The First-tier Tribunal has dismissed an appeal for a historic claim for VAT bad debt relief (BDR), judging that the appellant failed to discharge the necessary burden of proof to demonstrate that the conditions for a valid claim were satisfied (Allegion (UK) Ltd v HMRC 2023] UKFTT 273 (TC)).
Up to 19 March 1997 it had been a condition of claiming BDR that title in any goods must have passed to the consumer (property condition). Following GMAC UK plc v HMRC  STC 1247 the Court of Appeal decided that the property condition was not compatible with EU law, was disproportionate and should be disapplied. This prompted HMRC to publish Revenue and Customs Brief 1/2017. This recognised that taxpayers may have historic BDR claims that had been previously blocked by the now disapplied legislation and explained how HMRC would deal with such claims. HMRC accepted that meeting all of the evidential criteria of the BDR scheme would be difficult given the passage of time, and therefore alternative evidence would be accepted. A claimant was; however, still required to demonstrate that bad debts had been incurred in the relevant period, that no claims for BDR had already been made and that the amount claimed was as accurate as possible and fairly and reasonably calculated.
However, VAT Notice 700/18 made clear that title in goods would pass, and therefore bad debt relief would have been available despite the disproportionate property condition, where either of the following occurred:
- the goods in question had been sold on to a third party by the debtor; or
- the supplier chose to write to their customer and give up title in the goods to them.
Saint-Gobain Building Distribution Limited v HMRC
In the case of Saint-Gobain Building Distribution Limited v HMRC  UKUT 75 (TCC) (Saint-Gobain UT) the appellant had attempted to rely on the existence of a retention of title clause (RoT) to prove that title could not have passed and thus no BDR claims could have been made in the period under consideration. However, the tribunal considered the legal status of the RoT clause and concluded that title could have passed irrespective of it. The tribunal agreed with HMRC’s analysis that the property condition did not present a bar to BDR claims and that such claims were available at the time and Saint-Gobain was doing no more than attempting to make a very late claim without the requisite documentation.
The current case
Allegion (UK) Ltd also attempted to rely on the existence of a RoT clause to argue that title would not have passed and thus no BDR claims had already been made. It argued that its case should be distinguished from Saint-Gobain UT because of the quality of its evidence, its witness Mr Crampton had worked for 35 years in a senior finance position in the group throughout the claim period and had direct first-hand knowledge of the group and was familiar with its VAT compliance and what its accounting procedures were. He was certain that a RoT clause was not only included in the terms and conditions but it was also enforced as it was the policy of the group not to surrender title to goods in cases of payment difficulty because it was regarded as commercially important to retain title.
However, HMRC asserted that during the relevant claim period Mr Crampton was not employed in a senior position in the appellant’s group nor was he involved in preparing and submitting group VAT returns. Furthermore, historic HMRC records showed that at least one company in the group had claimed BDR in the period under consideration.
The judge concluded that:
“The Appellant has not discharged the burden of proof to demonstrate that the conditions for a valid BDR Claim were satisfied. The only evidence relied upon by the Appellant was the witness evidence of Mr Crampton. We attached little, if any, weight to Mr Crampton’s evidence and found that his evidence provided no basis to distinguish on factual grounds the binding decision in Saint-Gobain UT. The facts of this appeal were squarely within the facts of Saint-Gobain and, applying the same reasoning, the RoT Clause in the Appellant’s standard terms and conditions would not have prevented a BDR Claim. In any event, we found on the basis of the evidence before us that it was more likely than not that the Appellant’s standard contract terms and conditions did not during the Claim Period contain a RoT Clause. The only documentary evidence that was in evidence before the Tribunal, the Schedules, confirmed that the Appellant had previously claimed BDR.
For all of the above reasons, we dismiss the appeal.”