Abbey National Plc v Customs and Excise

Factual and Procedural Background

An appeal is brought by Company A against a decision of the London Tribunal Centre of the VAT and Duties Tribunal, concerning VAT bad debt relief (BDR) claims related to conditional sale agreements for vehicle financing. Company A, through its wholly owned subsidiary Wagon Finance Ltd ("Wagon"), provides finance for vehicle purchases under conditional sale agreements involving equal instalment payments comprising principal (including VAT) and credit charges (non-VATable). Wagon must account for VAT on the supply of goods when possession passes to the customer, but credit is accounted for as supplied instalment by instalment. In cases of customer default, Wagon seeks BDR only for the bad debt relating to the goods' supply, not the credit element.

Wagon argued that instalment payments should be apportioned between principal and credit using methods reflecting the gradual reduction of principal over time, such as the actuarial method or the "rule of 78" method. The Commissioners of Customs & Excise ("the Commissioners") contended that domestic legislation requires apportionment on a statutory time basis, attributing instalment payments first to the earliest supply (goods) before credit.

The disputed assessment applied the Commissioners' straight-line method (an extra-statutory concession), which apportions payments evenly over the instalment period. The Tribunal dismissed Wagon's appeal against this assessment. Company A now appeals, maintaining that the straight-line method is not open to the Commissioners and asserting that contractual terms and accounting principles support alternative apportionment methods.

Legal Issues Presented

1. Whether the apportionment of instalment payments between principal (goods) and credit for VAT bad debt relief purposes must follow the statutory time basis prescribed by domestic legislation or whether contractual arrangements or other methods (actuarial or rule of 78) may be applied.
2. Whether Community law requires that primacy be given to the parties' contractual apportionment arrangements over domestic legislation.
3. Whether the domestic regulation governing apportionment (Regulation 170) is ultra vires or irrational and thus unenforceable.
4. Whether the Commissioners' extra-statutory concession to use a straight-line method was lawful and whether it displaced the statutory time basis.
5. Whether Wagon's accounting practices and principles require recognition of an alternative apportionment method for VAT purposes.

Arguments of the Parties

Appellant's Arguments

• The conditional sale agreements, incorporating or mirroring Consumer Credit Act provisions, imply an apportionment of instalments between principal and interest on a "rule of 78" basis.
• The statutory rebate on consumer default is calculated on a rule of 78 basis, implying the same should apply to instalments already paid.
• Wagon's accounts are prepared on the rule of 78 basis or a similar actuarial method, consistent with accounting standards and company law requirements to present a true and fair view.
• Community law does not preclude recognition of the parties' apportionment arrangements and may require respect for them.
• The Commissioners abandoned the statutory time basis during the relevant period, creating a void that should be filled by contractual apportionment.
• The decision in GMAC supports deriving apportionment from finance company accounts.
• There is a VAT principle supporting the ascertainment of a "subjective value" of consideration for credit and goods, which should be reflected in apportionment.

Respondent's Arguments

• Domestic legislation, specifically section 36 of the VAT Act 1994 and Regulation 170 of the VAT Regulations 1995, prescribes a statutory time basis for apportionment that overrides any contractual arrangements.
• The statutory time basis attributes payments first to the earliest supply (goods) and only thereafter to credit, unless the purchaser allocates payment at the time of payment (which did not occur).
• The Commissioners have lawfully exercised their regulatory powers in enacting Regulation 170 and the subsequent Regulation 170A, including the straight-line method.
• Regulation 170 is rational and not ultra vires, designed to provide a simple, practical, and fair method applicable across various types of purchasers, including traders and private individuals.
• Community law does not require primacy to be given to parties' contractual arrangements; Member States determine conditions for VAT adjustments, and Regulation 170 complies with this.
• The extra-statutory concession to allow a straight-line method was lawful and did not repeal or invalidate Regulation 170.
• Accounting principles must yield to statutory VAT rules; differences between accounting and VAT treatment are permissible and common.
• The GMAC decision does not support Wagon's position on apportionment derived from finance company accounts.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by clarifying the statutory framework governing VAT bad debt relief, focusing on section 36 of the VAT Act 1994 and Regulation 170 of the VAT Regulations 1995, which prescribe a time-based apportionment method attributing payments first to the earliest supply (goods) before credit, unless the purchaser specifically allocates payments at the time of payment.

The court rejected Wagon's contention that contractual arrangements or Community law override this statutory scheme. It found no provision in Community law requiring primacy for parties' apportionment arrangements and noted the broad discretion Member States have to determine conditions for VAT adjustments under Article 11(C)(1) of the Sixth Directive.

Regarding rationality, the court held that Regulation 170 is not irrational under the Wednesbury standard. It serves legitimate policy goals including simplicity, fairness to both finance companies and traders, and practicality across diverse cases. The historical rule of thumb (Clayton's case) supports the time-based attribution.

The court further held that the Commissioners' extra-statutory concession to use a straight-line method was a rational exercise of discretion and did not repeal or invalidate the statutory time basis. The concession benefits Wagon relative to the statutory method.

The court also dismissed Wagon's argument based on accounting standards and company law, emphasizing that tax law prevails over accounting principles and that flexibility exists in accounting methods, including the use of the straight-line method.

The court found no necessity to infer an implied contractual apportionment on the rule of 78 basis; statutory rebates under the Consumer Credit Act do not imply a corresponding apportionment of instalments already paid.

The "subjective value" argument was rejected as irrelevant because the relevant apportionment is from the perspective of the customer, for whom there was no evidence of any apportionment aligning with Wagon's position.

The court distinguished the GMAC decision, finding it unrelated to the apportionment issue here and not supportive of Wagon.

In sum, the court concluded that statutory provisions govern apportionment for VAT bad debt relief, overriding contractual or accounting considerations, and that the straight-line method concession is lawful and rational.

Holding and Implications

DISMISSED

The appeal by Company A against the Tribunal's decision was dismissed. The court held that statutory legislation and regulations prescribe the apportionment method for VAT bad debt relief claims, which overrides any contractual arrangements or accounting methods. The Commissioners' use of the straight-line apportionment method as an extra-statutory concession was lawful and rational. The direct effect is that Company A must comply with the statutory apportionment rules and cannot rely on alternative apportionment methods for VAT bad debt relief purposes. No new precedent was established beyond affirming the primacy and rationality of the statutory apportionment framework.