Allegion (UK) Limited v The Commissioners for HMRC

On 14 January 2021, the Appellant appealed to the Tribunal against the decision of the Respondents (“HMRC”) to refuse the Appellant’s claim for retrospective VAT bad debt relief (“BDR”) for the period 1 April 1989 to 19 March 1997 (“the Claim Period”). The original claim was for the amount of £615,697 (plus statutory interest) which was reduced to £584,655. The reduction was to reflect the estimated sales percentage for a division of the Appellant’s group of companies called NT Access Limited that provided services and was ineligible for inclusion in the claim for BDR. The relevant supplies made by the Appellant during the Claim Period were of security systems, products and services for domestic and commercial premises.

HMRC rejected the claim on the basis that the Appellant could not satisfy the evidential requirements for a valid claim for BDR contained in the Revenue and Customs Brief 1 (2017): VAT – historical bad debt relief claims” (“R&C Brief 1/2017”) as it could not demonstrate to HMRC that it was a valid claim for BDR and, in particular, that any claim to BDR for the Claim Period had not already been made.

The Appellant in its skeleton argument dated 3 May 2022 under the heading of “Note” indicated that it intended to “seek to add a schedule to this skeleton argument, to set out the membership of the VAT group” and “The Appellant wishes to submit an additional witness statement to deal points made below in relation to (i) ‘Accounting Matters’ and (ii) ‘Methodology’”. On 12 May 2022, the Appellant’s representative, RSM UK Tax and Advisory Services LLP (“RSM”) served an application for permission to file the additional witness statement of Mr Andrew Ilsley, Indirect Tax Director at RSM, together with 10 exhibits totalling 333 pages (“the Application”). The Application at [10] stated that:

On 19 May 2022, HMRC served their Objection to the Application. HMRC objected to the Application on the basis that it was (i) extremely late without any explanation why it was not served earlier and (ii) the proposed evidence is the first time that the Appellant has provided the base documents upon which the calculation of the claim for BDR was based. HMRC proposed, as a possible compromise that the Tribunal should made a decision in principle on whether the Appellant has satisfied the conditions for making an historic BDR claim. In the event that the Tribunal determined that the Appellant had made a valid BDR claim the parties could reach agreement as to the quantum of the BDR claim or, failing agreement, make an application for the Tribunal to determine quantum. In a written decision dated 20 May 2022, the Tribunal refused the Application on the basis that it could only be concluded that it would be unjust and unfair at such a late stage to grant the Application and directed that the issues before the Tribunal should be determined in principle with quantum, if relevant, to be agreed by the parties. In respect of the point at [10] in the Application, Judge Williams stated that this was not an appropriate way for the Appellant to adduce further evidence at this late stage, if it now seeks to adduce additional information it should make an application for permission together with detailed reasons.

The Application was renewed at the hearing and was again refused by the Tribunal. The reasons for the refusal were: the lateness of the Application, no adequate explanation for the delay nor was it clear from the spreadsheets who at RSM had produced them, the methodology followed or the documents considered. Furthermore, we did not consider that the additional documents were material to the determination that we had to make in this appeal and may only be of relevance in the event that we find in favour of the Appellant and quantum cannot be agreed.

The BDR Claim was made pursuant to Article 11C (1) of the 6th Council Directive 77/388/EEC (now Article 90 Directive 2006/112/EC), which stated:

For claims made in respect of supplies made on or after 1 April 1989, the Finance Act 1990 applied. Section 11 provides:

Section 36 VATA 1994 replaced s 11 FA 1990. For the purposes of this Appeal, there are no material differences between s 36 VATA and s 11 FA 19903, other than the period referenced in s 11(1)(c) of two years reducing first to 12 months (by the Finance Act 1991), then to six months (by the Finance Act 1993). The requirements to qualify for BDR were set out in HMRC’s VAT Notice 700/18 (April 1991, January 1996, and April 1996). VAT Notice 700/18 is referred to in R&C Brief 1/2017. The Notices particularised the availability of BDR and evidential requirements. Relevantly for these purposes, the January 1996 VAT Notice stated:

Section 39 of the Finance Act 1997 repealed the Property Condition:

The VAT Regulations 1995 relevantly provide:

In GMAC UK plc v Revenue and Customs Commissioners [2017] STC 1247 (“GMAC”) the Court of Appeal decided that the Property Condition was not compatible with EU law, was disproportionate and should be disapplied. The Property Condition was repealed from 19 March 1997. This prompted HMRC to publish R&C Brief 1/2017. This recognised that taxpayers may have historic BDR claims for the period 1 April 1989 to 19 March 1997 and the Brief explained how HMRC would deal with historic 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.

R&C Brief 1/2017 stated:

The Tribunal heard oral evidence from Mr Christopher Crampton, a Chartered Management Accountant, employed by the Appellant as a Home & Work Controller. Mr Crampton adopted and confirmed his witness statement dated 28 October 2021 (“WS”). Mr Crampton answered questions in straightforward manner and was open concerning matters raised that he had no knowledge of.

Mr Crampton’s evidence included the following points.

There was no real dispute between the parties as to the applicable law, the issue in dispute is whether the Appellant can demonstrate that it satisfies the conditions for making an historic BDR Claim.

Mr Southern submitted as follows for the Appellant.

The Appellant's claim is that:

The ordinary rule in VAT is that goods are supplied when they are delivered, not when ownership passes: Staatssecretaris van Financien v Shipping & Forwarding Enterprise BV [1991] STC 627. Thus a supply of goods takes place for VAT purposes when possession is transferred, not when title is transferred. During the Claim Period the UK had chosen to impose a restriction on VAT BDR in a manner which was later held to be in breach of EU law. Section 11(4)(b) FA 1990 and s 36(4) VATA 1994 denied a refund unless "in the case of a supply of goods, the property in the goods has passed to the person to whom they were supplied or to a person deriving title from, through or under that person." That Property Condition was held to be a breach of the principle of effectiveness: GMAC (at [85-91]); it was thus ineffective ab initio: Deutsche Morgan Grenfell v IRC [2007] STC 1 (“DMG”) (at [23]).

The Appellant suffered commercial bad debts in the Claim Period. UK law denied BDR on the bad debts because the Appellant sold to customers on terms incorporating a RoT clause; the only reason BDR was not claimed was because of the Property Condition; that was a problem caused by HMRC's incorrect incorporation of the Property Condition into UK law, as found in GMAC. The Appellant did not claim BDR at the time; if relief had been claimed then the Appellant’s witness, Mr Crampton would have known this, and the Appellant would not now be making this claim. By the presumption of regularity it can be assumed that the Appellant complied with the (then) legal framework and conditions; also, any contemporaneous claims would have been spotted and disallowed by HMRC (on their then understanding of the Property Condition). The Appellant was a well-run commercial organisation which took its responsibilities seriously.

DMG makes it clear that, so long as the national legislation says what is says, a taxpayer must assume that what is says is correct: DMG at [113]-[114]. Thus there must be a presumption of regularity, and so non-recovery.

The common law rule is that "no one gives who possesses not" (nemo dat qui non habet). In other words, one person with a limited right to property cannot confer on another a superior right to that property. This principle is extensively modified both by statute and decisions of the courts. Section 25 Sale of Goods Act 1979 ("SOGA ") provides that a buyer in possession of goods can, if certain conditions are fulfilled, give a good title to a person who acquires the goods from him.

Section 17 SOGA provides that property in the goods passes when the parties intend it to pass. Hence, the seller of goods will usually protect itself by retaining title under the sale agreement until payment. While the goods are in the possession of the buyer, the seller has the right to retake the goods. As this is a proprietary right, it will survive the buyer's insolvency. However, any attempt to retain a proprietary interest in the products of the goods or in the proceeds of sale of the goods is likely to be characterised as a charge and unenforceable in the absence of registration. The seller's proprietary interest is limited to an interest in the goods themselves. The seller can always expressly waive his RoT and HMRC say he should have done so in these cases in order to be able to claim BDR. SOGA does not provide that there may be an implied release from the RoT clause but that in prescribed circumstances it will be defeated by a subsequent transfer.

Section 25 SOGA was an exception to the general principle that title only passed on full payment, by allowing a non-owner to pass title to a third party and must be interpreted strictly. Where goods were incorporated into another form (e.g. door locks into a building) then the goods ceased to exist as a distinct item and the contract between the customer and the third party was not a contact for the sale of goods. The type of goods which the Appellant’s group sold are likely to be incorporated into a building. Bad debts will often be accounted for on a global basis rather than on an individual basis.

The retention of title clause prevented BDR, unless the goods were sold on by the customer, that was clear from s 11(4)(b) FA 1990, but was of very limited application. In practice a supplier may only find or conclude that he has not been and will not be paid until some time after the sale when the notion of waiving the RoT clause had become academic. The supplier will not usually know what the client does with the goods. The only way for the Appellant to avoid the Property Condition was to waive the RoT clause in specific cases (as suggested in HMRC's Notice 700/18 – which seemed wholly uncommercial) and Mr Crampton’s evidence was that this was contrary to the Appellant’s company policy and he could not recall that ever being done.

The defect in UK VAT legislation was that it deferred time of supply to the time when title was transferred, where the contract contained a retention of title clause. For VAT purposes there is no difference between credit sales where the contract contains a reservation of title clause and credit sales where there is no retention of title condition. HMRC were wrong to contend that GMAC only concerned the simpler case of cars being sold on hire purchase. The position was stated by Floyd LJ in GMAC:

It was accepted that it is for the Appellant to show (on the balance of probabilities) that (i) no prior recovery has been made, and (ii) the overpaid VAT can be quantified with sufficient accuracy.

The key factor is that the UK legislation wrongly blocked BDR, by imposing an invalid condition. The only relevant question is: did the statutory wording apply to reservation of title clauses, such as the contractual terms used by the Appellant? The answer is 'Yes'. In that case the argument that, hypothetically, the Appellant could have recovered BDR in the Claim Period, notwithstanding the statutory provision to the contrary (the Property Condition), is irrelevant. The only relevance of HMRC's argument would be if it supported a possibility that, notwithstanding what the law said, taxpayers had in fact recovered VAT. There must be a presumption of regularity, and so non-recovery.

It would be inconsistent with the principle of effectiveness for HMRC to block an historical claim by relying on UK procedural law matters. Amministrazione Delle Finanze Dello Stato v San Giorgio [1985] 2 CMLR 658 (“San Giorgio”) stated at [14] that any requirement of proof which has the effect of “making virtually impossible or excessively difficult to secure the repayment of charges levied contrary to Community law would be incompatible with Community law”. The right to recover input VAT is directly effective, notwithstanding the discretion left to Member State regarding its exercise, Garage Molenheide BVB v Belgium (Joined Cases C-286/94 and C-47/96) [1998] STC 126, AG at paragraphs 31-32. In the absence of EU rules governing repayments and time limits, it was for the domestic law of each Member State to designate the courts and tribunals having jurisdiction and to lay down detailed procedures, Marks & Spencer (Case C-62/00) (2002] STC 1036, ECJ paragraph 14. The principle of proportionality is also relevant in this appeal. This principle applies throughout EU law including VAT, Garage Molenheide at [45]-[49]. At a minimum, it means that national rules of procedure and rules of evidence cannot defeat an historic VAT repayment claim, given the fundamental nature of the right to repayment, unless the impact of the rules in the particular case can be justified as proportionate. HMRC's guidance on Fleming claims provides an important context, where HMRC stated that there is no special relaxed evidential rule for historic VAT claims, but "we will accept estimated claims provided that the assumptions on which the estimates have been based are reasonable and sustainable."

Because of the passage of time, the original evidence was no longer available. Most of those employed by the suppliers will have moved to other employers, retired or died. Alternative evidence was available and although inherently of lesser value, it could be relied upon especially as the absence of the original evidence was because the Property Condition had previously barred BDR claims. Approximation was sufficient, provided it supported the conclusions drawn from it – see the Upper Tribunal in Lothian NHS Health Board v RCC [2015] STC 2221 at [21-23].

The legal inability to recover BDR, because of the Property Condition, was strongly suggestive of no prior recovery. When one is trying to prove a negative, then the absence of information was itself relevant.

As regards the Schedules, these related to a company known as TLL. This company was in a special position. It was acquired by the Appellant in 1990. For commercial reasons it retained its own trading terms and accounting teams. It appears that its sale terms did not include a RoT clause and it may have used debt factoring. The Schedules are only pertinent to TLL. Mr Crampton’s evidence is that it was highly unlikely that the UK Group, especially a group the size of the Appellant, would have used factoring, let alone non-recourse factoring. The Appellant’s cost of capital was lower than the cost of factoring, so there was no commercial reason to use factoring. The sales of TLL could be excluded from the Claim to remove the possibility of over-recovery in this respect. It does not afford a ground for rejecting the whole Claim.

The assumptions and methodology of the Claim are set out in RSM’s letter dated 23 May 2018. There are reliable group accounting records for five of the seven periods of account which come within the Claim Period which show the percentage of bad debts suffered. These also show the percentage of UK turnover as a proportion of worldwide turnover so the bad debt figures are based on actual figures. For the two years ending 31 October 1990 and 31 October 1996 the accounts do not show the percentage of bad debts so an average figure for bad debts in the period has been used. The original calculation was revised to remove the sales of NT Access Ltd, which only provided services and was not affected by the restrictions of VAT BDR on sales of goods.

The astute observer will have noted that the submissions made by Mr Southern on behalf of the Appellant are, for all intents and purposes, identical to those made to the Tribunal in Saint-Gobain.

It was in oral submissions that, for the first time, Mr Southern submitted that the decision of the UT in Saint-Gobain Building Distribution Limited v R&C Comrs [2021] UKUT 75 (TCC) (“Saint-Gobain UT”) could be distinguished on the basis of the quality of Mr Crampton’s evidence. He 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. Mr Crampton provided full and informative answers. He can be certain that the Group’s standard terms contained a RoT clause in the same or similar terms to the terms used by the Group in September 2000. He was aware that the BDR rules prevented a claim to BDR where title to the goods title to the goods was retained by the seller. 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. That Group policy was binding on tax compliance. As regards TLL, this was a minor problem and had been dealt with by Mr Crampton in his evidence.

We note that the claim to “statutory interest” was not in the Appellant’s Notice of Appeal nor particularised.

Ms Black made the following submissions on behalf of HMRC.

In summary, HMRC position is:

The burden of proof is on the Appellant and it has produced no evidence fulfilling the requirements for a BDR claim, see Regency Factors plc v The Commissioners for HM Revenue and Customs [2022] STC 323, at [39]-[42]. The courts have made it clear, even in the context of Fleming claims, that it is for the claimant to establish its case, including as to whether claims had not been previously made. The fact that this is an historic claim does negate the need to evidence the claim. HMRC are not denying the Appellant’s San Giorgio right, it is clear the HMRC accept valid claims but they do have to be valid claims, see HBOS plc; Lloyds Banking Group plc v HMRC [2021] UKFTT 307 (TC). HMRC are able and willing to be flexible regarding evidence but there does need to be evidence.

The Appellant’s reliance upon NHS Lothian for the proposition that “… if there is a valid claim, difficulties of evidence and quantification should not as such be a barrier to the making of an order for the repayment of VAT” is misplaced as the Appellant has not come close to overcoming the first hurdle that there is a valid claim, this decision adds nothing further. The Appellant’s appeal rests primarily on the evidence of Mr Crampton. HMRC refer the Tribunal to Gestmin SGPS S.A. v Credit Suisse [2013] EWHC 3560 and Kogan v Martin [2019] EWCA Civ 1645 as to the approach to be taken to assessing his evidence and fallibility of human memory. Mr Crampton’s evidence is all from memory and recollection and prefaced with “on reflection” or “as I recall”. During the Claim period he was not employed in a senior position in the Appellant’s group nor was he involved in preparing and submitting Group VAT returns.

HMRC’s Statement of Case put the Appellant to proof as to what percentage, if any, of sales resulted in bad debts written off by the Appellant. The Appellant’s skeleton argument sets out a brief description of the methodology used and simply asserts that the Group accounts show the percentage of bad debts suffered. No accounts are in evidence before the Tribunal and the Appellant has failed to establish it suffered from any bad debt during the Claim Period.

The Appellant has only produced terms and condition with a RoT clause that are dated after the Claim Period. There is no direct evidence that such a clause was contained in the relevant contracts during the Claim Period. Even if there was a RoT clause during the Claim Period (or it is inferred that there was one), HMRC consider that this would have been ineffective for the following reasons:

HMRC submit that that Property Condition had no impact on the Appellant during the Claim Period and it could have made BDR claims. Following the reasoning of the Tribunal in Saint-Gobain FTT, on the balance of probabilities, it is likely that the Appellant did make claims for BDR during the Claim Period. There is no direct evidence before the Tribunal to undermine this. In contrast, the limited contemporaneous evidence that does exist indicates that BDR claims were made during the Claim Period, the Appellant has failed to satisfy this condition. In addition, there is evidence that the Appellant used factoring services during the Claim Period, the Appellant has failed to satisfy Condition 4 at paragraph 2.2 of VAT Notice 700/18. Mr Crampton’s in cross-examination confirmed that he had no knowledge or involvement with TLL and the Schedules would imply that he had not seen everything in the whole Group.

The methodology used by the Appellant to quantify the BDR claim has not discharged the evidential requirements of Regs. 167 and 168 of the VAT Regulations. It is clear from the Appellant’s own case that at least two sets of amounts were erroneously included in the original BDR claim:

The facts in the Tribunal decision in Saint-Gobain were important and needed to looked at in detail. The decision was after the UT decision in GMAC but before the Court of Appeal decision in GMAC. There was no dispute in Saint-Gobain that the three companies were in the VAT group, the decision was also a decision in principle. At [8], the witnesses were listed and, as in this appeal, included an application to admit further evidence. At [9], the accounting evidence was summarised, the accounting evidence was significantly more than what is before this Tribunal. A “White Book” was in evidence which set out details of the Saint-Gobain’s specific provisions for bad debts and bad debts charged to the P&L account. At [10], Mr Leach, Saint-Gobain’s witness, confirmed that the businesses did not have any old records evidencing: whether bad debts were incurred in the Claim Period, the terms and conditions used at the time and whether BDR had been claimed. Mr Leach’s evidence was similar to that of Mr Crampton. At [11], HMRC’s witness, Mr Lunn, confirmed that a claim that he thought similar to Saint-Gobain’s claim had been made during the Claim Period. At [14]-[28], points were made that are almost identical points to those being made in this appeal. At [48], the Tribunal set out the correct approach to be adopted to determine if there were any prior claims to BDR. At [54]-[55] the Tribunal set out the approach on evidence and the burden of proof stating:

[56]-[90] set out a detailed discussion of the evidence. At [57] the Tribunal set out a typical RoT clause which was in similar terms to that exhibited to Mr Crampton’s statement. The Tribunal made a finding of fact at [58] that it was unlikely that the goods would be sold on in the same condition. At [61]-[67], the Tribunal considered the legal status of the RoT and concluded that title would have passed irrespective of the RoT clause. At [69]-[70], 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 same two consequences apply here.

At [71]-[76], the Tribunal considered the witnesses’ recollection of Saint-Gobain’s accounting treatment for bad debts. Mr Crampton did refer to a company file setting out the Appellant’s procedures but it was referred to for the first time in oral evidence and was not in evidence before the Tribunal. At [86]-[90], the Tribunal held that Harcros, in the same line of business as the claimant companies, did make BDR claims during the Claim Period and this counted against Saint-Gobain on the question of whether that it is more likely than not that BDR was not claimed in the Claim Period. At [91]-[92], the Tribunal concluded that the Appellant had not shown that it more likely than not that no BDR claims were made in the Claim Period and the RoT clause did not prevent title passing to customers when the goods were consumed by being incorporated into building projects being undertaken by the customers.

It is of note that the Appellant’s appeal was stayed behind the Saint-Gobain appeal to the UT. The UT, Judge Raghavan and Judge Brannan, upheld the decision of the Tribunal. At [42] to [46], the UT held that there was nothing illogical in the Tribunal accepting HMRC’s argument that where the Property Condition did not present a bar to BDR claims it was more likely than not that VAT BDR claims were made. That was effectively an inference based on the evidence that if the Appellant could have claimed then it probably would have. The UT rejected the Appellant’s allegations that the Tribunal in its findings of fact had wrongly disregarded or overlooked evidence, at [50], [63], [69] and [75]-[78]. Following the release of the UT decision in Saint-Gobain, the Appellant confirmed that it wished to pursue its appeal as there were important distinguishing factors

This appeal is squarely within the facts of the Tribunal decision in Saint-Gobain and, absent any basis for distinguishing the decision, this Tribunal is bound by the decision of the UT in Saint-Gobain. The Appellant’s skeleton argument did not address the UT decision in Saint-Gobain nor set out why it did not apply here.

We consider it relevant that this appeal was stayed pending the decision in Saint-Gobain UT which was released on 29 March 2021. Following the release of the UT decision, the Appellant confirmed that it wanted to proceed with the appeal on the basis that the decision could be distinguished. As we observed at [33], the Appellant’s submissions in this appeal repeat the submissions that were advanced before the Tribunal in Saint-Gobain, arguments that were rejected. It was only during oral submissions that the Appellant confirmed for the first time that Saint-Gobain UT could be distinguished on a factual basis because of the “quality” of Mr Crampton’s evidence in this appeal. We have considered in detail the decisions of the Tribunal and UT in Saint-Gobain and Ms Black’s submissions at [44] to [48]. Mr Crampton in cross-examination accepted, correctly in our view, that the Appellant’s claim appeared very similar to that made in Saint-Gobain. We agree with HMRC that this appeal falls squarely within the facts and legal issues considered by the Tribunal in Saint-Gobain and that the decision in Saint-Gobain UT is binding upon this Tribunal. We have adopted and applied the reasoning of the Tribunal and UT in Saint-Gobain, which were unchallenged by the Appellant, in determining this appeal. We have below considered whether the “quality” of Mr Crampton’s evidence is such that the decision in Saint-Gobain UT can be distinguished on its facts.

There was no dispute between the parties that the correct approach to determine the issues in dispute were as set out by the Tribunal at [54] in Saint-Gobain: