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HMRC internal manual

VAT Bad Debt Relief

HM Revenue & Customs
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Making a claim: Bad debt relief claims by finance companies

General Motors Acceptance Corporation UK Ltd (GMAC) (2004) EWHC 192 (Ch)

This case concerned the correct VAT treatment of transactions involving cars where their sale under hire purchase agreements was not completed – either because the customer was entitled to end the agreement early or because the customer defaulted.

In both cases GMAC were entitled to repossess the car and resell it. In this situation the customer remained liable for any outstanding balance after taking into account proceeds (net of the costs of repair and sale) of the sale of the repossessed car.

The High Court upheld the decision of the tribunal. It was found that:

  • GMAC were entitled to a regulation 38 (reduction in consideration) adjustment regarding repossessed and voluntarily returned cars.
  • Irrespective of how the car came back into GMAC’s possession, the return of the car constituted a repossession for the purposes of Article 4(1)(a) of the Cars Order 1992. The sale of the repossessed car accordingly fell to be de-supplied. (Article 4 (1)(a) of both the VAT (Cars) Order and the VAT (Special Provisions) Order have since been amended. Where goods are delivered under finance agreements on or after 1 September 2006 the re-sale after return or repossession is no longer de-supplied).
  • The level of documentation presented in the GMAC case was satisfactory for the purposes of regulation 24.

The GMAC decision only applies to hire purchase and conditional sale agreements, where title passes on final payment. Credit sales are not covered by the GMAC decision.

The High Court decision found that bad debt relief was available to a finance house in the case of a defaulting customer. This would be calculated on any unpaid element, after reducing the value of the original supply by the proceeds of the second sale. In calculating the relief, any payments received should be attributed to the goods and to the finance in the same ratio as the total cost of goods and the total cost of finance to the customer (as described in VBDR2400).

The impact of the GMAC decision on the operation of regulation 38 is covered in detail in V1-24A Chapter 13.

Abbey National plc (2005) EWHC 1187 (Ch)

This case involved the attribution rules contained in regulation 170A.

The High Court found that statutory rules on allocation such as regulation 170A overrode any accounting provisions.

The High Court re-affirmed the view of the tribunal: We did not see from the case argued before us that there is a general principle of the VAT system which can be applied to permit a taxpayer to claim a particular relief on the basis of the accounting treatment of the underlying transactions – VAT is not a tax which necessarily follows accounting principles applied to the supplies on which the tax is charged.