The judgment extensively references European Union (EU) case law to interpret the applicable VAT directives. Notable cases include:

• NLB Leasing doo v Slovenia (C-209/14): Established that VAT liability should reflect the actual consideration received, emphasizing that tax authorities cannot collect VAT on amounts not ultimately received by the supplier.
• Tratave Tratamento de gua Residual do Ave SA v Autoridade Tributária e Aduaneira (C-672/17): Highlighted that measures to prevent tax evasion must not undermine the fundamental principles of VAT, such as neutrality and proportionality.
• Kraft Foods Polska (C-588/10): Upheld procedural requirements for claiming bad debt relief, stressing that conditions should not be excessively burdensome.
• SCT d.d. v Republic of Slovenia (C-146/19): Ruled that member states must allow adjustments to the taxable amount if the taxpayer can demonstrate that claims are irrecoverable, even if procedural requirements are not strictly met.

These cases collectively underscore the balance between member states' discretion to impose procedural requirements and the necessity to uphold VAT's fundamental principles. The Court of Appeal utilized these precedents to affirm that while procedural requirements are within the state's purview, they must not be so onerous as to prevent legitimate claims for bad debt relief.

The court's legal reasoning hinged on Articles 90 and 273 of the Principal VAT Directive (Council Directive 2006/112/EC). Article 90 mandates that the taxable amount for VAT should reflect the actual consideration received, allowing for reductions in cases of non-payment or reduced prices. Article 273 grants member states the discretion to impose conditions and procedures to ensure correct VAT collection and prevent evasion.

The Court of Appeal examined whether the UK's procedural requirements, specifically Regulation 168(3) requiring a single account for bad debt claims, were within the permissible limits of member states' discretion. Referencing EU case law, the court determined that such procedural requirements are legitimate, provided they do not render the claim process "impossible or excessively difficult" for taxpayers.

Furthermore, the court distinguished between substantive and formal restrictions. Substantive restrictions pertain to actual eligibility criteria for bad debt relief, while formal restrictions relate to the procedural steps required to claim such relief. The judgment affirmed that formal requirements like maintaining detailed records and a single account serve legitimate purposes without encroaching on the substantive right to reclaim VAT on bad debts.

This judgment has significant implications for businesses seeking VAT bad debt relief in the UK. It reinforces the necessity of strict procedural compliance, particularly regarding record-keeping and accounting practices. Companies must ensure that their accounting systems can segregate and track VAT-related bad debt claims accurately.

Additionally, the decision underscores the enduring influence of EU VAT directives on UK law, even post-Brexit, as the retained EU case law continues to guide domestic judicial interpretations. Businesses must remain vigilant in adhering to both substantive and procedural requirements to avoid similar setbacks in VAT recovery claims.

On a broader scale, the judgment reinforces the principle that while member states retain some discretion in implementing VAT directives, this discretion is bounded by overarching principles of neutrality, proportionality, and the prevention of tax evasion. This ensures a consistent and fair application of VAT laws across different jurisdictions.

Bad Debt Relief under VAT

Bad debt relief allows businesses to reclaim VAT on debts that are unlikely to be paid by customers. This prevents businesses from bearing the burden of paying VAT on money they never received.

Articles 90 and 273 of the Principal VAT Directive

- Article 90: Requires businesses to reduce their taxable VAT amount if they face non-payment or reduced payment for goods or services provided.

- Article 273: Grants member states the ability to set additional rules and procedures to ensure accurate VAT collection and prevent fraud, within certain limits.

Procedural vs. Substantive Requirements

- Substantive Requirements: Criteria determining eligibility for VAT bad debt relief (e.g., actual non-payment).

- Procedural Requirements: The steps and documentation needed to claim relief (e.g., maintaining specific records).

Single Account Requirement

Regulation 168(3) mandates that businesses keep a single, organized account for bad debt claims. This ensures that VAT authorities can easily verify the validity of claims through a clear audit trail.