manifest defect was, however, that it had the practical effect of excluding from the relief provisions small debts which were bad, and to which the reach of article 11C(1) was obviously intended to extend, simply because the debtor was not insolvent within the meaning of the legislation. The Old Scheme had the direct, and predictable, effect of depriving many classes of creditor of the bad debt relief entitlement that article 11C(1) intended them to enjoy. In the case of small debts owed by individuals, it would not be open to the creditor to satisfy the insolvency condition at all even though, by any objective standards, the debt was obviously bad. In the case of small debts owed by companies, it might in theory have been open to the creditor to obtain a winding up, but in practice only at a cost (perhaps irrecoverable) likely to be in excess of any ultimate tax refund so that, as a matter of practical politics, it would be a reasonable commercial decision for the creditor not to incur it. The insolvency condition may have been convenient from the administrative viewpoint of HMRC. Since, however, it illegitimately deprived a wide class of creditors of their rights under article 11C(1), it was unlawful.
73. I would dismiss the appeal on ground 4.

(c) Preliminary issue 1

74. I set this out in [5] above, and the Upper Tribunal's answer in [6] above. This issue was premised and answered on the assumption, which I would hold to be correct, that BT had a directly effective right under the Directive to claim bad debt relief during the relevant period in respect of bad debts that did not satisfy the insolvency condition in section 12 of the Finance Act 1978 and section 22 of VATA 1983. The Upper Tribunal's further assumption was that such directly effective right had to be enforced under section 12 of the Finance Act 1978 and section 22 of VATA 1983. One difficulty with that is, however, that BT's claims were not brought until 30 March 2009, whereas section 39(5) of the FA 1997 barred any claims under section 22 after 19 March 1997. The Upper Tribunal's conclusion, in answer to preliminary issue 1, was that the exercise of BT's directly effective right 'was no longer available as a result of section 39(5)', but was not barred in accordance with the general principles of EU law. There was, therefore, no time limit for the exercise of such right.
75. The Upper Tribunal's discussion about this commenced at [160]. Their view was that the national court had to provide a remedy for the directly effective right and would often be able to do so by an appropriate 'moulding' of its legislation. In [165] they said that, even though the Old Scheme's insolvency condition imposed an impermissible restriction on the right to relief, section 22 was nevertheless the domestic provision by which bad debt relief was to be delivered. It had, therefore, to be read as providing the mechanism for a directly effective claim. It is to be read as if it provided such relief by disapplying the insolvency condition.
76. The Upper Tribunal referred to the mechanism for making claims under the 1978 and 1981 Regulations. They noted that the prescribed procedure was 'intimately connected' with the insolvency condition and that it was only by reference to that procedure that any time limit was imposed. They said that such procedure could not apply to the directly effective claims since as the insolvency condition would never be fulfilled, there could be no document proving it by reference to which the time for making a claim would start running under the Regulations.
77. It followed that, for the purposes of enforcing the directly effective right, the requirement to make a claim in the way specified by the Regulations had to be disapplied and appropriately adapted. Their view was that, once section 22 and the Regulations were so disapplied and adapted to cater for directly effective claims, they imposed no time limit upon their making. Whilst the Upper Tribunal answered preliminary issue 1 by holding that section 39(5) of the Finance Act 1997 barred BT's claims for relief under the Old Scheme as a matter of domestic law, it also held that they were not barred as a matter of EU law. It is that last conclusion that HMRC challenges in relation to preliminary issue 1.
78. In challenging the Upper Tribunal's answer to preliminary issue 1, Mr Lasok submitted that: (1) it is a general principle of EU law that, absent an express provision prescribing a time limit for exercising a right, the right must be exercised within a reasonable time; (2) UK legislation must be interpreted and applied in a manner consistent with EU law; (3) BT's EU law right to bad debt relief operated outside the national rules, and so those rules must be adapted or interpreted so as to require the right to be exercised within a reasonable time – that is to say, BT cannot exercise an EU law right to circumvent a national law time limit without also bringing into play the EU principles regarding the exercise of EU law rights; (4) BT did not bring its claim within a reasonable time: the start date for bringing each claim was when each debt became the subject of supplies during the period from 1978 to 1989, yet it did not bring any claim until March 2009; and (5) when section 39(5) withdrew the Old Scheme for bad debt relief, it could not have affected BT's EU law rights unless it applied to a bad debt that had arisen within a reasonable time before 19 March 1997. Since the relevant supply period ended on 31 March 1989, and BT was billing on either a monthly or quarterly basis, any bad debt must have become apparent soon afterwards, so that on no basis can it be said that BT's claims could not have been made within a reasonable time before the cut-off date of 19 March 1997.
79. Mr Lasok relied on four authorities for the proposition that EU law rights have to be exercised within a reasonable time. He referred first to Sanders v. Commission of the European Communities (T-45/01) [2004] ECR II-3315, a decision of the then Court of First Instance. The case turned materially on the European Atomic Energy Community Treaty ('EA') and was a claim by the applicants against the Commission for compensation by reason of the failure of the European Communities to engage them as temporary servants whilst they were working at the Joint European Torus Joint Undertaking. The court said, at [42], that it had to decide whether the dispute had to be classified as general litigation on non-contractual liability under Articles 151 and 188(2) EA, or as concerning relations between the Community and its servants under Article 152 EA; and its answer to that was that it was litigation falling within the latter category. The case was therefore in the nature of a staff dispute with the Commission. The most relevant section of the judgment is that headed 'Obligation to act within a reasonable time', which occupies [59] to [66], and although it is centrally focussed on the need for reasonable expedition in the making of claims against Community institutions it does include this more general statement, at [59]:

'There is an obligation to act within a reasonable time in all cases where, in the absence of any statutory rule, the principles of legal certainty or protection of legitimate expectation preclude Community institutions and natural persons from acting without any time-limits, thereby threatening, inter alia, to undermine the stability of legal positions already acquired. In actions for damages liable to result in a financial burden on the Community, the obligation to submit a claim for compensation within a reasonable time derives also from a need to safeguard the public coffers which is specifically given expression, as regards actions for non-contractual liability, in the five-year limitation period laid down by Article 46 of the Statute of the Court.'

80. Mr Lasok relied next on Allen v. Commission (Case T-433/10P), 14 December 2011), a decision of the General Court. The claim was of a similar nature to that considered in Sanders (and also in Richard J. Eagle and Others v. Commission of the European Communities (Case T-144/02), in which judgment was given on the same day as it was in Sanders). The Upper Tribunal dealt fully with Allen in [217] to [233] of their judgment. They noted that Allen was dealing with the special situation of an EU institution where the legal relationship was governed by EU law and no relevant domestic law had any application. In cases like Allen, the court could therefore look only to EU law. The Court of Justice has, however, repeatedly pointed out that, provided the principles of effectiveness and legitimate expectation are observed, time limits are a matter for the Member States. If a Member State properly transposes a directive without imposing any time limit for the claiming of rights under it, the State cannot then impose a time limit by reference to EU law. If, however, the Member State fails properly to transpose a directive, what time limits, if any, apply to a claim to enforce the rights directly? By reference to this case, the Upper Tribunal's view was that, if the necessary moulding and adapting of section 22 and the 1981 Regulations results in the claim being subject to no time limit under the national legislation, there is no basis for subjecting it to some supposed general principle of EU law requiring claims to be brought within a reasonable time. They did not regard Allen as leading to that conclusion.
81. Third, Mr Lasok referred us to Arango Jaramillo and Others v. European Investment Bank (EIB) [2013] 2 CMLR 49, a decision of the Court of Justice. That does not, as I read it, advance HMRC's position. It is not a case in which the circumstances were remotely analogous to those of the present case and is not an authority that provides any answer to the Upper Tribunal's explanation of the applicable principles.
82. Fourth, Mr Lasok referred us to the decision of the Court of Justice in Alstom Power Hydro v. Valsts ienemumu dienests (Case C-472/08) [2010] STC 777. There the taxpayer sought a refund of what were said to be overpaid sums of VAT. The claim was brought after the three-year time limit prescribed by Latvian law and so was refused. The taxpayer challenged that decision on the ground that because article 18(4) of the Directive laid down no time limit for such claims, the Latvian revenue authority was not entitled to rely on a nationally imposed time limit. The question referred to the CJEU was whether the Directive precluded the national imposition of the three-year time limit for claims. The answer was that it did not. The court said:

'16. First, by analogy with the situation applicable to the exercise of the right to deduct, the possibility of making an application for the refund of excess VAT without any temporal limit would be contrary to the principle of legal certainty, which requires the tax position of the taxable person, having regard to his rights and obligations vis-à-vis the tax authority, not to be open to challenge indefinitely (Ecotrade SpA v. Agennzia delle Entrate – Ufficio di Genova 3 Joined Cases C-95/07 and C-96/07 [2008] STC 2626, [2008] ECR I-3457, para 44).'

83. Mr Cordara submitted in response that the authorities relied upon by Mr Lasok did not support HMRC's case and that the Upper Tribunal's reasoning to contrary effect was correct and should be upheld.

Conclusion

84. I would uphold the Upper Tribunal's answer to preliminary issue 1. It is, I consider, important to identify how BT claims to bring its claim for bad debt relief. Mr Cordara made regular references to the claim being made under section 80 of VATA 1994, which the Upper Tribunal did not accept, and BT challenges that under its cross-appeal. I explain later why I consider the section 80 argument to be mistaken and shall here say no more about it.
85. The claim that BT makes is for bad debt relief in respect of supplies it made over (i) the period 1 January 1978 to 30 September 1978, a nine-month period during which no domestic bad debt relief was in force; and (ii) over the period 1 October 1978 to 31 March 1989, when there was a domestic bad debt relief entitlement in place, exercisable under the statutory provisions enacted successively in section 12 of the Finance Act 1978 and section 22 of VATA 1983, and the regulations made under them.
86. As regards supplies made during the first, nine-month, period during which there was no bad debt relief domestic legislation in place, BT was, as I would hold, entitled nevertheless to enforce domestically its directly effective rights under article 11C(1) of the Directive. There was some discussion in argument as to the nature of the claim that it could have made and I cannot see how it could have been otherwise than of an English common law restitutionary nature, in respect of which there would be a domestic limitation period of six years. I did not understand either side to suggest anything different.
87. As regards supplies made from 1 October 1978 to 31 March 1989, BT was entitled to make bad debt relief claims successively under sections 12 and 22 in cases in which it could satisfy the insolvency condition, and in such cases it could make its claims either in its VAT return for the accounting period when it received the requisite insolvency document, or in any subsequent return, although the latter indulgence was removed in 1991. The time limits for making such claims were indisputably governed by the provisions of sections 12 and 22 (which themselves said nothing about time limits) and the regulations made under them (which did, and I have summarised it). No-one has suggested that there was anything wrong with those time limits from the perspective of EU law.
88. BT could, as I would hold, and had it grasped the point at the time, also have made direct claims under article 11C(1) of the Directive for bad debt relief in all cases (whether or not the insolvency condition was satisfied) on the basis that the insolvency condition was unlawful and incompatible with its EU law rights under the Directive. But the only procedural way in which it claims it was then entitled to do so was by way of an appropriate adaptation and moulding of sections 12, 22 and the regulations so as to accommodate the rights it was exercising and which ought to have provided for them in the first place. The adaptation and moulding required was, however, no more than was necessary to enable it to enforce its rights: it could not extend to incorporating time limits for making claims that were not already in the regulations. To the extent, therefore, that the regulations imposed time limits that were inapplicable to BT's claims (those fixed by reference to the receipt of the insolvency document), they would be disapplied; but nothing would be added in their place. To the further extent, as followed, that no time limit was prescribed by the regulations for the bringing of the claims, BT would not have been subject to any time limit.
89. HMRC now argues, however, that any such claims must in fact have been subject to undefined limitation periods, of necessarily uncertain length; and that such a consequence is required by reference to EU law principles that claims must be brought within a reasonable time. The error in that proposition is that whilst BT would be directly enforcing its EU law rights, it would be doing so under the umbrella of domestic machinery that subjected it to no such limits; and the application or otherwise of limitation periods to the bringing of claims is a matter for the domestic law of the member state where the claim is brought. HMRC can, in my view, point to nothing in such domestic law that can justify its assertion that the direct enforcement by BT of its EU law rights under the provisions of sections 12 and 22 (as appropriately moulded) would have been subject to the condition that such claims must be brought within a reasonable time. In particular, if the domestic legislation had properly implemented article 11C(1) but had expressly provided that refund claims could be brought without limit of time, that might have been unusual, but would not have been unlawful (compare the observations of Lord Scott of Foscote in Fleming's case, at [2008] UKHL 2; [2008] 1 WLR 195, at [20]). I can see no reason why the implied unlimited time for the bringing of BT's directly effective claims under the section 22 machinery is not equally lawful.
90. The Upper Tribunal gave rather fuller reasons for the same conclusion. I agree with them. I would dismiss HMRC's appeal against the Upper Tribunal's decision on preliminary issue 1.

Preliminary Issue 2

91. I set out preliminary issue 2 at [5] above and the Upper Tribunal's answer to it at [6] above. The premise of that issue was that the affirmative answer under preliminary issue 1 in relation to BT's EU law rights was of no value to BT if the exercise of those rights was anyway barred by section 39(5) of the FA 1997. The question under preliminary issue 2 was whether section 39(5) had to be disapplied, or construed, in such a way as not to affect BT's exercise of its EU rights.
92. The Upper Tribunal held that section 39(5) must be disapplied, or construed, under EU law, so as not to affect BT's exercise of its EU law rights (I do not myself understand how it could have been construed so as not to do so). Their reason for that conclusion, as summarised in [238] of their judgment, was that inadequate notice of the impending change proposed to be enacted by section 39(5) was given. The result was that claims which accrued prior to 1 April 1989 could still be made after 18 March 1997 and, so it seems, at any time thereafter. The Upper Tribunal explained their very full reasoning for that summary conclusion in [186] to [216], which focussed on the facts of the GMAC case. Their reasoning repays reading.
93. Mr Cordara's essential submissions were that the Upper Tribunal's decision was correct for the reasons they gave. Mr Lasok advanced cogent submissions as to why their decision was wrong. I shall summarise Mr Lasok's submissions, explain the reasons the Upper Tribunal gave for their different conclusion and then express my own decision.
94. Mr Lasok's four propositions were these: (1) under EU law, a discretionary legal regime can be changed at will as long as the legitimate expectations of persons affected by the change are protected, such as by the provision of information indicating that a change in the law is foreseeable; or, where a change is sudden and unforeseeable, by a transitional period; (2) the relevant legitimate expectation is that of the claimant (in this case BT) to the protection of EU law, not that of another person; (3) a legitimate expectation cannot be claimed if a person, as a prudent and circumspect operator, had sufficient information to permit it to expect that (in this case) the Old Scheme could be withdrawn. In such a case, no transitional period is required; (4) on the facts, the termination of the Old Scheme was foreseeable and BT did not have a legitimate expectation on which it could rely in order to avoid the application to it of section 39(5). The net effect is that section 39(5) did not fall to be disapplied, or construed, in the way that the Upper Tribunal did.
95. Mr Lasok based his first proposition on the judgment of the Court of Justice in Gemeente Leusden and Holin Groep BV cs v. Staatssecretaris van Financien (Joined Cases C-487/01 and C-7/02) [2004] ECR I-5337. The essence of the point there was whether the EU law rights of the Gemeente Leusden, the lessor of a sports field, had been infringed by a legislative change in relation to VAT introduced by the Dutch government so as to counter what was perceived to be unjustified tax avoidance. It is possible to obtain all that is relevant from just two paragraphs of the judgment:

'69. It follows that the Sixth Directive, interpreted in accordance with the principles of protection of legitimate expectations and legal certainty, does not preclude the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in adjustment of deductions made in respect of immovable property acquired as capital goods which is let pursuant to Article 20 of the Sixth Directive.

70. Although Article 20 of the Sixth Directive does not, as such, breach the above principles, it cannot none the less be ruled out that the national legislature has breached them in that, without taking account of a legitimate expectation of taxable persons which had to be protected, it suddenly and unexpectedly withdrew the right to opt for taxation of lettings of immovable property, when the objective to be attained did not require it, without allowing taxable persons bound by leases current at the time of entry into force of the law the time to adjust to the new legislative situation. …'

96. Mr Lasok submitted that those paragraphs, in particular [70], encapsulated the vice against which the power to disapply national legislation may need to be exercised. It is the sudden and unexpected withdrawal of a right without taking account of the legitimate expectations of taxable persons which had to be protected, and without allowing such persons time to adjust to the new legislative situation.
97. For his second proposition, Mr Lasok also relied on Gemeente Leusden. The scene is again set by [69] and [70]; and Mr Lasok referred us to this:

'72. The Gemeente Leusden argues that it is impossible for it to alter the rent, first because of the uncertain outcome of the court procedure required and, second, because of the financial difficulty in which the sports club would be placed if it had to pay a higher rent.

73. To begin with, it must be observed that the argument that the sports club would find it difficult to finance a higher rent is not based on a legitimate expectation of the taxable person itself, that is to say the Gemeente Leusden, but on an expectation of its lessee, the sports club. That argument is thus not relevant and cannot be taken into consideration.'

98. Mr Lasok said that [73] shows that in considering whether a change in a national law unfairly affects a legitimate expectation under an EU law right, only the legitimate expectation of the claimant is relevant, not that of anybody else. In this case, the only relevant legitimate expectation is that of BT.
99. Mr Lasok's third proposition was founded on the decision of the Court of Justice in Plantanol GmbH & Co KG v. Hauptzollant Darmstadt (Case C-201/08) [2009] ECR I-8343. The German Mineral Oil Tax law, as amended in July 2002, provided that the rates of taxation laid down in specified paragraphs were to be reduced until 31 December 2002 in accordance with the quantity of biofuel contained in the mineral oils covered by those paragraphs. It also provided for the Federal Minister of Finance to submit a biennial report to the Bundestag which (inter alia) proposed, if necessary, an adjustment of the reduced tax rates. A further law of 2003 amended the earlier law so as to extend the reduced tax rates to 31 December 2009 and provided for the Minister now to submit annual reports including proposals, where overcompensation existed, for an adjustment to the tax rates. In July 2006, the Law on the Taxation of Energy repealed the Mineral Oil Tax Law as from 1 August 2006 and made biofuels subject to tax as 'energy products'. Paragraph 50 provided that a taxable person could apply for an exemption for energy products which were taxed and were composed of biofuels intended as motor fuels or heating fuels, an exemption which was to apply until 31 December 2009. Paragraph 50 was then amended from 1 January 2007 by a law of 18 December 2006 and, by the amendment, also limited the exemption to pure biofuels, that is those not blended with other energy products.
100. The essence of the problem was that the law provided for a reduced rate or exemption in relation to blended fuels that was to carry on until December 2009 (subject though to the Minister's proposals in his report) whereas suddenly, with effect from 1 January 2007, the exemption disappeared. Plantanol had marketed since 2005 a blended fuel and found itself presented with a tax demand on its energy products for the period 1 January to 31 May 2007. That resulted in a reference to the Court of Justice. The court considered Directive 2003/30 and concluded, first, that Plantanol enjoyed no right to a tax exemption under its provisions. It said:

'36. It follows that the provisions of Directive 2003/30 do not require the Member State to introduce, or maintain in force, a tax exemption scheme for biofuels. It is clear in that regard from recital 19 to the directive that, although a tax exemption scheme is one of the means available to the Member States for attaining the objectives laid down in the directive, other means may also be envisaged, such as financial assistance for the processing industry and the establishment of a compulsory rate of biofuels for oil companies.

37. Moreover, it is apparent from Article 3(4) of Directive 2003/30 that the Member States also enjoy a wide discretion with regard to the products which they wish to promote in order to attain the objectives laid down in the directive, since they may choose to give priority to the promotion of certain types of fuels by taking account of their overall cost-effective climate and environmental balance, while also taking into account competitiveness and security of supply.

38. In those circumstances, it must be decided that no right to a tax exemption can be deduced from the provisions of the directive, particularly in regard to a specific product.'

101. That conclusion took the court to the next question, which was whether the general principles of legal certainty and the protection of legitimate expectations preclude a Member State, with regard to a product such as that in issue, from withdrawing, before the expiry date initially laid down in the national rules, a tax exemption scheme which applied to such products. In particular, the referring court wished to know whether such a withdrawal required that exceptional circumstances must exist. I quote at some length from what the court said:

'43. It must be recalled that the principles of legal certainty and protection of legitimate expectations form part of the Community legal order. On that basis, these principles must be respected by the Community institutions, but also by Member States in the exercise of the powers conferred on them by Community directives (see, to that effect, Case C-381/97 Belgocodex [1998] ECR I-8153, paragraph 26; Case C-376/02 "Goed Wonen" [2005] ECR I-3445, paragraph 32; and Case C-271/06 Netto Supermarket [2008] ECR I-771, paragraph 18).

44. It follows that national rules such as those at issue in the main proceedings, which are intended to transpose the provisions of Directives 2003/30 and 2003/96 into the domestic legal order, must respect those general principles of Community law.

45. According to settled case-law, it is for the referring court alone to determine whether such rules comply with those principles (see, inter alia, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-4191, paragraph 34; Joined Cases C-347/06 ASM Brescia [2008] ECR I-5641, paragraph 72), the Court, in a reference for a preliminary ruling under Article 234 EC, being solely competent to provide the national court with all the criteria for the interpretation of Community law which may enable it to determine the issue of compatibility (see, inter alia, Joined Cases C-286/94, C-340/95 and C-47/96 Molenheide and Others [1997] ECR I-7281, paragraph 49).

46. It should be recalled in that regard that, according to the case-law, the principle of legal certainty, the corollary of which is the principle of the protection of legitimate expectations, requires on the one hand, that rules of law must be clear and precise and, on the other, that their application must be foreseeable by those subject to them (see, inter alia, Case C-63/93 Duff and Others [1996] ECR I-569, paragraph 20; Case C-107/97 Rombi and Arkopharma [2000] ECR-3367, paragraph 66; and Case C-17/03 VEMW and Others [2005] ECR I-4983, paragraph 80). That requirement must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which those rules impose on them (Case C-17/01 Sudholz [2004] ECR I-4243, paragraph 34).

47. With regard to the requirement of clarity and precision, it must be held that, in the present case, the national rules which withdrew the tax exemption at issue in the main proceedings appear to comply with that requirement.

48. With regard to whether the withdrawal of the tax exemption scheme at issue was foreseeable, it must be pointed out that although the withdrawal was only for the future and did not therefore undermine the exemption obtained by the applicant in the main proceedings in respect of 2005 and 2006, both the Mineral Oil Tax Law, in the version which entered into forced on 1 January 2004, and the Law on the Taxation of Energy, in the version which entered into force on 1 August 2006, provided for the application of the tax exemption scheme until 31 December 2009. With regard to biofuels such as the product at issue in the main proceedings, however, the rules adopted subsequent to 18 December 2006 withdrew the tax exemption scheme, with effect from 1 January 2007, that is to say, before the date previously announced.

49. It must, however, be recalled that, as the Court has already ruled, the principle of legal certainty does not require that there be no legislative amendment, requiring as it does, rather, that the legislature take account of the particular situations of traders and provide, where appropriate, adaptations to the application of the new legal rules (see VEMW and Others, paragraph 81). …

51. With regard, more specifically, to the principle of the protection of legitimate expectations, it must however be pointed out that, in the main proceedings, the national legislature withdrew, before the date previously announced, a tax exemption scheme as regards which it had indicated on two occasions, by way of express legal provisions, that it would be maintained in force until a later date which had been clearly announced.

52. It must be accepted that a trader, such as the applicant in the main proceedings, who commenced his activities under the tax exemption scheme in favour of biofuels at issue in the main proceedings, and who, to that end, made costly investments, could see his interests considerably affected by the withdrawal of that scheme before the date announced, all the more so if that withdrawal takes place suddenly and unforeseeably, without leaving him enough time to adapt to the new legal situation.

53. It is clear from the Court's settled case-law that any economic operator on whose part the national authorities have promoted reasonable expectations may rely on the principle of the protection of legitimate expectations. However, where a prudent and circumspect economic operator could have foreseen that the adoption of a measure is likely to affect his interests, he cannot plead that principle if the measure is adopted. Furthermore, economic operators are not justified in having a legitimate expectation that an existing situation which is capable of being altered by the national authorities in the exercise of their discretionary power will be maintained (see, to that effect, in particular, Joined Cases C-37/02 and C-38/02 Di Lenardo and Dilexport [2004] ECR I-691, paragraph 70 and the case-law cited, and Case C-310/04 Spain v. Council [2006] ECR I-7285, paragraph 81).

54. As regards the expectation which a taxable person might have as to the application of a tax advantage, the Court has already held that when a directive on fiscal matters gives wide powers to the Member States, a legislative amendment adopted under the directive cannot be considered to be unforeseeable (Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 66). …

57. However, it is for the national court to determine whether a prudent and circumspect economic operator could have foreseen the possibility of such a withdrawal in a context such as that of the main proceedings. As the case concerns a scheme laid down under national legislation, the procedures for dissemination of information normally used by the Member State which adopted it and the circumstances of the case must be taken into account when the national court makes an overall and specific assessment of the question whether the legitimate expectations of the economic operators covered by those rules were duly respected in the specific case (see, to that effect, "Goed Wonen", paragraph 45). …

59. The possibility cannot be ruled out that those circumstances, or some of them, were such as to indicate, and this is a matter for the national court to consider in the framework of the main proceedings, that the national rules which withdrew the tax exemption at issue and which entered into force in a very short period of time, did not receive, at that time, a sufficient degree of publicity among interested parties … thereby making access to the applicable rules of national law more difficult for the persons subject to those rules. …

67. It must therefore be concluded that it is by taking account of all the foregoing factors, and all other circumstances relevant to the case before it, that the national court must consider, in the context of an overall assessment in the specific case, whether the applicant in the main proceedings, as a prudent and circumspect operator, had sufficient information to permit it to expect that the tax exemption scheme at issue in the main proceedings could be withdrawn before the date initially laid down for its expiry.'

102. Mr Lasok said no suggestion has been made that it was not open to the United Kingdom to change the Old Scheme; or, for example, to modify its New Scheme by reducing, as it did, the original two year period to six months. Prudent and circumspect economic operators – such as BT – were not justified in holding any expectation that the Old Scheme would be maintained forever. As the Court of Justice explained, the question is whether such operators could have foreseen the possibility of the change that happened. In that connection, it is relevant to consider the publicity about the change that was given to interested parties. But the question does not turn on whether an authoritative advance announcement was made. The question is whether, in all the circumstances, the operator would have had sufficient information to permit it to expect that a change was possible.
103. Having set out the legal foundation for it, Mr Lasok developed his fourth proposition, namely that, on the facts, the termination of the Old Scheme was foreseeable and BT did not have any legitimate expectation on which it could rely in order to avoid the application to it of section 39(5).
104. The Upper Tribunal took a rather different view, and Mr Lasok referred us to [149] of their judgment, in which they concluded that the provisions of the Finance Act 1990 'could not be seen as a signal that the provisions of the Old Scheme would be likely, in the future, to be repealed rather than to be allowed to run their course'. In like vein, and after referring to the saving provision in paragraph 9(1) of Schedule 13 to VATA 1994, which allowed claims under section 22 of VATA 1983, notwithstanding the general repeal of VATA 1983, the Upper Tribunal then said:

'151. … It is correct, no doubt, to describe this as a transitional provision in the sense that it provides for the Old Scheme to apply in relation to old supplies and would, in the course of time, become exhausted. But that is not to say that it was transitional in the sense of being merely temporary in the expectation that it would in due course be abrogated. As with FA 1990, we do not consider that the provisions of the VATA 1994 can be seen as a signal that the provisions of the Old Scheme would be likely, in the future, to be repealed rather than to be allowed to run their course.'

105. In response to that, Mr Lasok reminded us that, in addition to the changes introduced by the FA 1990, the consequential 1991 Regulations and guidance, by way of a change to the previous practice, required any claims for relief under the Old Scheme to be made in the return for the tax period when the relevant insolvency document was received – they could no longer be made in any subsequent return. Mr Lasok said the circumstances introduced by these changes made it clear to any prudent and circumspect operator that there would necessarily come a time when any claims he had or might have under the Old Scheme would come to an end, following which there was a likelihood that the Old Scheme would be repealed. The prudent and circumspect operator does not in such circumstances do nothing. He may have a considerable volume of small bad debts arising from his pre-April 1989 supplies and for him to do nothing may be to find that the Old Scheme has been repealed before he has done what might be open to him. As a prudent and circumspect operator, he will have known for years of his directly enforceable EU law rights (or at least that he has a good arguable case that he has such rights), and will know also that any such rights will have to be enforced under the umbrella of section 22. If he does not, he will foresee that a time may come when there may be a material adverse change in the law with regard to claims under section 22, and it will be too late for him to make his claim. Mr Lasok pointed out that the evidence was that BT destroyed documents relating to bad debts six years after they arose, which he said was not the conduct of an operator relying on the expectation that it could make a claim at any stage in the future.
106. I regard those submissions as compelling. My intuition is that there is something inherently wrong in BT's complaint that, as from 19 March 1997, section 39(5) unlawfully deprived it of its right to enforce its directly effective rights under article 11C(1). It had had since 1978 the opportunity to enforce those rights in respect of each and every bad debt as it arose, and was entitled to claim in doing so that the insolvency condition was invalid; and by 19 March 1997 it is likely that all its debts arising from its pre 1-April 1989 supplies were either paid or statute-barred. The only reason it had not taken steps to enforce its directly effective rights is, so I presume, that it was unaware of them. Ignorance of one's legal rights is not, I should have thought, a sound basis upon which a bid can ordinarily be made to disapply legislation that has, eventually, put a stop to their future exercise.
107. Mr Lasok's line of argument, however, cut no ice with the Upper Tribunal, which gave careful reasons why section 39(5) fell to be disapplied. The main corpus of the Upper Tribunal's reasoning was addressed to the GMAC case. They said first that, subject to the question of whether it could be disapplied, section 39(5) precluded any EU law claim being made through the mechanism of section 22. The next question was that of notice. Was it necessary for taxpayers to be given notice of the termination of the Old Scheme and, if so, was adequate notice given? In that context, they noted Mr Lasok's submission that section 39(5) had nothing to do with time limits, but was simply a provision marking the final stage of the change from the Old Scheme to the New Scheme, something the UK government was entitled to do by changing the conditions under which bad debt relief was available pursuant to the derogation power in article 11C(1); whereas Mr Cordara submitted that section 39(5) was a provision imposing a time limit on making a claim in respect of a subsisting right, and that the case was no different from that discussed in Fleming.
108. The Upper Tribunal did not regard Mr Lasok's analysis as reflecting the whole story. Save for supplies during the overlap period from 1 April 1989 to 26 July 1990, the New Scheme was not simply substituted for the Old Scheme. In relation to pre-1 April 1989 supplies, it was only the Old Scheme that applied or ever could apply. The termination of that scheme meant that, whilst some GMAC claims could have been made years earlier, GMAC may have made supplies in early 1989 which resulted in bad debts only shortly before, or even after, 19 March 1997 (I have earlier noted that different considerations applied to the BT case). The Upper Tribunal considered Fleming (upon which Mr Cordara relied) and Gemeente Leusden and Plantanol (upon which Mr Lasok relied).
109. The Upper Tribunal summarised the issues in Fleming as follows:

'193 … This case related to claims for input tax repayment under regulation 29 of the VAT regulations 1995. Those regulations, it is to be noted, required a claim to be made in the period in which the VAT became chargeable, but (in the words "save as the Commissioners may otherwise allow or direct") reserved a discretion to the Commissioners.

194. A new regulation [29(1A)] was introduced which removed the right under regulation 29 to claim a deduction more than three years after the return date for the period in which the VAT became chargeable. The question was whether this was permissible without the creation of a sufficient transitional period in which outstanding claims could be made, and whether the way in which the change had been advertised created such a period. Lord Hope (see at [1]), Lord Carswell (see at [77]) and Lord Neuberger (see at [103]), and as such, a majority of the House, all appear to have considered that the communication of a transitional period might be made by the Administration rather than the legislature, but said that it must be widely disseminated.'

110. The effect of the amendment by regulation 29(1A) was retrospectively to curtail the time allowed to a taxpayer under the prior regulations to claim a deduction of input tax. There was no dispute that it was unlawful. This was because prior to the amendment there was no time limit for the making of such a claim, and the amendment introducing such a limit included no appropriate transitional arrangements. The amendment was therefore disapplied.
111. The Upper Tribunal considered Mr Lasok's submission that GMAC's case was different from that in Fleming, because section 39(5) did not retrospectively impose a time limit where previously there was none. Section 39(5) was more correctly to be regarded as simply discontinuing a particular regime (the Old Scheme) at the end of what was in substance a transitional period that opened with the Finance Act 1990. The Upper Tribunal accepted that the regime of the Old Scheme had changed, but noted that as regards pre-1 April 1989 supplies the substance of what had happened was that the regime had been abolished without a replacement. They then recorded Mr Lasok's submission that the decision in Fleming was based on the proposition that transitional provisions were required in order to protect the taxpayers' legitimate expectations. By contrast, GMAC (and BT) could, after the Finance Act 1990, have had no like legitimate expectations that the Old Scheme would remain in place unaltered. After also considering the Gemeente Leusden and Plantanol cases, the Upper Tribunal continued:

'202. In our view, the position in the present case is much closer to Fleming than it is to Gemeente Leusden and Plantanol. First of all, in both the present case and in Fleming, the taxpayer has a claim (in the present case, a directly enforceable right under Article 11C(1) on the footing that the Insolvency Condition and the Property Condition are incompatible with EU law) to reduce its liability for tax. In contrast, the impact of the changes in Gemeente Leusden and Plantanol was on the amount of tax which would become payable because of the way the transactions in question would be charged. Secondly, the total exclusion of bad debt relief for supplies made before 1 April 1989 – in contrast with the adoption of a replacement scheme applicable to such supplies – cannot, we consider, be justified as a condition or derogation within Article 11C(1). The only justification, as we see it, is that the elimination of claims under section 22 (as appropriately adapted for directly enforceable claims) is the imposition of a reasonable time limit within such claims must be made. The fact that a replacement scheme might have been adopted (and in such a case, the Gemeente Leusden and Plantanol approach might well be correct) is not an answer in the case where the section 22 claim was altogether abolished. A taxpayer in the position of GMAC with an accrued directly enforceable claim was, we consider, in substantially the same position as Mr Fleming. In our view, GMAC had a legitimate expectation that the period during which it would be able to make a claim for bad debt relief in the absence of any replacement scheme would not be brought to an end without an adequate opportunity being given to make a claim. Thus, just as the introduction of a shortened time limit without a transitional period in Fleming breached the principles of effectiveness and legitimate expectations, so, in the present case, the termination of the right to make a claim under section 22 without an adequate opportunity to make a claim would breach those principles unless an adequate transitional period was provided for.

203. That conclusion leads on to the question of notice and transitional provisions. It is important to see precisely what it was that the House of Lords decided in Fleming. That case concerned the retrospective shortening of a time limit for making a claim. It applied in respect of accrued rights. It was held, that to be compliant with EU law (i) the new time limit had to be fixed in advance so as to give legal certainty (ii) where the new time limit was retrospective, there had to be an adequate transitional provision so that those with accrued rights had a reasonable time within which to make their claims before the new time limit applied, it being for Parliament, or HMRC by means of an announcement disseminated to taxpayers to introduce prospectively an adequate transitional period (iii) that where a new time limit was introduced without any, or any reasonable, transitional period, it would be a breach of EU law to enforce the new time limit in relation to accrued rights at least for a reasonable period (iv) that the adequacy of the transitional period was to be determined by reference to the principles of effectiveness and legitimate expectations, so that the period was not so short as to render it practically impossible or excessively difficult for a person with an accrued right to make his claim and (v) where the national court decided that the transitional period was inadequate, it had to fashion the remedy necessary to avoid an infringement of EU law which would normally be to disapply either permanently or temporarily the operation of the retrospective application of the new time limit. As to (iii), the reasonable period must itself be certain. This appears most clearly from the speech of Lord Neuberger at [88] and [90], although it is implicit in the speeches of Lords Hope and Scott and of Lord Carswell too.'

112. The Upper Tribunal noted three differences from Fleming that could be identified in the GMAC case. First, whereas in Fleming, HMRC attempted to correct the wrongful curtailment of the taxpayers' rights after the legislative change, in the present case, if notice of the change was required at all, it was provided in advance by the November 1996 documents referred to in [40] and [41] above and by the Finance Bill published in December 1996 – some four months before the change came into force on 19 March 1997. Thus it could be said that taxpayers were put generally on notice of the ending of the Old Scheme, and Mr Lasok had also made the point that its eventual demise had been signalled much earlier by the changes made in 1990. Second, whereas the taxpayer in Fleming made his claim within a reasonable time of what the Upper Tribunal explained as the 'start date', GMAC did not make its claims until about 2006, some nine years after the Old Scheme was terminated. Third, whereas the taxpayer's substantive rights in Fleming were clear and all that was in issue was the introduction of curtailed limits to their exercise, here the substantive EU law rights that were asserted were and are disputed by HMRC.
113. The Upper Tribunal explained why those differences did not by themselves resolve the case in GMAC's favour and that the only, and critical, outstanding question was whether, on the facts, the November/December 1996 announcements amounted to an effective notice of the ending of the Old Scheme and, if so, whether such notice was of adequate duration. In answer to that, the Upper Tribunal considered that it was inappropriate to assess the adequacy of the notice period simply by reference to the opportunity of a taxpayer to enforce directly effective rights on the footing that the Old Scheme, by inclusion (inter alia) of the insolvency condition, did not correctly implement the Directive. There would or might be taxpayers who, foreseeing the imminent demise of the Old Scheme, would wish in the meantime to achieve the satisfying of the insolvency condition as to bring themselves within the letter of the Old Scheme; and the Upper Tribunal gave their reasons why the short window between November 1996 and March 1997 was an inadequate one within which to do so. The Upper Tribunal said that:

'211. … The UK government had provided a scheme of bad debt relief in the shape of the Old Scheme which it alleged, and continues to allege, was compliant with EU law. HMRC cannot, when it comes to determining whether such a taxpayer is entitled to a transitional period, and if so what period, rely on our decision that the Old Scheme was not in fact compliant, to deprive the taxpayer of that opportunity.

212. GMAC is not, of course, such a taxpayer since it did not, and cannot now, fulfil the Property Condition. But the fact that there may be other taxpayers who could seek to rely on a transitional period sufficient to allow the Insolvency Condition to be satisfied has an impact, in our view, on the appropriate transitional period in respect of GMAC's directly enforceable claims. It would be wrong in principle, we consider, for GMAC (and others in the same position) to be required to bring a claim within a shorter period than that applicable to persons potentially entitled to make a claim under domestic legislation. A person seeking to enforce a claim under EU law must not be treated in a less favourable way than a person seeking to enforce an equivalent right under domestic law. Accordingly, we conclude that the period from 26 November to 18 March 1997 was not an adequate transitional period within which GMAC could be required to asserts its directly enforceable rights.'

114. Finally, the Upper Tribunal held that, even if they were wrong to identify the appropriate transitional period by reference to the period appropriate to a taxpayer seeking to rely on the domestic legislation, they gave their reasons, perhaps a little tentatively, in [213] as to why, given what they called certain 'steers' from the Court of Justice and Fleming, the transitional period of 16 weeks from, at the earliest, 26 November 1996 until 19 March 1997 was anyway inadequate.
115. The Upper Tribunal's reasoning, as summarised above, related to the GMAC case. They applied it to the BT case in [238] to [241], by re-affirming their earlier conclusion that adequate notice was not given of the impending change proposed to be introduced by section 39(5); and therefore the BT claim made in March 2009 was still in time.
116. In [240] and [241] the Upper Tribunal addressed questions of a nature that did not arise in the GMAC case, namely as to BT's claims in respect of the period 1 January 1978 to 30 September 1978, before the enactment of section 12 of the FA 1978. They dealt first with the case where the supply pre-dated 1 October 1978 but the bad debt post-dated it and held that such a situation was within section 12, since section 12(6) provided for the section to apply also in cases in which the debtor becomes insolvent after 1 October 1978. Bad debts of this nature were therefore in the same position as those arising as a result of supplies after 1 October 1978.
117. As for cases of bad debts arising before 1 October 1978 on supplies made before that period, the Upper Tribunal's view was that, even though section 12 was not then on the statute book, once it was its mechanism could also apply to BT's directly effective right to bad debt relief in respect of such debts.

Conclusion

118. Taking first the period 1 January to 30 September 1978, we had some generalised discussion about this during the argument, but it did not distinguish between the types of case referred to in [116] and [117] above. Given my overall conclusion in respect of the main part of BT's claims, namely, that part relating to supplies made during the period 1 October 1978 to 31 March 1989, I regard it as unnecessary to deal separately with these two types of case. Either they are blighted by the same problem as relates to the main claim; or else the only right that BT ever had to claim relief in respect of these bad debts was a common law restitutionary claim, which is long since statute barred.
119. As for BT's claims in respect of supplies during the period 1 October 1978 to 31 March 1989, I respectfully disagree with the Upper Tribunal that section 39(5) did anything amounting to an unlawful curtailment of the exercise by BT of its directly effective EU rights under the Old Scheme.
120. I admit to having derived little assistance in the resolution of this issue from the European authorities to which we were referred. I also regard the case as having little about it that is akin to what happened in Fleming. I would, however, agree with Mr Lasok that, if at the time of the introduction of the New Scheme, BT had any expectations as to the future of the Old Scheme, it would, as a prudent and circumspect operator, be likely to have foreseen its eventual repeal. I also accept his submission that a claim by a litigant to a national court inviting a disapplication of a provision of its national law as infringing the litigant's EU law rights is one that must be decided on the basis of the facts affecting the particular litigant, in this case BT.
121. The essential question for us is, I consider, whether BT is right that the enactment of section 39(5) of the FA 1997, which barred the making of any Old Scheme bad debt relief claims after 19 March 1997, infringed its directly enforceable rights under the Directive to claim VAT bad debt relief in respect of the bad debts the subject of the claim that BT eventually made in March 2009. Those debts all arose from supplies made prior to 31 March 1989, 20 years earlier. I explained in [48] above how, having regard to the nature of BT's business, the badness of the latest bad debts to accrue would have been apparent to BT within (at most) months of the end of 1989 – and within several years before 19 March 1997 (and see also the last part of [105] above).
122. It had, therefore, been open to BT from the dawn of the Old Scheme in 1978 down to 1990 to make bad debt relief claims under the machinery of the Old Scheme in respect of each bad debt now relied upon as it arose; and it continued to be open to it to make belated such claims during the remaining years of the 1990s in which the Old Scheme machinery remained on the statute book. Of course, in making good such claims BT would have had to show that the insolvency condition was incompatible with its EU law rights. I consider, however, that we must approach the case on the basis that it could and would have done so. The only reason BT did not make such claims is, I presume, because it was unaware that it was open to it to do so.
123. I do not understand how such unawareness can be a relevant consideration. EU law has been flowing up our estuaries since 1972 and BT had every opportunity to obtain the most expert advice as to its rights. I therefore fail to understand how BT can now say that the eventual demise by the Finance Act 1997 of a bad debt scheme that had included provisions that, so it claims and I would hold, infringed its directly enforceable EU rights was a change in the law that also infringed its directly enforceable EU rights. It did not. BT had literally had almost decades in which to enforce its rights, but did nothing towards doing so. The suggestion that the four-month warning of the impending change in the law was too short a warning for BT, or those in a like position, is one with which I also disagree. BT could in fact have sought to enforce its directly enforceable EU rights during that period, although in the event it still did nothing towards doing so for a further 12 years. It is in my view counter-intuitive that BT should now be entitled to bring such a stale claim. The Upper Tribunal's further suggestion that the four-month warning was insufficient to enable traders to seek the opportunity, should they wish to, of satisfying the domestic insolvency condition may be correct as a matter of fact. But the more relevant question is, I consider, whether the enactment of section 39(5) is one that infringed BT's directly enforceable EU rights to claim bad debt VAT relief in respect of its supplies made prior to 31 March 1989. In my judgment, it did not.
124. I would allow HMRC's appeal against the Upper Tribunal's answer to preliminary issue 2.

BT's cross-appeal

125. I shall deal with this briefly. The question is whether BT's tax refund claims are correctly to be regarded as having been brought under section 80 of VATA 1994 and enjoyed the extended limitation period conferred by section 121 of FA 2008. The Upper Tribunal answered this in the negative. I set out the terms of section 80 in [29] and [37] above and section 121 in [44] above. The section 80 argument was advanced as an alternative basis for the enforcement of BT's directly effective rights (alternative, that is, to section 22). If well founded, it would follow that the FTT had jurisdiction to hear BT's appeal.
126. The Upper Tribunal's view, succinctly expressed in [181], was that section 80 applies to cases where the taxpayer has brought into account as output tax an amount that was not output tax due. When GMAC (and likewise BT) made its supplies, it accounted for tax which was then due. The subsequent failure of the customer to pay for the supply gave rise to a bad debt, and a possible claim for bad debt relief, which would be for the repayment of all or part of the output tax originally paid by BT. The arising of such bad debt did not, however, mean that the output tax earlier paid was not output tax due within the meaning of section 80. It was and remained so, and the arising of the bad debt did not retrospectively change that.
127. Mr Lasok supported the Upper Tribunal's reasoning and I too agree with it. Not even BT seems to have believed that section 80 was relevant. Its somewhat ill-drawn claim letter of 30 March 2009 was in respect of bad debt relief and made no suggestion that it had made any payment of tax which was not output tax due. This, I take it, is the sense of the second sentence of the Upper Tribunal's answer to preliminary issue 3.
128. I would dismiss BT's cross-appeal against the Upper Tribunal's answer to preliminary issue 3.

Lord Justice Kitchin :

129. I agree. The question in relation to preliminary issue 2 is whether section 39(5) of the Finance Act 1997 has to be disapplied under EU law in such a way as not to affect BT's rights under EU law in respect of bad debts arising in the prescribed accounting periods to 31 March 1989. I, like my lords, have come to the conclusion that the Upper Tribunal fell into error in answering this question in the affirmative.
130. I recognise that the New Scheme was not simply substituted for the Old Scheme. As the Upper Tribunal observed, the Old Scheme is the only scheme which has ever applied to supplies made before 1 April 1989, and its termination therefore meant that BT could no longer seek bad debt relief in respect of supplies made before that date. Nevertheless, it cannot be disputed that the UK was entitled to change the conditions under which bad relief was available pursuant to the powers of derogation conferred by Article 11C(1), and specifically to impose a time limit within which claims in respect of such supplies had to be brought, subject of course to the general principles of legal certainty and the protection of legitimate expectations.
131. Here we are concerned with the legitimate expectations of BT as the taxpaying person. In that regard the following points seem to me to be particularly material. First, the Finance Act 1990 closed the Old Scheme in relation to supplies after 26 July 1990. From that point it would have been apparent to a prudent operator that there would come a time when the provisions of that scheme would be perceived to have run their course and it was likely that the legislation underpinning that scheme would be repealed.
132. Further, BT is, as I have said, concerned in this claim with supplies to 31 March 1989. These supplies were generally billed on a quarterly basis and so the latest debts within its claim would have fallen due within a few months thereafter and many years before 19 March 1997. As Mr Lasok submitted and I agree, by March 1997, all debts owed to BT in relation to supplies made before 31 March 1989 were either paid or time barred, a fact reflected in BT's practice of destroying its documents after six years. So for BT, by March 1997, the Old Scheme had indeed run its course, subject to its right to enforce its directly effective rights under EU law through the machinery of section 22 of VATA 1983, as appropriately adapted and moulded.
133. Moreover, as Rimer LJ has explained, BT had had since 1978 the opportunity to exercise its directly effective rights under EU law in respect of each and every bad debt as and when it arose. Nevertheless I am prepared to accept that it had, or at least must be considered to have had, a legitimate expectation that it would not be deprived of those rights without being given notice which was adequate for traders in its position.
134. BT and other traders were, however, given notice of the closure of the Old Scheme by the Budget Notice and Budget News Release of November 1996 and by the publication in December 1996 of the bill which became the Finance Act 1997. As prudent and circumspect operators they knew or must be taken to have known they had a period of nearly four months until the Act came into force to make a claim in respect of their directly effective rights, and to do so using the machinery of the adapted and moulded section 22 (without the insolvency condition).
135. In all these circumstances and approaching the matter, as Mr Lasok invited us to, on the basis of any legitimate expectation BT held or was entitled to hold, I believe that it and other traders in a similar position should have anticipated the possibility of the repeal of the legislation underpinning the Old Scheme. Further, and far from there being any sudden and unexpected withdrawal of a right to claim bad debt relief in respect of supplies made prior to 31 March 1989, prudent and circumspect operators in the position of BT had ample time to act in the light of the notice they were given.
136. I would simply add that it is a curiosity of this case that BT was plainly not aware of its directly effective rights, as Mr Cordara frankly accepted. Accordingly it did not as a matter of reality have any expectation as to its entitlement to bring such a claim, and providing it with a longer period of notice would not have made the slightest difference to it.

Lord Justice Christopher Clarke :

137. I agree.
138. In relation to Issue 2, the question is, as Rimer LJ has observed, whether section 39 (5) of the Finance Act 1997 must be disapplied because it amounted to an unlawful curtailment of the exercise by BT of its directly effective EU rights under the Old Scheme. Any claim to enforce those rights would fall to be made under that scheme, shorn of the insolvency condition.
139. Whether the curtailment was an unlawful infringement of BT's rights depends on its effect on a litigant in BT's position. A prudent and circumspect operator in BT's position must be taken to have realised (i) that it had, at least arguably, directly effective EU rights which would invalidate the insolvency condition under the Old Scheme; (ii) that the Old Scheme might well be wound up so as no longer to be available for any claim thereunder; and (iii) that the likelihood of such a winding up would increase as time passed following the introduction of the New Scheme.
140. BT could have made claims under the Old Scheme from October 1978 down to 19 March 1997. The Old Scheme became ineffective on the next day, as had been foreshadowed in the Budget News Release of 26 November 1996. In circumstances where the New Scheme had come into existence in 1990 and where it was apparent that the Old Scheme might well be brought to an end at some stage thereafter – as the United Kingdom was entitled to do - the notice of nearly 4 months was not too short.
141. The Upper Tribunal held that it was wrong for GMAC (and others in the same position) to be required to bring a claim within a shorter period than that applicable to persons potentially entitled to make a claim under domestic legislation, on the grounds that a person seeking to enforce a claim under EU law must not be treated in a less favourable way than a person seeking to enforce an equivalent right under domestic law.
142. Its reasoning – contained in paragraphs 211 and 212 of its decision (see [113] above) - was, as I understand it, as follows. First, since HMRC alleged that the Old Scheme was compliant with EU law it could not, for the purpose of deciding whether EU law required the taxpayer to benefit from a transitional period, claim that it was not so compliant: para 211. Second, some taxpayers could benefit from a transitional period in which they could seek to satisfy the insolvency condition. For such taxpayers four months was an inadequate period for that purpose. Third, it was wrong in principle for GMAC and others in the same position to be required to bring a claim within any shorter period than that applicable to other persons potentially entitled to make a claim under domestic legislation. Accordingly GMAC and BT alike had not lost their EU law rights because they had not been given adequate notice of the impending change.
143. I respectfully disagree with this line of reasoning. I do not see why the fact that HMRC has sought (unsuccessfully) to contend that the Old Scheme was EU law compliant means that, when it comes to determining whether the taxpayer was entitled to a transitional period, it should be assumed that it was. The Court must proceed on the basis of the law as it has held it to be. The analysis contained in para 212 of the Tribunal's decision thus involves the erroneous assumption that the Old Scheme was EU law compliant in order to determine whether adequate notice was given of its termination. EU law is, in this manner, invoked so as to require a notice to the taxpayer in order that he may be able to comply with a condition which is in EU law terms invalid. This appears to me to be a contradiction in terms. It is also unclear to me how precluding BT from claiming to enforce its EU rights under the Old Scheme (without the insolvency condition) after the coming into force of section 39 (5) involves treating it in a less favourable way than a person seeking to enforce an equivalent right under domestic law.
144. The illegitimacy or otherwise of any restriction on BT's EU rights which is said to arise from section 39 (5) because the Old Scheme was abolished is not, in my view, dependent on whether four months was too short a period to enable some taxpayers to satisfy the invalid domestic insolvency condition. The relevant question is whether the removal of the right to claim under the Old Scheme (ignoring the condition) was made without adequate notice. In my judgment, it was not.
145. I would, therefore, like my lords, allow HMRC's appeal in respect of preliminary issue 2.