Barlin Associates Ltd v Revenue & Customs

Factual and Procedural Background

The Appellant, a trade mark attorney business which had ceased trading and deregistered for VAT, issued invoices between 2005 and 2010 to a client, Company A, totaling £871,896.18 including VAT of £127,665.36. The Appellant accounted for this VAT to HMRC, but Company A did not pay the invoices. The Appellant pursued payment through legal proceedings initiated in February 2011, which Company A defended on grounds of lack of proper authorisation and insufficient invoice detail. The parties settled out of court in November 2012, with Company A agreeing to pay £306,000 (including VAT) in full and final settlement. Subsequently, the Appellant issued a credit note for the unpaid balance, including VAT of £82,095.78, and sought repayment of this VAT from HMRC. HMRC refused repayment, prompting the Appellant's appeal to the First-tier Tribunal.

Legal Issues Presented

1. Whether the Appellant is entitled to repayment of VAT on the credit note issued after settlement with Company A, representing a reduction in the consideration for the supply.
2. Whether the reduction in consideration constitutes a bad debt or a legitimate adjustment under VAT law and the Principal VAT Directive (PVD) Article 90.
3. The applicability and interpretation of UK VAT legislation, including Regulation 38 of the VAT Regulations 1995 and Section 80 of the Value Added Tax Act 1994, in the context of repayment claims following deregistration.
4. Whether time limits under UK law prevent the Appellant from recovering the VAT repayment after deregistration and issuance of the credit note.
5. Whether a deregistered taxpayer retains rights under Article 90 of the PVD to claim repayment of VAT after a reduction in consideration.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that there was a reduction in consideration for the supply following the settlement with Company A, entitling it to reclaim VAT in accordance with Article 90 of the Principal VAT Directive and Regulation 38 of the VAT Regulations 1995.
• It argued that VAT must be exactly proportional to the price of the supply, and the credit note reflected a legitimate adjustment for the overcharged amount.
• The Appellant maintained that the time limit in Regulation 38(1A) was repealed and that no other time limits should preclude repayment, especially as the Appellant was not insolvent but simply deregistered.
• It rejected HMRC’s characterization of the situation as a bad debt, emphasizing that following settlement, no debt remained and thus no bad debt relief claim was appropriate or relevant.

Respondents' Arguments (HMRC)

• HMRC argued that the Appellant’s claim was essentially a bad debt claim, subject to statutory time limits, and that the Appellant was largely out of time to make a bad debt relief claim under Section 36 VATA and Regulation 165A.
• HMRC contended that Regulation 38 was inapplicable because the situation was not a reduction in consideration but a bad debt.
• They asserted that where a taxpayer has deregistered, the adjustment must be made in the VAT accounting period when the original supply was made, invoking Section 80 VATA and associated time limits.
• HMRC also suggested that a deregistered taxpayer has no rights under Article 90 of the PVD to claim repayment.

Table of Precedents Cited

Court's Reasoning and Analysis

The court found the facts undisputed and focused on the legal interpretation of the VAT Directive and UK legislation. It emphasized that Article 90 of the Principal VAT Directive grants a right to reduce taxable amounts where there is cancellation, refusal, non-payment, or reduction in price after supply.

The court rejected HMRC's characterization of the claim as a bad debt relief claim, reasoning that following the settlement, no debt remained and thus no bad debt existed to be written off. This distinction was critical because bad debt relief claims are subject to strict time limits, which the Appellant had missed.

The court examined the meaning of "reduction in consideration," rejecting the precedent relied upon by HMRC that denied VAT adjustment after agreed price reductions. Instead, it endorsed the reasoning in Cobojo Ltd and Cumbria County Council, which recognized that settlements reducing the amount payable after supply constitute legitimate reductions in consideration under Article 90 and Regulation 38.

The court further analyzed the time limit issue, noting that the UK time limit in Regulation 38(1A) had been repealed and that applying other time limits (such as under Section 80 VATA) to deny repayment after deregistration would conflict with the directly effective rights under EU law. It held that the Appellant’s deregistration did not extinguish its right to claim repayment under Article 90.

The court concluded that the Appellant was entitled to issue a credit note and claim repayment of VAT despite deregistration and that HMRC's refusal was unlawful. It also noted that UK legislation imposing time limits that prevent exercising this right were incompatible with EU law and thus disregarded them pursuant to the European Communities Act 1972.

Holding and Implications

The court allowed the appeal, holding that the Appellant was entitled to repayment of the VAT amount shown on the credit note issued after settlement with Company A.

The direct effect of Article 90 of the Principal VAT Directive ensures that suppliers have a right to VAT repayment when the consideration for a supply is reduced post-supply, even if the supplier has deregistered for VAT. UK statutory provisions imposing time limits that prevent such repayment in these circumstances are incompatible with EU law and must be disregarded.

The decision clarifies that a settlement reducing the amount payable is a reduction in consideration rather than a bad debt for VAT purposes, and that deregistration does not negate the right to claim VAT repayment under Article 90. No new precedent was established beyond the application of existing EU law principles and prior tribunal decisions.