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)
Warren J and Judge Hellier
FTC/52/2010

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/10/2016

Lord Justice Floyd:

Introduction

1. This is an appeal from the decision of the Upper Tribunal, Tax and Chancery Chamber ("UT") (Warren J and Judge Charles Hellier), released on 3 August 2012. The appeal raises issues concerning VAT bad debt relief in relation to debts which GMAC UK PLC, formerly General Motors Acceptance Corporation (UK) PLC ("GMAC"), incurred in connection with its supplies of motor cars between 1978 and 1997. The UT's decision was given on an appeal from the decision of the First-Tier Tribunal, Tax Chamber ("FTT") (Judge Wallace and Miss S.C. O'Neill) released on 6 May 2010.
2. The UT also dealt in its decision with the determination of three preliminary issues in a separate tax appeal by British Telecommunications PLC ("BT") which raised some of the questions arising on GMAC's appeal. That part of the decision of the UT has already been the subject of an appeal to this court: The Commissioners for Her Majesty's Revenue and Customs v British Telecommunications PLC [2014] EWCA Civ 433. I will refer to that decision as "BT CA".
3. In the GMAC appeal the UT decided to refer a question to the Court of Justice of the European Union ("CJEU"). The CJEU gave its ruling on that issue on 3 September 2014. The issue in question does not arise on this appeal: I mention it only as it will explain why, in 2016, we are hearing an appeal from part of a decision of the UT given in 2012.
4. GMAC is a finance company which buys motor vehicles from dealers and then sells them on to customers on hire purchase terms. At the outset of the transaction GMAC accounts for VAT on the full sale price charged to the customer, excluding credit charges, as it is required to do as a result of Article 5(4)(b) of Directive 77/388 EEC ("the Sixth VAT Directive" or "the Directive") which was implemented by paragraph 1 of Schedule 4 of the Value Added Tax Act 1994 ("VATA 1994"). That paragraph provides that, in general, any transfer of the whole property in goods is a supply of goods, whereas the transfer of the possession of goods is a supply of services. However, if the possession of goods is transferred under a hire purchase agreement, it is a supply of goods. As possession is transferred at the inception of a hire purchase contract, VAT on the supply is payable in full at that point.
5. In the periods with which the appeal is concerned the UK's domestic VAT bad debt relief provisions imposed one or both of two conditions which had to be satisfied before bad debt relief was available. One condition was that, on a supply of goods, the property had passed ("the property condition"). The other condition was that the debtor was formally insolvent, reinforced for some of the time with a requirement that the taxpayer had proved in the insolvency of the debtor ("the insolvency condition"). Both these conditions for bad debt relief present problems in the context of hire purchase agreements. Firstly, if the customer defaults on the payments under the hire purchase agreement, property will not have passed. So in the very case in which bad debt relief might be claimed, the property condition cannot be satisfied. Similarly, where the finance company did not take insolvency proceedings, for example because the amount outstanding was less than the relevant bankruptcy or insolvency limit, or where the costs associated with such proceedings were not commercially justified, it could not satisfy the insolvency condition. GMAC contends that the property condition and the insolvency condition were incompatible with the Sixth VAT Directive which provided a directly enforceable right to relief for non-payment or partial payment of the consideration for a supply. The FTT and the UT held that the property condition and the insolvency condition were indeed incompatible with the Sixth VAT Directive, and accordingly fell, to that extent, to be disapplied.
6. Some of the hire purchase supplies for which VAT bad debt relief was refused in the present case occurred before 1 April 1989. HMRC say that the part of GMAC's claim which relates to the period 1978 to 1989/1990 is time-barred by section 39(5) of the Finance Act 1997, and also because GMAC had no exercisable rights under EU law, given that, as a general proposition of EU law, such rights must be exercised within a reasonable time. The UT held that general propositions of EU law did not bar the claim, but that section 39(5) did. However section 39(5) fell to be disapplied because inadequate notice had been given to GMAC of the change in the law.

The legislative framework

7. The relevant legislative history is set out with great clarity in paragraphs [10] to [44] of BT CA. I have borrowed heavily on that account in what follows, with some amendment in recognition of the fact that the property condition was not in issue in that case.

The EU legislation

8. VAT was introduced into the UK by the Finance Act 1972. VAT became chargeable on supplies on or after that date on the coming into force of that Act on 1 April 1973.
9. In 1977, the Community introduced the Sixth VAT Directive. The relevant provisions have since been consolidated in the Principal VAT Directive 2006/112/EC ("the PVD"), but it was the Sixth VAT Directive which was in force at the times material to these proceedings. Article 1 required member states to modify their VAT systems so that the systems as modified entered into force by 1 January 1978 at the latest.
10. Article 11, in Title VIII, is entitled "Taxable Amount". Article 11A1(a) provides 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;"

11. Article 11C(1) explains that the taxable amount is to be reduced in certain cases. It reads:

"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."

12. Thus, 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, although the member state may impose conditions on the ability to achieve this. The objective is obviously to reinforce the principle in Article 11A1(a) that the tax is to be charged on that which is actually obtained or to be obtained from the customer. The reduction is to be "under conditions which shall be determined by the member states". In Case C-588/10 Minister Finansow v. Kraft Foods Polska SA the CJEU said 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."

13. In addition, the second paragraph of Article 11C(1) confers a power upon member states to derogate from the provisions of the first paragraph in a case of total or partial non-payment. In Case C-330/95 Goldsmiths (Jewellers) Ltd v. Customs and Excise Commissioners [1997] STC 1073 ("Goldsmiths") the CJEU explained at paragraph 18 that the exercise of the power to derogate needed to be "justified":

"The power to derogate, which is strictly limited to [the case 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."

14. The relevant provisions in the Sixth VAT Directive reappear in the PVD. Although those provisions do not apply in this case, some of the authorities refer to the provisions of the PVD. Thus Article 11A(1) of the Sixth VAT Directive is to be found in Article 73 of the PVD; Article 11C(1) in Article 90.

Finance Act 1978: the old scheme

15. The UK first introduced a bad debt relief scheme, somewhat later than required by the Directive, in section 12 of the Finance Act 1978. It became known in due course (for reasons which will appear) as "the old scheme" and came into effect on 1 October 1978.
16. 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 1st October 1978."

17. Subsection (1)(a) limits the operation of the scheme to cases where the supply of goods or services is for a consideration in money. It was this provision which gave rise to the reference to the CJEU in Goldsmiths which concerned the unavailability of relief when a supply is on barter terms. Subsection (1)(b) imposes the insolvency condition and subsection (2)(a) imposes a requirement for proving in the insolvency. Subsection (2)(c) imposes the property condition. The insolvency condition meant that GMAC 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 a company) was in a creditors' voluntary or compulsory winding up and the circumstances "are such that it is unable to pay its debts". It is also worth noting at this stage that, although subsection (6) restricts the application of the section to cases where the debtor becomes insolvent after 1^st October 1978, it applies of necessity to supplies made before that date.
18. 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 3 provided that, save as the Commissioners might 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 that 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. 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 that a debt was bad.
19. The Value Added Tax Act 1983 ("VATA 1983"), which came into force on 26 October 1983 repealed section 12 of the Finance Act 1978 and replaced it with its own section 22, which was in material respects identical.
20. 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. The resulting changes extended the definition of insolvency in the case of both individuals and companies.
21. On 1 April 1986, a new set of regulations came into force, revoking the earlier 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, 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.
22. Section 24 of the Finance Act 1989 introduced a set of provisions concerned with the overpayment of VAT. It subsequently became section 80 of the VATA 1994. That section is relevant to GMAC's cross-appeal and to its case that section 24 and the subsequent versions of it provided an alternative jurisdictional basis upon which it was entitled to apply for relief in respect of the bad debts it had suffered during 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)." …"

23. There was thus a six year limitation period for bringing such claims. Subsection (5) gave a mistake-based claim to the taxpayer which can be asserted at any time up to six years from discovery of the mistake.

Finance Act 1990: the new scheme

24. The Finance Act 1990, which received Royal Assent on 26 July 1990, introduced a new scheme of bad debt relief ("the new scheme") replacing section 22 of VATA 1983. Section 11 provided as follows:

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

(a) on or after 1st 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. …

(4) A person shall not be entitled to a refund under subsection (2) above unless—

(a) the value of the supply is equal to or less than its open market value, and

(b) in the case of a supply of goods, the property in the goods has passed to the person to whom they were supplied or to a person deriving title from, through or under that person.

(5) 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;

(b) require a claim to be evidenced and quantified by reference to such records and other documents as may be so specified;

(c) require the claimant to keep, for such period and in such form and manner as may be so specified, those records and documents and a record of such information relating to the claim and to subsequent payments by way of consideration as may be so specified;

(d) require the repayment of a refund allowed under this section where any requirement of the regulations is not complied with;

(e) require the repayment of the whole or, as the case may be, an appropriate part of a refund allowed under this section where the claimant subsequently receives any payment (or further payment) by way of the consideration written off in his accounts as a bad debt;

(f) include such supplementary, incidental, consequential or transitional provisions as appear to the Commissioners to be necessary or expedient for the purposes of this section;

(g) make different provision for different circumstances.

(6) The provisions which may be included in regulations by virtue of subsection (5)(f) above may include rules for ascertaining—

(a) whether, when and to what extent consideration is to be taken to have been written off in accounts as a bad debt

(b) whether a payment is to be taken as received by way of consideration for a particular supply;

(c) whether, and to what extent, a payment is to be taken as received by way of consideration written off in accounts as a bad debt.

(7) The provisions which may be included in regulations by virtue of subsection (5)(f) above may include rules dealing with particular cases, such as those involving part payment or mutual debts; and in particular such rules may vary the way in which the following amounts are to be calculated—

(a) the outstanding amount mentioned in subsection (2) above, and

(b) the amount of any repayment where a refund has been allowed under this section.

(8) No claim for a refund may be made under subsection (2) above in relation to a supply as regards which a refund is claimed, whether before or after the passing of this Act, under section 22 of the [1983 c. 55.] Value Added Tax Act 1983 (existing provision for refund in cases of bad debts).

(9) Section 22 of that Act shall not apply in relation to any supply made after the day on which this Act is passed.

(10) Sections 4 and 5 of that Act shall apply for determining the time when a supply is to be treated as taking place for the purposes of construing this section.

(11) That Act shall be amended as follows—

(a) in section 39(1A)(b) after the word "above" there shall be inserted the words "or section 11 of the Finance Act 1990";

(b) in section 40(1)(f) after the words "section 22 above" there shall be inserted the words "or section 11 of the Finance Act 1990".

(12) In section 13(2) of the [1985 c. 54.] Finance Act 1985, the word "and" at the end of paragraph (b) shall be omitted and after paragraph (c) there shall be inserted the words "and

(d) a refund under section 11 of the Finance Act 1990,"."

25. The new scheme was different in kind from the old scheme: it was now essentially time-based. Although the 1990 Act repealed section 22 of VATA 1983 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. The importance of the new scheme was that it did away with the insolvency condition, replacing it with a system based on writing off of the debt in accounts, coupled with a timing condition. The property condition remained, for the time being, in subsection (4)(b).
26. 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. A subsection (3A) was subsequently inserted to deal with consideration which was not in money, in order to meet the judgment in Goldsmiths which had ruled that the exclusion of non-monetary consideration from the old scheme was contrary to EU law. The section was also amended by section 39(1) of the Finance Act 1997 in relation to supplies after 19 March 1997 to remove the property condition.
27. Paragraph 9(1) of Schedule 13 to VATA 1994, "Transitional Provisions and Savings", provided that:

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

28. Paragraph 9(2) of Schedule 13 provided that claims for refunds of VAT may not be made in accordance with section 36 if relating to supplies made before 1 April 1989 or "any supply as respects which a claim is or has been made under section 22 of [VATA 1983]".
29. 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 18 July 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."
30. Section 83 contains a list of the matters in respect of which an appeal lies to the First-tier tribunal. Sub-paragraph (b) relates to "the VAT chargeable on the supply of any goods or services…". Sub-paragraph (h) relates to "a claim for a refund under section 36 or section 22 of the 1983 Act" and sub-paragraph (t) to "a claim for the repayment of an amount under section 80".
31. 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).
32. 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 ending of the old scheme

33. 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".
34. 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. …"

35. The last identified change was to "cancel the VAT Regulations covering the old (pre-1990) scheme of Bad Debt Relief". 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).
36. 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(5) which I have referred to above. It brought the shutters finally down on any old scheme claim for bad debt relief in respect of supplies prior to 26 July 1990.

GMAC's claim to bad debt relief

37. GMAC's claim for bad debt relief was first made in a letter to HMRC dated 20 February 2006. In that letter, Mr Mason, who was GMAC's VAT manager, explained that he was writing in relation to GMAC's ability to claim VAT bad debt relief on hire purchase agreements prior to the changes made to section 36 of the VATA1994 effective from 20 March 1997. He explained that GMAC maintained that it had an entitlement to VAT bad debt relief prior to 20 March 1997 both under the old scheme, effective from 2 October 1978, and under the new scheme, effective from 1 January 1990. He explained that GMAC's right to make such an adjustment, which they were not quantifying at that stage, was based upon their interpretation of European VAT law.
38. The letter recognised that where a customer under a hire purchase contract was in default, GMAC was able to repossess the goods and make a VAT price adjustment. That principle had been established by the decision of Field J in Customs and Excise Commissioners v General Motors Acceptance Corporation [2004] EWHC 192 (Ch). However a debt could remain even after repossession, and whilst it had been possible to recover VAT by way of a bad debt relief claim based on this debt from 19 March 1997/1 May 1997, section 36(4)(b) of the Act specifically excluded hire purchase contracts from eligibility for bad debt relief prior to that date. Basing itself on Goldsmiths the letter contended that section 36 did not implement correctly article 11C(1) of the Sixth VAT Directive and was disproportionate and distortive. The letter continued:

"In our opinion, there is no time limit that currently precludes the making of Bad Debt Relief claims in respect of supplies made between the first introduction of a Bad Debt Relief regime from 2 October 1978 to 1 May 1997. The claim therefore falls outside section 80 ("Credit for, or repayment of, overstated or overpaid VAT") because, in principle, it does not relate to an overpayment of VAT (that is, a payment by way of VAT that was not VAT due to the Commissioners at the time)."

39. The letter went on to request a written decision from HMRC. HMRC responded substantively to Mr Mason's letter by a letter of 18 July 2006. HMRC contended that the ability to make a claim under section 22 of the VAT Act 1983 was removed by section 39(5) of the Finance act 1997 with the effect that no claim could be made under the 1983 Act after 19 March 1997. Accordingly GMAC would be able to make a claim under section 36 of the VATA 1994 in relation to supplies made on or after 1 April 1989 (providing the conditions of section 36 were met) but only where the consideration for the supply became due before 1 May 1997. No claim was available for supplies made prior to 1 April 1989. As to the Property Condition, HMRC replied as follows:

"The Department does not accept that the property condition was ultra vires. Article 11C allows member states to set their own conditions in application of article 11C. The property condition was a valid condition of the kind that member states are entitled to set."

40. HMRC subsequently requested GMAC to quantify its bad debt relief claim. That request was complied with by a letter dated 31 March 2008 from its accountants KPMG. The quantified claim from 1978 to 1996 was £2,302,743.

The grounds of appeal

41. There are four grounds of appeal:

Ground 1: Does section 39(5) bar GMAC's claim for supplies which took place before 1 April 1989?

Ground 2: Is GMAC's EU law based claim no longer live, because it has not exercised its EU law right within a reasonable time?

Ground 3: Is the Property Condition inconsistent with EU law?

Ground 4: Is the Insolvency Condition inconsistent with EU law?

42. By a respondent's notice GMAC contend that there are alternative methods of giving effect to GMAC's EU law rights which did not fall foul of section 39(5).
43. At the outset of the appeal we indicated that we considered it more convenient to consider grounds 3 and 4 before grounds 1 and 2, and the parties addressed us in that order. I follow that approach in this judgment.

Grounds 3 and 4: Are the property and/or insolvency conditions inconsistent with EU law?

Legal principles

44. On its face, the second subparagraph of Article 11C(1) of the Sixth VAT Directive gives member states the power to derogate entirely from the obligation to reduce the taxable amount, provided that the derogation is limited to the cases of total or partial non-payment. If it is possible to have no system at all for total or partial non-payment, one might think that a system which excluded it in certain classes of case, but otherwise permitted it would be unobjectionable. That is not, however, how the jurisprudence in this area has developed, and is not the case advanced by HMRC.
45. In Goldsmiths, the taxpayer made supplies of jewels to RRI in exchange for advertising services rather than money. On RRI's insolvency before it had supplied all the services to which the taxpayer was entitled, the taxpayer made a claim for bad debt relief. The claim was refused by the Commissioners on the basis of section 11 of the Finance Act 1990 (see above) which provides that the consideration for the supply must be in money. The CJEU was asked by the Value Added Tax Tribunal, whether the derogation contained in Article 11C(1) of the Sixth VAT Directive permitted "a member state which enacts provisions for the refund of tax in the case of bad debts to exclude relief where the consideration lost consists of something other than money."
46. The essence of the court's ruling is contained in paragraphs 14 to 18 of its judgment. Although I have already cited paragraph 18, I repeat it here:

"14. In order to answer that question, it should be borne in mind that Article 11A(1)(a) of the Sixth Directive provides, with a view to harmonizing 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 (Case 230/87 Naturally Yours Cosmetics v Commissioners of Customs and Excise [1988] ECR 6365, paragraph 16) 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 (Case C-317/94 Gibbs v Commissioners of Customs and Excise [1996] ECR I-5339, paragraph 24).

16. In accordance with that principle, the first subparagraph of Article 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 subparagraph of Article 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 harmonization pursued by the Sixth Directive."

47. The points to note from that passage are the following. First, the principle that the amount chargeable is "everything which constitutes the consideration which has been or is to be obtained" is regarded as a fundamental principle of the Sixth Directive. There is nothing novel in that proposition: see Case C-317/94 Elida Gibbs Ltd v Customs and Excise Commissioners [1996] STC 1387 at paragraphs 26-29. Its objective is to achieve a harmonised approach to the taxable amount. Secondly, that fundamental principle is supported by the first subparagraph of Article 11C(1) which defines cases in which the taxable amount is to be reduced. These cases are cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place. They are all cases where the consideration for the supply turns out to be less than originally specified. Thirdly, the second subparagraph allows member states a power of derogation from the first subparagraph (and thus from the fundamental principle) limited to the case of total or partial non-payment. Fourthly, the power to derogate is based on the notion that, in the member state concerned, total or partial non-payment "may be difficult to establish or only be temporary". Fifthly, the court concluded that, in order that the objective of fiscal harmonisation is not undermined, the exercise of the power to derogate must be justified.
48. The court in Goldsmiths went on to consider whether the justification put forward by the United Kingdom - that there is a greater risk of evasion where the unpaid consideration is not expressed in money – was acceptable. The court held it was not acceptable for two reasons. Firstly, measures to prevent evasion were not permitted to derogate from the basis of charging VAT laid down in the Directive except within the limits strictly necessary for achieving that specific aim, citing Case C-324/82 EC Commission v Belgium [1984] ECR 1861. By systematically excluding all transactions in which the consideration is not expressed in money from the refund of VAT, the legislation altered the taxable amount for that class of transactions in a manner which went "beyond what is strictly necessary in order to avoid the risk of tax evasion." It extended to entirely genuine barter transactions, of which the taxpayer's activities were accepted to be an example. Secondly, the court considered that the transactions where the consideration was in money and transactions where the consideration was in kind were economically and commercially identical. The refusal to refund VAT where consideration payable in kind is not paid in whole or in part represented discriminatory treatment.
49. The reasoning of the court is expressed in the well-established language of proportionality and fiscal neutrality. In particular, despite the general power to derogate in the case of total or partial non-payment, the legislation of a member state which avails itself of the power must satisfy a proportionality test in EU law. It does not appear that the exercise of the power is limited to the circumstances identified in paragraph 18 of the court's judgment – temporary or difficult to establish – because the court went on to examine whether the UK's legislation went no further than was necessary for a different purpose – prevention of evasion. In any case, therefore, the measure must be necessary and appropriate for the attainment of the specific objective which is pursued by the legislation and no more than is required to achieve that specific aim.
50. For what is involved in the proportionality assessment we were referred to Joined Cases C-37/06 and C-58/06 Viamex Agrar Handels GmbH and another v Hauptzollamt Hamburg-Jonas. Having explained that the principle of proportionality must be observed both by the Community legislature and by the national legislatures and courts which apply Community law, it said:

"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)."

51. Although paragraph 36 in that judgment is expressed in terms of testing EU institution measures, the "manifestly inappropriate" test is also the appropriate test for testing national measures implementing EU law: see R (Lumsdon) v Legal Services Board [2015] UKSC 41; [2015] 3 WLR 121 at [73] and [78] to [79] per Lords Reed and Toulson JJSC.
52. In Case C-337/13 Almos Agrárkülkeskedelmi Kft v Nemzeti Adó-és Vámhivatal Közép-magyarországi Regionális Adó Foigazgatósága ("Almos") the taxpayer, a Hungarian undertaking, had sold and delivered a quantity of rapeseed to a customer who then failed to pay for it. The parties then agreed that the property in the rapeseed remained in Almos, and that the rapeseed was to be returned by a fixed date. Before the fixed date arrived the goods were seized, whereupon Almos brought an action for the return of the rapeseed, or its price. Almos, having received no consideration, sought to recover the VAT paid on the transaction. The Hungarian tax authority declined the repayment. Hungarian law required VAT to be paid on the supply of goods. Although the law contained provisions for relief in some circumstances, these did not include simple non-payment. The Hungarian court asked the CJEU a variety of questions, some of which the court considered strayed into the exclusive area of competence of the national court. One of the questions, that numbered (2) at paragraph 17 of the judgment, was:

"… is the taxable person entitled, in the absence of national legislation, to reduce the taxable amount, on the basis of the principles of tax neutrality and proportionality, and in the light of Article 90(1) of the VAT Directive, where it receives no consideration on completion of a transaction?"

53. However, at paragraph 20 the court interpreted two of the questions (those numbered (1) and (5)) as asking in essence:

"… whether the provisions of Article 90 of the [Principal VAT Directive] require that the national provisions which transpose them expressly list all of the situations conferring entitlement, according to paragraph 1 of that article, to a reduction in the taxable amount for VAT."

54. The answer which the court gave at paragraph 28 was:

"… The provisions of Article 90 of the [Principal VAT Directive] must be interpreted as not precluding a national provision which does not provide for the reduction of the taxable amount for VAT in the case of non-payment of the price if the derogation provided for in Article 90(2) is applied. However, that provision must then mention all the other situations in which, under Article 90(1), after a transaction has been concluded, part or all of the consideration has not been received by the taxable person, which is a matter for the national court to ascertain."

55. The court therefore specifically concerned itself only with a narrow question, namely whether legislative silence in respect of non-payment could amount to a derogation. The answer was that it could be a derogation, but the adoption of this legislative approach made it important to ensure that the other situations mentioned in Article 90(1) from which the member state is not permitted to derogate are all expressly mentioned.
56. However, it is the intervening paragraphs, particularly paragraphs 23 and paragraph 25, which have attracted particular attention in this case. Thus the court, in paragraph 23, says:

"… Article 90(2) permits Member States to derogate from the above-mentioned rule in the case of total or partial non-payment of the transaction price. Hence taxable persons cannot rely, under Article 90(1) of the VAT Directive, on a right to a reduction of the taxable amount for VAT in the case of non-payment of the price if the member state concerned intended to apply the derogation provided for in Article 90(2) of that directive." (emphasis supplied)

57. At paragraph 25 the court said:

"… if the total or partial non-payment of the purchase price occurs without there being cancellation or refusal of the contract, the purchaser remains liable for the agreed price and the seller, even though no longer proprietor of the goods, in principle continues to have the right to receive payment, which he can rely on in court. Since it cannot be excluded, however, that such a debt will become definitively irrecoverable, the European Union legislature intended to leave it to each member tate to determine whether the situation of non-payment of the purchase price, which, of itself, unlike cancellation or refusal of the contract, does not restore the parties to the original situation, leads to entitlement to have the taxable amount reduced accordingly under conditions it determines, or whether such a reduction is not allowed in that situation."

58. The CJEU in Almos went on to consider a further series of questions which it interpreted as asking the court what rights the taxable person could rely on "in the event that [the national court] were to consider, other than in the case of non-payment of price, that the national provisions at issue in the main proceedings do not correctly transpose the provisions of Article 90(1) of the VAT Directive." The court went on to explain, at paragraph 34, that the provisions of Article 90(1), despite granting member states a margin of discretion, were sufficiently precise and unconditional to have direct effect. Thus, in contrast to provisions about reduction for total or partial non-payment, "taxable persons may rely on Article 90(1) of the VAT Directive before national courts against the State to obtain a reduction in the taxable amount for VAT."

The Tribunals' decisions on grounds 3 and 4

59. The property condition was considered by the FTT at paragraphs 59 and 61 of its determination. It held that the property requirement went beyond what was appropriate or necessary to achieve the aims identified by the CJEU at paragraph 18 of Goldsmiths. It also accepted a submission that the property condition produced an unjustified difference in treatment of HP transactions compared with credit sales, and resulted in irrational differences in treatment depending on the circumstances of the default.
60. The Upper Tribunal considered this issue in paragraph 88 of its decision:

"As to the Property Condition, we do not understand what the justification for this is said to be nor how it is any more or less difficult to say that a debt is a bad debt depending on whether property has passed or not. Even if the principle of proportionality has no part to play, and even if there is no issue of breach of the principles of fiscal neutrality or non-discrimination, we do not consider that there can be one policy in relation to cases where property has passed and another policy in cases where property has not passed, given that both policies must derive from the same requirement to justify the derogation. Further, given the basis for the power to derogate stated in [18] of the judgment in Goldsmiths, such a derogation would not satisfy the principle of proportionality. Accordingly assuming that this is a matter for the national court, we consider that the property condition was not authorised by the power to derogate."

61. The FTT dealt with ground 4 at paragraphs 59 and 60 of its determination. It considered that the insolvency condition did not meet the aims identified in Goldsmiths at paragraph 18. It added:

"Unless another creditor instituted bankruptcy proceedings, the insolvency requirement involved GMAC taking action which it regarded as uncommercial. It is a statement of the obvious that the institution of bankruptcy proceedings could frequently involve incurring costs exceeding the debt recovered, particularly if there was difficulty in tracing the defaulter. It is also a statement of the obvious that if the insolvency requirement was a substantial obstacle for a large company such as GMAC recovering debts which could often be substantial, it was an even greater obstacle for a small trader such as a shopkeeper or a builder."

62. The UT addressed the point at paragraphs 84 to 91 of its determination in similar terms. They also considered that it was not justifiable to exclude from bad debt relief debts owing by an individual which did not exceed the statutory minimum. Separately, they considered that the requirement actually to prove in the insolvency was manifestly disproportionate in the case of a small debt.

The judgment in BT CA on ground 4

63. The property condition was not the subject of this court's decision in BT CA because BT's contracts did not include such a term. HMRC's attack on the insolvency condition in BT CA is dealt with at paragraphs 62 to 73 of the judgment of Rimer LJ, with whom Kitchin and Christopher Clarke LJJ agreed. HMRC are recorded as making five points in support of their contention that the UT were wrong in their conclusion that the insolvency condition was unlawful. These were: (1) that the second subparagraph of Article 11C(1) of the Directive conferred a discretionary power to derogate under which member states have a margin of appreciation; (2) members states were therefore at liberty to configure bad debt 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 is not available in all cases; (4) the UK scheme had a purpose which was consistent with the permitted purposes of the derogation; (5) taken as a whole it was proportionate.
64. Rimer LJ considered that that the real question under this ground was whether the imposition of the insolvency condition was consistent with the permitted purpose of the power of derogation and/or whether, taken as a whole, it was proportionate. The attack on the decision of the UT was that although it considered that the insolvency condition went too far, it made no attempt to identify what lesser measure could have been adopted. An analogy of sledgehammers and nuts featured in the argument. Rimer LJ expressed his conclusions at paragraphs 71 and 72 of his judgment:

"71. … 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."

65. Earlier in the judgment, at paragraph 59, when dealing with the question of whether Article 11C(1) satisfied the conditions for direct effect, Rimer LJ dealt with the power of derogation in the second subparagraph of Article 11C(1):

"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."

HMRC's submissions on grounds 3 and 4

66. Mr Beal submitted that the Almos case showed that a member state could derogate entirely from the total or partial non-payment provision of Article 11C(1), and that if it did so its decision would not be subjected to any proportionality assessment. He accepted that this was not what the UK had done in the present case. What had occurred was a partial derogation. However he submitted that it was not possible against this background to regard the right to bad debt relief as untrammelled, because that would put in place an entitlement which the EU legislature had recognised could be overridden. Thus any proportionality test to be applied in the case of a partial derogation was to involve only a very light touch.
67. In developing his submissions, Mr Beal relied on Case-390/12 Robert Pfleger and others at paragraphs 39-45, for the proposition that the exercise of a power of derogation did not cease to be proportionate because other member states had adopted less restrictive measures in the same area. The derogation needed to be judged solely by reference to the objectives pursued by the competent authorities of the member state concerned and the level of protection which they seek to ensure. In the particular area concerned in that case, the organisation of games of chance, national authorities enjoyed a significant margin of discretion.
68. Mr Beal also relied on Case C-550/11 PIGI v Direktor [2013] STC 272, a case concerned with the input side of the VAT equation which is now regulated by Article 185 of the Principal VAT Directive, and which requires adjustment to returns where there is a cancellation or price reduction in connection with a purchase. Article 185(2) derogates from that requirement in the case of "theft … duly proved" except where a member state opts in and requires a reduction in the case of theft. Bulgarian law had taken advantage of the opt in. In the court's view this allowed the authorities to require a reduction, even where the theft was not conclusively proved by identifying the perpetrator. So, Mr Beal submits, it was not open to the taxpayer to set up an untrammelled right, limiting a reduction to the case of theft duly proved. Once the right is subject to a derogation, one has to look more widely to find grounds for challenging its exercise.
69. Mr Beal drew attention to the unusual nature of a hire purchase agreement, where property does not pass until the final payment. Where the customer defaults, and the goods are repossessed and sold, there has been no transfer of title, but an outstanding debt will normally remain. He submitted that this raised temporal issues concerning how one reduces for non-payment the sums that would otherwise be due. The outstanding debt is not really anything to do with the value of the goods supplied, but represents a charge for services or for the time value of money. The "murky boundaries" between the supply of goods and the supply of services justified a differential treatment for bad debt relief purposes. He also submitted that Parliament was entitled to exercise its power of derogation to carve out retention of title cases for differential treatment, because they were different from cases where title passed.
70. Mr Beal's argument against the insolvency condition is based on the premise that EU law has moved on in a significant way since the decision in BT CA because of the decision in Almos. He submits that an analysis of the reasoning in BT CA shows that it is based on the existence of an untrammelled right to bad debt relief, whereas Almos showed that a member state was entitled to derogate from the requirement to provide a reduction in the case of total or partial non-payment. The insolvency condition provided a bright line test, which traded off the fact that certain bad debts would be irrecoverable on the one hand with certainty on the other. It was equivalent to a de minimis threshold. Parliament had been entitled to balance these considerations in devising the scheme.
71. Finally Mr Beal drew our attention to Article 233 of the Community Customs Code. That Article commences:

"Without prejudice to the provisions in force relating to the time-barring of a customs debt and non-recovery of such a debt in the event of the legally established insolvency of the debtor, a customs debt shall be extinguished:"

72. The article continues by reciting a number of circumstances in which the debt is treated as extinguished. Mr Beal submits that there can be nothing untoward in the adoption of insolvency of a debtor as a criterion for the recoverability of a debt when this code expressly appears to recognise it.

GMAC's submissions

73. We were not assisted by the fact that GMAC's skeleton argument simply declined to deal with the arguments advanced on behalf of HMRC on these grounds, beyond saying that they supported the decisions of the Tribunals below and BT CA. Given that the Almos case was decided after the decision of the UT and the judgment of this court in BT CA, this response was obviously going to be inadequate. Parties should not expect the court to be prepared to listen to arguments which they have declined to address in their skeletons. Nevertheless, as we accepted Mr Cordara's apology, and as Mr Beal did not suggest he had been prejudiced by GMAC's reticence, I will move on.
74. Mr Cordara submitted that it was clear from Goldsmiths that derogations from the fundamental principle enshrined in Article 11A(1)(a) were to be subjected to a proportionality assessment. There was, he submitted, no error in the manner in which this issue had been addressed by the FTT or the UT. Their judgments were multi-factorial, evaluative assessments by specialist tribunals with which this court would not normally interfere.
75. Mr Cordara also submitted that Almos does not advance HMRC's position. The question answered by the CJEU in Almos was concerned and concerned only with whether the power to derogate could be exercised by silence in national legislation. The court did not, but did not need to, go further and explain that if the power to derogate was to be exercised it must satisfy a requirement of proportionality. There is no indication in the report of the case that the Hungarian measure was the subject of a proportionality challenge. Had the court been intending to make any adjustment to what it had said in Goldsmiths it would have been unlikely to have dispensed with an Opinion from an Advocate General.

Discussion ground 3 and 4

76. It is important to distinguish at the outset between the scope of a power and the rationale for its existence. It is clear from the decision in Almos that the power to derogate contained in the second sub-paragraph of Article 11C(1) is wide enough in scope to allow a member state to decline to provide a scheme for the reduction of the taxable amount in the case of total or partial non-payment. As the court said in that case "taxable persons cannot rely, under Article 90(1) of the VAT Directive, on a right to a reduction of their taxable amount for VAT in the case of non-payment of the price if the member state concerned intended to apply the derogation provided for in Article 90(2) of that directive."
77. On the other hand, the rationale for the existence of the power to derogate was said by the CJEU in Goldsmiths to be the fact that total or partial non-payment may be difficult to establish or only temporary. Although of course the rationale is highly relevant to the legality of the exercise of the power, the rationale does not limit the scope of the power. Indeed it is difficult to see how one could fashion a national scheme which only disallowed a reduction in cases where the non-payment was difficult to establish or temporary. Rather, as it seems to me, what the European legislature is recognising by the second subparagraph of Article 11C(1) is that the fact of non-payment may not necessarily demonstrate a reduction in the consideration received by the supplier, because non-payment and reduction of consideration are not at all the same thing. A member state may therefore decide that total or partial non-payment is not to be treated as giving rise to a reduction in consideration and therefore a relief against VAT.
78. It follows that I agree with Mr Beal that Almos recognises that a member state may decline to implement a system of relief for non-payment altogether, notwithstanding that this will result in the refusal of relief for debts which are genuinely bad debts. No justification would be required for a wholesale derogation beyond that explained in Goldsmiths. It does not follow, however, that if a member state does decide to implement a partial system of relief for non-payment, its exercise of the power to derogate can escape scrutiny.
79. It is not without significance that the questions asked of the court in Goldsmiths were in part concerned with whether the power to derogate was "all or nothing", thereby, without more, excluding the partial derogation which had occurred in that case. The court does not seem to have expressed a view on that suggestion, but its view that the derogation has to be "justified" has to be understood in the context that it was a partial derogation which was under consideration in that case. By implementing a partial system of relief for non-payment the member state is recognising that there is nothing inherently problematic in general with granting such relief. In that context the member state must put forward something which justifies the partial exercise of the power to derogate. An example of such justification might be that, in the area covered by the derogation, it is more than usually difficult to identify whether a bad debt exists. The fact that a member state may derogate entirely in the case of total or partial non-payment does not mean that it can exclude from relief particular classes of case for reasons which have nothing to do with whether it is difficult to identify whether a bad debt exists. If it were able to do so the objectives of the Directive would be undermined.
80. The property condition does not only have the effect of excluding from relief all bad debts incurred in connection with hire purchase agreements. It goes further and excludes relief in the case of any contract for the supply of goods which contains a Romalpa (retention of title) clause. So the question one has to ask is not, as Mr Beal suggested, whether there is something special about bad debts in the field of hire purchase which justifies their exclusion from the scheme, but whether one can justify the exclusion of all supplies of goods where title is retained.
81. Like the UT and the FTT, I do not understand how such an exclusion can be appropriate or necessary. The justification suggested in Goldsmiths at paragraph 18 – difficult to establish or temporary– cannot apply. It is no more difficult to establish that a hire purchase agreement has given rise to a bad debt than it is in the case of any other debt.
82. HMRC's only other attempted justification is based on the existence of murky conceptual boundaries between supplies of goods and services, and between supplies of goods and the time value of money. I do not see how these categorisation problems assist. As I said at the outset of this judgment Article 5(4)(b) of the Sixth VAT Directive implemented by paragraph 1 of Schedule 4 of VATA 1994 provides that if the possession of goods is transferred under an agreement for the sale of goods or under a hire purchase agreement, it is a supply of goods. The categorisation problem is thus solved by the Directive, and cannot be advanced as a reason for excluding bad debt relief in this category of supplies of goods.
83. I would accordingly hold, in agreement with both the FTT and the UT, that the property condition is not in accordance with EU law, and falls to be disapplied.
84. HMRC's argument in support of the insolvency condition relies on the suggestion that the law has moved on significantly since the decision of the CJEU in Goldsmiths, the decision of the UT in this case and the decision in BT CA. However I do not consider that Almos represents the paradigm shift for which Mr Beal contends. Almos certainly makes clear that a member state is free to decline to implement any system of relief for total or partial non-payment. It is entitled to take the view that such debts are "difficult to establish or only temporary", because the creditor retains the right to sue. As I have explained, justification in cases of wholesale derogation is a comparatively straightforward matter. Where on the other hand the member state has no inherent objection to allowing relief for total or partial non-payment in general, it will need to justify any restriction on the right to claim it in particular classes of case. I see nothing in Almos, which concerned a wholesale derogation (if there had been a derogation at all) which contradicts the need for such justification. If it had been intended to contradict or qualify the views expressed so clearly in Goldsmiths, I have no doubt that it would have done so expressly.
85. I would therefore be very hesitant to depart, on the ground of a subsequent change in EU law, from this court's decision in BT CA. But even freed of authority in this court, I would reach the same conclusion as was reached in BT CA.
86. It is important to recognise that we are concerned with the insolvency condition enacted in the old scheme. We are not concerned with the abstract question of whether the ability of a debtor to pay his debts could form a justifiable criterion for bad debt relief. The vice in the insolvency condition enacted within the old scheme lies not in the adoption of that criterion, but in the detail of what the condition requires, and the practical consequences of that detail. Through its definition of insolvency, the condition in the old scheme requires legal proceedings to have been taken to obtain the bankruptcy of an individual debtor or the winding up of a company. Such proceedings would simply not be justified in the case of small debts, and would not be available at all for debts owed by individuals below the bankruptcy limit. The result is that entire classes of bad debt claims are excluded from relief, when there is no reason to suppose that they are not genuine bad debts.
87. The debts in the present case were more substantial than those in BT. Nevertheless the evidence was that in 90-95% of repossessions by GMAC there was no bankruptcy or insolvency. The vast majority of customers were individuals. In very large part the insolvency condition could not be satisfied as a matter of business practice. Plainly in the case of smaller traders, or large traders whose business depends on small debts, the obstacles would be yet greater. Such wholesale inroads into the right to relief, which is intimately connected to the right to be taxed on the consideration actually obtained, cannot sensibly be justified on the basis that it is the unintended consequence of the adoption of a convenient bright line test.
88. I also cannot agree that the insolvency condition is a form of de minimis test. The de minimis principle applies where it is wrong for the law to intervene to deal with trifling matters. That rule cannot be said to apply to a trader, such as GMAC or BT, for whom the insolvency condition is practically impossible to satisfy in relation to the vast majority of its bad debts, which are plainly substantial in aggregate. I also do not think that the fact that a customs debt is treated as extinguished upon the legally established insolvency of the debtor under the Community Customs Code throws any light on the necessity or appropriateness of this measure.
89. I do not think that this is a case which turns on the precise level at which one scrutinises the exercise of the power to derogate. Whether one adopts Mr Beal's light touch or a heavier hand, the inroads into the article 11C(1) right created by the insolvency and property conditions cannot satisfy the EU law requirements of appropriateness and necessity. I therefore have no difficulty with the FTT and UT's conclusions that the property and insolvency conditions were not proportionate. I would dismiss HMRC's appeal on grounds 3 and 4.

Ground 1: Does section 39(5) bar GMAC's claim for supplies which took place before 1 April 1989?

Legal principles

90. The principle legal issue under this head, at least as seen by the UT, is whether section 39(5) fell to be disapplied so as not to affect GMAC's exercise of its EU law rights. This involved a consideration of the circumstances in which, in accordance with EU law, a member state may withdraw a taxation regime. The principles are discussed in BT CA at paragraphs 94 onwards. I will do no more than summarise those which are important here.
91. A member state may change a discretionary legal regime (such as an option to treat leases for taxation purposes as immovable property) as long as legitimate expectations of those affected by the change are protected, such as by the provision of information or by an adequate transitional period. EU law is however broken where a member state suddenly and unexpectedly withdraws such a regime without allowing persons affected the time to adjust: Gemeente Leusden and Holin Groep BV cs v Staatssecretaris van Financien (Joined cases C-487/01 and C-7/02) at [69] to [70].
92. A legitimate expectation cannot be claimed if a prudent and circumspect operator had sufficient information to expect that a scheme (such as the old scheme) could be withdrawn. This proposition is to be found in the decision of the CJEU in Plantanol GmbH & Co KG v Hauptzollamt Doemstadt Case C-201/08, [2009] ECR I-8343. It is worth setting out the following from the judgment of the court:

"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-6911, 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)…

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.

93. In Marks & Spencer plc v Commissioners of Customs and Excise Case C-62/00 the CJEU considered the imposition of a time limit which acted retrospectively to remove accrued rights. The case was concerned with the time limit in section 24 of the Finance Act 1989 (re-enacted in section 80 of VATA 1984) which requires that claims for repayment of VAT not due should be made within six years from the date on which the VAT was paid. On 18 July 1996 the government announced in Parliament without previous warning that the period was to be reduced to three years with immediate effect. The purpose was to prevent a rush of claims before the legislation could be put in place. When the legislation was put in place it provided, in section 47(2) of the Finance Act 1997, that it was deemed to have come into effect on 18 July 1996.
94. As an aside, the court first pointed out at paragraphs 22-27 that the referring court had proceeded on the mistaken premise that correct implementation of the provisions of a directive prevented individuals from relying on the direct effect of the directive before national courts, and that it was only when the directive had not been implemented, or had incorrectly implemented, that EU law rights could be so deployed. At [27] the court said:

"Consequently, the adoption of national measures correctly implementing a directive does not exhaust the effects of the directive. member states remain bound actually to ensure full application of the directive even after the adoption of those measures. Individuals are therefore entitled to rely before national courts, against the State, on the provisions of a directive which appear, so far as their subject-matter is concerned, to be unconditional and sufficiently precise whenever the full application of the directive is not in fact secured, that is to say, not only where the directive has not been implemented or has been implemented incorrectly, but also where the national measures correctly implementing the directive are not being applied in such a way as to achieve the result sought by it."

95. The court considered that the legislation breached the EU law principles of effectiveness and legitimate expectations. As to the principle of effectiveness, the court recognised at [36] that national legislation curtailing the time within which a claim must be made was, subject to certain conditions, compatible with EU law. One of these conditions was that the time set for its application must be such as to ensure that the right to repayment is effective. At [37] the court regarded it as plain that a provision which reduced the period for making claims from six to three years by providing that the new time limit is to apply immediately to claims made before the date of the enactment would not comply with that condition. The court went on, at [38], to say that national legislation reducing the time within which claims had to be made:

"is subject to the condition … that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right."

96. At [39] the court pointed out that "in order to serve their purpose of ensuring legal certainty limitation periods must be fixed in advance". The court likewise held at [46] that the principle of the protection of legitimate expectations applied so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes collected in breach of the Sixth Directive.
97. The House of Lords considered similar issues in Fleming (t/a Bodycraft) v HMRC [2008] UKHL 2. The case concerned claims for input tax repayment under regulation 29 of the Value Added Tax Regulations 1995. New regulations were introduced which removed the right to claim a deduction more than three years after the return date for the period in which the VAT became chargeable. Given that the amendment had the potential to interfere with vested rights, the question was whether this was permissible without the creation of a sufficient transitional period in which outstanding claims could be made. Lord Neuberger clearly considered that the transitional period could be created by communication from the administration rather than by legislation: see [103] – [104], and Lords Hope and Carswell agreed with Lord Neuberger. Lord Neuberger summarised the principles at paragraph [79] in the following way:

"It appears to me that the following relevant propositions can be derived from well-established principles of Community law and, more specifically, from the reasoning of the European Court of Justice ("the ECJ") in Marks & Spencer Plc v Commissioners of Customs and Excise (Case C-62/00) [2002] ECR I-6325 (known as Marks & Spencer II") and Grundig Italiana SpA v Ministero delle Finanze (Case C-255/00) [2002] ECR I-8003 (known as "Grundig II"):

a) It is open to the legislature of a Member State to impose a time limit within which a claim for input tax must be bought: Marks & Spencer II para 35;

b) It is further open to the legislature to introduce a new time limit, or to shorten an existing time limit, within which such a claim must be brought, even where the right to claim has already arisen (an "accrued right") when the new time limit (a "retrospective time limit") is introduced: Marks & Spencer II paras 37 and 38;

c) Any such time limits must, however, be "fixed in advance" if they are to "serve their purpose of legal certainty": Marks & Spencer II para 39;

d) Where a retrospective time limit is introduced, the legislation must include transitional provisions to accord those with accrued rights a reasonable time within which to make their claims before the new retrospective time limit applies: Marks & Spencer II para 38 and Grundig II para 38;

e) In so far as the legislature introduces a retrospective time limit without a reasonable transitional provision (as in Grundig II) or without any transitional provision (as in Marks & Spencer II), the national courts cannot enforce the retrospective time limit in relation to accrued right, at least for a reasonable period; otherwise, there would be a breach of Community law: see Autologic plc v Inland Revenue Commissioners [2006] 1 AC 118 paras 16 to 17;

f) The adequacy of the period accorded by the transitional provision ("the transitional period") is to be determined by reference, inter alia, to the principles of effectiveness and legitimate expectation: Marks & Spencer II paras 34 and 46, and Grundig II para 40; in particular, it must not be so short as to render it "practically impossible or excessively difficult" for a person with an accrued right to make a claim: Marks & Spencer II para 34, and Grundig II para 33;

g) It is primarily a matter for the national courts to decide whether the length of any transitional period is adequate, although the ECJ will give a view if the transitional period is "clearly" so short as to be inconsistent with Community law: Grundig II paras 39 and 40;

h) The absence of a transitional period of adequate length is not, however, automatically fatal to the enforcement of the retrospective time limit: Grundig II para 41;

i) Where there is no adequate transitional period, it is for the national court to fashion the remedy necessary to avoid an infringement of Community law: Marks & Spencer II para 34, Grundig II paras 33, 36, 40, and 41, Autologic paras 16 and 17, and the ECJ's decision in Metallgesellschaft Ltd and ors v Commissioners of Inland Revenue (Joined Cases C-397/98 and C-410/98) [2001] ECR I-1727, at para 85;

j) That remedy would, at least normally, be to disapply (perhaps only for a period) the operation of, the retrospective application of the new time limit to claims based on accrued rights: Marks & Spencer II paras 34 to 41, and Grundig II paras 38 to 40 and especially (with regard to temporary disapplication) para 41.

The Tribunals' decisions on ground 1

98. The FTT dealt with this issue at paragraphs 91-104 of its decision. The FTT noted (at [94]) that there was no time limit under the VAT legislation for making claims for bad debt relief under section 22 of VATA 1983 until the right to make such claims was terminated without transitional provisions by section 39(5) of the Finance Act 1997. The FTT concluded that there was an interference with a vested right to claim bad debt relief which had been taken away retrospectively without appropriate transitional provisions. Section 39(5) of the Finance Act 1997 therefore had to be disapplied.
99. Given that the FTT was of the view that the claim was one brought under section 22 of VATA 1983, it concluded that the appropriate jurisdictional gateway for the appeal before them was that provided by section 83(1)(h) of the VATA 1994: "a claim for a refund under section 36 or section 22 of the [VATA 1983]", and not the provisions for which GMAC contended in the alternative.
100. The UT dealt with this issue in paragraphs 160-216 and 234 of its decision. The UT agreed that the appropriate route to assert a directly enforceable EU law claim to bad debt relief is to make a claim under section 22 and relevant regulations, appropriately moulded as necessary to the EU law right. The UT also agreed that section 22 did not impose any time limit for the bringing of such claims. Such time restrictions as were imposed by the regulations were tied to the existence of proof in the insolvency, and therefore fell to be disapplied as well. The UT also agreed with the FTT's conclusion that the appropriate jurisdictional gateway was section 83(1)(h), and not sections 83(1) (b) or (t) (quoted above at 30), as GMAC had contended.
101. The UT then considered in paragraph 186 whether the bringing to an end of relief under section 22 by section 39(5) of the Finance Act 1997 automatically brought to an end GMAC's right under Article 11C(1) of the Directive to claim bad debt relief for the period in question. The UT concluded that it did have that effect. At paragraph 189 the UT concluded that the effect of section 39(5) was to bring to an end the possibility of claims in relation to directly enforceable EU rights in exactly the same way as it brought to an end claims which fell within the letter of section 22.
102. The UT then considered, from paragraph 190 of its decision, the question of whether it was necessary for the taxpayer to be given notice of the termination of the old scheme, and if so whether sufficient notice had been given. Having reviewed Fleming and the ECJ authorities of Gemeente Leusden and Plantanol, the UT concluded that the termination of the right to make a claim under section 22 without an adequate opportunity to make a claim would breach the EU law principles of effectiveness and legitimate expectations unless an adequate transitional period or period of adequate notice was provided for. The UT considered that the Budget News Release, the Budget Notice and the Finance Bill did not give adequate notice of the end of the old scheme so as to provide sufficient time for those with accrued directly enforceable rights to exercise them.
103. In the course of dealing with the facts, the UT noted that: (i) many of GMAC's claims to bad debt relief were ones which GMAC could have asserted under EU law "many years before the passing of the Finance Act 1997"; (ii) in relation to supplies made before 1 April 1989, many, if not most, directly enforceable claims to relief would have arisen well before 18 March 1997; (iii) there would, at least in theory and probably in reality, have been some bad debts which arose for the first time shortly before or even after 18 March 1997. The possibility of a bad debt arising for the first time shortly before that date could not be dismissed.

The decision in BT CA on ground 1

104. This issue was considered by this court in relation to BT in BT CA where the UT had reached similar conclusions to those it reached in relation to GMAC. The court came to a different view from the UT. Rimer LJ gave the leading judgment, Kitchin and Christopher Clarke LJJ adding short concurring judgments of their own.
105. I should first explain, however, that at paragraphs 57 to 61 the court rejected HMRC's argument that Article 11C(1) did not create directly effective rights. At paragraph 60, Rimer LJ said:

"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."

106. I do not think that what is said here requires qualification in the light of Almos. Rimer LJ acknowledged the power for member states to derogate in the case of total or partial non-payment. If the member state has not implemented article 11C(1) at all it cannot be said that it has chosen to derogate from it in the specific case of total or partial non-payment. Almos was concerned with whether a member state who has implemented Article 11C(1) to some extent can be said to have derogated by silence on relation to total or partial non-payment. The answer given by the CJEU was that it could, provided that the cases where no such power existed were expressly provided for.
107. In relation to the issue at hand, Rimer LJ accepted a submission made by counsel for HMRC, 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. He also accepted 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 that case BT. He regarded the essential question to be whether BT was 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. 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. 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 belatedly to make such claims during the remaining years of the 1990s in which the old scheme machinery remained on the statute book. In making good such claims BT would have had to show that the insolvency condition was incompatible with its EU law rights, but he considered that the case had to be approached on the basis that it could and would have done so. The only reason BT did not make such claims was because it was unaware that it was open to it to do so. Rimer LJ continued at paragraph 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."

HMRC's submissions on ground 1

108. Mr Beal submitted that the reasoning and conclusions of the Court of Appeal in BT CA applied to GMAC's claim as well. Like BT, GMAC has had the opportunity since 1978 to enforce its directly effective rights in respect of each and every bad debt as it arose and was entitled to claim in doing so that the relevant UK legislative provisions were invalid. Like BT, if at the time of the introduction of the new scheme GMAC had any expectations as to the future of the legislation relating to pre-1 April 1989 claims, it would, as a prudent and circumspect operator, have foreseen their eventual repeal.
109. Mr Beal further submitted that even in the case of a hypothetical 60 month contract (the longest term of any contract GMAC used) entered into on the latest relevant date, 31 March 1989 (which would therefore end in March 1994) and in relation to which the default giving rise to the directly effective EU law claim occurred right at the very end of the period of the agreement, GMAC would still have had three years (more if the default occurred earlier) in which to make a claim. During that period, and indeed from the dawn of the new scheme in 1989, a circumspect and diligent taxpayer would appreciate that claims for bad debt relief on supplies made before 1 April 1989 were in a period of run-off and would eventually be abolished. Four months actual notice of the abolition of the scheme was, in those circumstances, adequate notice.
110. He submitted, congruently with the approach of this court in BT CA, that the present case must be approached on the basis that GMAC could have brought a claim to relief, challenging the compatibility of the property and insolvency conditions. The susceptibility of VAT legislation to EU law challenges could be seen from the fact that the challenge in the Goldsmiths case dated from June 1993, well before the coming into force of section 39(5).
111. Mr Beal recognised that there were factual differences between GMAC's claims and those of BT. BT's claims all crystallised soon after 1 April 1989 and were likely to have been statute barred well before 1997, whereas a default occurring at the very end of a 60 month contract which commenced on 1 April 1989 would, by comparison, be a much more recent default. He also accepted that the claim in the present case was made sooner than that in BT: it was made in February 2006 as opposed to some time in 2009. Nevertheless, he submitted that the fact of total or partial non-payment of the debts should have been apparent by mid to late 1994, yet the claim based on the directly enforceable right to relief for total or partial non-payment was not made until nearly 12 years later.
112. As to Marks & Spencer and cases which followed it, Mr Beal submitted that the present case is not one where rights were removed without prior notice, and with no transitional arrangement, thereby rendering the exercise of rights impossible. The whole of the period from the beginning of the new scheme, during which the right to claim under the old scheme was preserved, was a transitional period. There followed a period of express notice of the ending of the transitional arrangement. Moreover there was an important difference in terms of expectations between the reduction of an existing limitation period as in Marks & Spencer, where taxpayers are entitled to assume that they can delay their claims to the end of that original period, and the present case where the prudent and circumspect operator could, for a long period, foresee the ending of the scheme. Against that background, the four month period of notice of the change in legislation was adequate.
113. Mr Beal submitted that, correctly stated, the point was whether the exercise of GMAC's directly effective EU law right to relief for non-payment was rendered excessively difficult or virtually impossible by the abolition of pre-1 April 1989 claims as from 19 March 1997, when the EU law right in question had been enforceable for some time before that date. He submitted that, in all the circumstances, it had not.

GMAC's submissions on ground 1

114. Mr Cordara submitted in his skeleton argument that the UT's decision should be upheld on this issue for the reasons given in the decision, or alternatively for additional reasons which it then set out. The additional reasons included the submission that the decision reached by this court in BT CA was confined to the particular facts of BT's case.
115. Thus Mr Cordara submitted that it is plain that the court found against BT on the issue of whether there had been adequate notice of the abolition of the ability to claim relief on the particular facts of the BT case. The court was careful not to say anything about the facts of the GMAC case, which were significantly different. In the BT case the services supplied were phone bills: low value, high frequency services with a short bad debt cycle. In GMAC's case the goods were high value, low frequency transactions with repossession and subsequent sale stages impacting on the overall bad debt position. The typical bad debt cycle was long and complex. Following a default, a repossession of the vehicle and its sale might give a partial remedy, but in the event of continued default, the agreement would have to be terminated. This was radically different from unpaid phone bills. The maximum period for recovery could be up to 12 years.
116. Mr Cordara submitted that the UT was right to conclude that the notice period was inadequate. He relies on the fact that, in paragraph 123 of BT CA, Rimer LJ said that the UT's conclusion 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".
117. In order to deflect what he saw as a criticism of his clients in not making their claims sooner, Mr Cordara cited Deutsche Morgan Greenfell [2006] UKHL 49 for the propositions: (a) that a party who has a mistaken view of the law which is falsified by a subsequent decision of the courts is to be treated as having made a mistake, and (b) that such a person cannot be said to have failed to use reasonable diligence to discover his mistake if the true state of affairs could not be discovered until the court had pronounced its judgment.
118. Thus far Mr Cordara's written argument did not involve any challenge to the principles applied by this court to the corresponding point in BT CA. However, his skeleton makes it plain, and Mr Cordara reiterated in argument before us, that GMAC's case does not depend on the principle of legitimate expectations. He submitted that GMAC had a directly effective right to bad debt relief. Legitimate expectations were relevant where the member state offers a discretionary legal regime which it removes without adequate notice. That was the reverse of this case, because the United Kingdom offered no regime of use to GMAC at all. Mr Cordara asks rhetorically "how can the abolition of an incompatible provision destroy a directly effective EU law right?" In Marks & Spencer the court emphasised that even the proper implementation of EU law into domestic law does not destroy the EU law right. It follows a fortiori, that the EU law right is not destroyed by its incompatible implementation. The only way in which the right could be defeated was by a properly introduced time bar.
119. Gemeente Leusden (cited in paragraph 91 above) was a case of an option exercisable by a taxpayer to be taxed on a particular basis, and not a case of a directly enforceable EU law right. Plantanol (cited in paragraph 92 above) was also a classic legitimate expectations case. The principles elaborated in those cases do not assist where, as here, there was a directly enforceable EU law right in play.
120. Mr Cordara's skeleton goes on to assert that the court in BT CA failed to consider the full range of alternative remedies open to or potentially open to a taxpayer "when concluding that section 39(5) of the Finance Act 1997 did not result in a taxpayer being treated less favourably than a taxpayer seeking to enforce an equivalent domestic law remedy".
121. The first alternative way in which the court could give effect to the EU law right was by moulding the new scheme to make it applicable retrospectively to GMAC's claims. He submitted that the legislative history showed that the United Kingdom was, from the inception of the old scheme in 1978 through to its final demise in 1997 moving step-wise towards a scheme which properly implemented Article 11C(1) of the Directive, successively removing the insolvency and the property conditions. Once it is recognised that the earlier schemes were non-compliant, the appropriate re-moulding is somehow to allow the new scheme to apply to earlier supplies. If that were done GMAC would have been able to bring its claims under the new scheme.
122. GMAC also argues that an alternative remedy is a claim under section 80 VATA 1994. But for the property and insolvency conditions, it could have made a claim on its returns for the period when the debts became bad. As a result it over-declared the amount of VAT due, and was entitled to reclaim it under section 80. In rejecting this approach, the UT had been wrong to focus only on the VAT period in which the supply was made. Although GMAC's claim had not been formulated as a section 80 claim (indeed the 2006 letter had expressly stated that it was not such a claim), the content of the 2006 letter correctly conveyed the facts underlying the claim.
123. Mr Cordara also placed some reliance on the decision of the Upper Tribunal in Revenue & Customs Commissioners v Iveco Limited [2016] UKUT 0263, another case concerning time limits for recovery of overpaid VAT. The case concerned the part of Article 11C(1) of the Directive concerned with reductions of price. The UT considered whether a claim to recover the VAT associated with the price reduction could be made under section 80, and the corresponding regulation, Regulation 38 of the Value Added Tax Regulations 1995. That regulation provided that the taxpayer should adjust his VAT account by making a negative entry in the VAT payable portion of his return. The UT however indicated that they considered that if the facts justifying a reduction existed, then it could be said in accordance with section 80 that the taxpayer had "(a) … accounted ... for VAT for a prescribed accounting period …. and (b) in doing so, has brought into account as output tax an amount that was not output tax due." They said this in relation to a particular hypothetical example:

"21. If T [the taxpayer] fails to implement Regulation 38, that is not an end of T's claim to credit or repayment of £200. The result of failing to implement regulation 38 is that, in the case where the amount otherwise due exceeds £200, T has paid too much VAT in the prescribed period just mentioned. It is accepted by both HMRC and Iveco that section 80 is applicable. In other words, the reduction in VAT which T could have achieved by using regulation 38 remains VAT which was not due to HMRC so that T can make a claim under section 80 to recover it. We consider that that is a correct and purposive approach to the legislation."

124. Mr Cordara therefore submits that GMAC had said enough for a claim under section 80 to be recognised, and the claim fell within section 80 because the UT in Iveco considered that the failure to follow Regulation 38 meant that the VAT accounted for in the subsequent claim was not output tax due.
125. A further alternative remedy advanced in GMAC's skeleton argument was a restitutionary claim based on a mistake of law, said to be supported by an estoppel argument based on correspondence in another case. This suggestion was fully answered in HMRC's skeleton argument. Mr Cordara did not elaborate orally on how such a mistake based claim could assist his case in this appeal, and expressly did not pursue the estoppel point.

Discussion ground 1

126. It is, I think, first necessary to draw attention to the fact that the focus of the successful EU law attack on section 22 was the property and insolvency conditions. It was not GMAC's case that the United Kingdom had failed to put in place any scheme for bad debt relief, only that the scheme which had been put in place, because it included the property and insolvency conditions failed the EU law test of proportionality. It would not therefore be a correct exercise of the power to mould section 22 to conform with the Directive to set the section aside in its entirety. Rather, this aspect of the case has to be approached on the basis that there remains in place a scheme for the relief of bad debts but without those parts of it which fall foul of EU law.
127. Secondly it is common ground that the right to claim a reduction in the case of non-payment is not absolute. It is open to member states to impose formal conditions on the exercise of the right, and to subject its exercise to reasonable time limits. It is also open to member states to make changes to the scheme, whether by changing the conditions, or by exercising, in a proportionate way, its power to derogate from the right. To that extent, therefore, the debate about whether the regime is a mandatory or discretionary one is not susceptible of a binary answer. It is mandatory in the sense that effect must be given to the EU law right, but the manner in which that is done, in terms of conditions and time limits, affords the member state a margin of discretion. Taxpayers cannot rely on the conditions for relief remaining the same.
128. Thirdly, it is clear that member states cannot retrospectively alter the time limits for claiming relief without adequate notice to the taxpayer. I do not, however, accept that this can only be done by means of a formal transitional provision embodied in legislation, and neither the UT nor this court in BT CA thought so either. What is adequate notice in the circumstances of an individual case is a matter for the national court to determine. In all cases the guiding lights are the principles of effectiveness and the protection of legitimate expectations.
129. Fourthly, I recognise that the time limit must be fixed in advance. However, I do not think that the statements relied on in the present case fall foul of this requirement. Taxpayers would understand that an announcement to end the old scheme in a pre-budget statement would take effect from the next Finance Act, and realise that steps needed to be taken to claim relief before that.
130. Fifthly, it is important to appreciate what section 39(5) did. It is true that it ended the old scheme, and, in respect of a given supply, did not give the taxpayer access to the new scheme. It was not therefore an alteration in the conditions for claiming bad debt relief for that supply, in the sense that the relief could continue to be claimed subject to the altered condition. Claiming relief in respect of that supply was no longer possible after the enactment of that section. The effect was, however, not different to an alteration in a time limit for making claims, which would also terminate the right to claim relief in respect of that supply. The imposition of procedural hurdles of this kind plainly lies within the discretion of the member state, provided it acts in accordance with the principles of effectiveness and protection of legitimate expectations.
131. Sixthly, for the reasons explained by the Court of Appeal in BT CA with which I am in full agreement, there was in truth a prolonged crossover arrangement between the old scheme and the new scheme. Section 22 was repealed by the Finance Act 1990 in relation to supplies made after 26 July 1990 but was left in place in respect of supplies before that date with the rider that supplies between 1 April 1989 and 26 July 1990 could be made under either scheme. A supply which only had available to it a claim under the old scheme was therefore of considerable antiquity when section 39(5) was enacted in 1997. The four month notice period must, in my judgment, be seen in that context.
132. Seventhly, I think that the UT was wrong to speculate that there might be bad debts accruing to GMAC after the enactment of section 39(5). What is relevant for the purposes of EU law is whether there has been "total or partial non-payment". We were not referred to any authority which established an EU law definition of these terms, although Mr Cordara referred to an International Financial Reporting Standard which defined a bad debt as one more likely than not to remain unpaid. As Mr Beal explained, the last of the relevant GMAC supplies will have been on or before 31 March 1989, and the longest HP contract would have its final payment five years later. That left three years even in this extreme case for GMAC to establish that it was unlikely to be paid. It is not relevant in this context to consider how long insolvency procedures might have taken.
133. Against that background, was the exercise of GMAC's EU law rights rendered excessively difficult or virtually impossible by section 39(5)? I do not consider that it was. GMAC had more than adequate time to exercise their EU law rights and were given adequate notice of the withdrawal of the scheme. It is no answer to say that GMAC's claim would have been rejected by the Commissioners in the same terms as their actual claim was rejected when it was eventually made in in 2006. As I have said, this part of the case must be approached on the basis of EU law for which GMAC contend and which I have held to be correct.
134. I do not therefore consider that it is necessary for the court to find some other route to give effect to GMAC's EU law rights, so as to avoid collision with section 39(5). I would simply record my view, which is in conformity with the view which GMAC expressed to the Commissioners in their original claim, that section 80 is not the appropriate domestic provision for giving effect to bad debt relief. When GMAC accounted for VAT on the whole value of the supply it did not account for VAT which was not due. That did not change at the point when GMAC considered the debt to be bad. To that extent, to the extent they are different, I prefer the views of the UT expressed in the present case to those expressed in Iveco.
135. It follows that I would allow HMRC's appeal on this ground

Ground 2: Does GMAC have a live EU law based claim or has it ceased to exist because it has not exercised the right within a reasonable time?

Legal principles

136. Sanders v Commission of the European Communities (Case T-45/01) [2004] ECR II-3315 was a claim against the Commission for compensation by reason of the failure of the European Communities to engage the claimants as temporary servants whilst working at the Joint European Torus. At paragraph [59] the CFI says, in what appear to be general terms:

"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 offers 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."

137. Allen v Commission Case T-433/10P, a decision of the General Court, was a similar case. At paragraph [26] the court said:

"… There is an obligation to within a reasonable time in all cases except those where the legislature has expressly excluded or expressly laid down a specific time limit. The basis for setting a reasonable time limit, in the absence of any statutory rule, is the principle of legal certainty, which precludes institutions and natural persons acting without any time limits thereby threatening to undermine the stability of legal positions already acquired."

138. At paragraph [50] in Allen the court explained that the existence of such a reasonable time principle did not conflict with the principles relating to the reduction of time limits, as discussed in Marks & Spencer and similar cases. The court was merely applying the pre-existing rule that claims must be brought within a reasonable time.
139. In Nencini v European Parliament Case C-447/13P, a decision of the CJEU on an appeal from the General Court, and decided after both the decision of the UT in the present case and that in BT CA, Mr Nencini sought annulment of the decision of the Secretary General of the Parliament regarding the recovery of his travel and parliamentary assistance expenses amongst other things on the ground that a relevant communication had not been sent to him within a reasonable time. The court agreed with him and annulled the relevant decision, notwithstanding the absence of an express time limit governing the sending of the communication. The court appears to have approved (at [38]) the statement made by the General Court that:

"… compliance with the reasonable time requirement in the conduct of administrative procedures constitutes a general principle of EU law whose observance the Courts of the EU ensure and which is laid down as a component of the right to sound administration by Article 41 (1) of the Charter of Fundamental Rights of the European Union."

140. The court applied by analogy the limitation period of 5 years imposed for enforcement of the debt which was being communicated.
141. In Alstom Power Hydro v Valsts ienemumu dienests Case C-472/08, the CJEU said at 16:

"… 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 (Joined Cases C-95/07 and C-96/07 Ecotrade [2008] ECR I-3457, paragraph 44)."

142. In paragraph 21 the court explained that the period must be sufficient to enable a "normally attentive taxable person" to assert his rights derived from European Union law. Mr Beal accepted that this hypothetical construct was at least a close relation of the prudent and circumspect economic operator referred to in Plantanol and other cases.
143. In Ze-Fu Fleischhandel GmbH v Huptzollamt-Hamburg Jonas Joined Cases C-201/10 and C-202/10 the taxpayer had claimed an export refund for the export of a quantity of beef to Jordan in 1993. 5 years later it was discovered that the cargo had in fact been exported to Iraq, which undermined the basis for the refund. A limitation period of 4 years applied under EU law, subject to the right of a member state to apply a longer period. The German courts enquired whether it was possible in those circumstances to apply a longer period by analogy with a 30 year limitation period which German law recognised in similar cases. The court confirmed that this was possible, and the fact that the limitation period was not laid down in a measure specifically applicable to the activity in question did not offend against legal certainty.

The UT's decision on ground 2

144. The UT considered this ground between paragraphs 217 and 233 of its decision. The starting point for the UT was their conclusion that GMAC's directly effective claim fell to be made under section 22, appropriately adapted and moulded. In relation to that claim there was no domestic time-limit. Any overriding EU time-limit did not come into play.

The decision in BT CA on ground 2

145. The point was also considered this court in BT CA which upheld the UT's conclusion. As Rimer LJ explained, the claim that BT made for bad debt relief in respect of its supplies related to a time when there was a domestic bad debt relief entitlement in place, exercisable successively under section 12 and section 22 of VATA 1983, and the regulations made under them. 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. It had not been suggested that there was anything wrong with those time limits from the perspective of EU law.
146. BT could also have brought claims under Article 11C(1), for which the domestic machinery would have to be adapted and moulded appropriately. The adaptation and moulding required was, however, no more than was necessary to enable it to enforce its rights. 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. BT was therefore not subject to any time limit for the bringing of its claims. Rimer LJ continued at paragraph [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."

HMRC's submissions on ground 2

147. Mr Beal submitted that when the taxpayer asserts EU law rights it is incumbent on him not merely to take the benefit of the rights but also the burden. The burden in the present case was to act within a reasonable period of time. He submits that this court fell into error in BT CA in rejecting the application of the reasonable time principle, and that was made clear by the supervening authority of Nencini. The principle only applied where there was no domestic limitation period.
148. Mr Beal also relied on Alstom and Ze-Fu Fleischhandel as being consistent with Nencini. He did not go further and specify what the reasonable time should be in the present case. He contended that whatever it was it could not be long enough to allow GMAC to bring its claims in 2006 in respect of debts which had become due at the latest by 1994. If it were necessary for the court to fix a time limit, this could be done by reference to time limits set in comparable situations under EU and domestic law.

GMAC's submissions on ground 2

149. Mr Cordara repeated the arguments which he had made in the UT. He submitted that Allen was a decision which related to the self-contained, supra-national world of the EU institutions. It was also a damages claim, not a claim to enforce a directly effective EU law right. In a case such as Allen it was only possible to look to EU law, and it was necessary to impose a time limit on claiming damages in the interests of legal certainty. There was a wide juridical gulf between that type of case and a case where a directive is being implemented, where EU law recognises that it is for national law to impose time limits.

Discussion ground 2

150. I propose to deal with this point shortly, as I agree with the decisions of the UT and this court in BT CA that there is no room in the context of the present case for the imposition of a time limit by reference to the EU reasonable time rule. Such time limits as applied to GMAC's claims to assert their EU law rights through the mechanism of the domestic machinery were, as explained in the decisions, disapplied because they set the time by reference to the invalid insolvency condition. The domestic legislation is therefore to be read as being silent as to any time limit, and as therefore not imposing any. There is nothing incompatible with EU law in not imposing any time limit: indeed time limits (or the absence of time limits) are, in my judgment, exactly the sort of conditions which are expressly left to the member state under the Directive. If a member state can impose a time limit of 30 years, as the CJEU expressly confirmed that it could in Ze-Fu Flesichhandel, then I do not see why legislation which imposes no time limit at all falls to be moulded to comply with a reasonable time principle.
151. The result might well be different if GMAC's case was that it was entitled to enforce its EU law right to a reduction for non-payment directly without reference to any domestic mechanism. In those circumstances, it might well be that the right could not exist indefinitely, and would be subject to the EU law reasonable time principle. But that is not, as I understand it, how GMAC puts its case, so I need say no more about it.
152. I do not regard this conclusion as inconsistent with any of the cited EU jurisprudence. The conclusion is no more of a threat to legal certainty, or the integrity of the VAT system, than a provision which expressly permitted claims to be made without limit in time, which would not be contrary to EU law.
153. I would accordingly dismiss HMRC's appeal in relation to ground 2.

Conclusion

154. HMRC's appeal is dismissed in relation to grounds 2, 3 and 4 is dismissed, as is GMAC's cross-appeal. HMRC's appeal on ground 1 is allowed.

Mrs Justice Theis:

155. I agree.

Lady Justice Arden:

156. I also agree.