VAT Debt Relief – British Telecom Plc vs HMRC

The lengthy and complex court case between British Telecommunications plc (BT) and HM Revenue & Customs (HMRC) over VAT bad debt relief originated in the late 1970s.

In 1978, the UK introduced its first bad debt relief scheme under the Finance Act 1978. This “Old Scheme” allowed companies to claim relief from VAT paid on sales where the customer subsequently failed to pay. However, strict conditions applied – notably, customers had to become insolvent before relief could be claimed.

The Old Scheme was replaced in 1990, but transitional provisions allowed claims to continue to be made under the original scheme. The Old Scheme was finally abolished in 1997, prohibiting claims after March of that year.

Meanwhile, since 1978, EU law has granted directly effective rights to claim bad debt relief under the Sixth VAT Directive. This was not conditional on customer insolvency. The problem for BT was that most unpaid bills needed to be bigger to trigger customer insolvency. So while EU law granted relief, UK law prevented it through the insolvency condition.

BT’s VAT Appeal

2009 BT wrote to HMRC, claiming over £200m in relief for bad debts accrued on unpaid customer bills from 1978 to 1989. HMRC rejected the claims.

BT appealed to the First Tier Tribunal in 2010. Two key elements were:

• The “Nine Month Claim” – 1978 up to the introduction of the Old Scheme
• The “Main Claim” – 1978 to 1989 under the Old Scheme

The complexity arose because domestic law prevented BT from accessing its EU law right to relief. Therefore, BT had to argue for UK law to be interpreted compatibly with EU law.

BT wanted its appeal joined with another VAT case – GMAC v HMRC. So in 2012, BT agreed to have preliminary issues decided by the Upper Tribunal rather than undergo a full fact-finding trial at the First Tier Tribunal.

The Upper Tribunal Decision

Three preliminary issues were referred to the Upper Tribunal:

1. Was BT’s 2009 claim barred by the lapse of time?
2. If so, did UK law (section 39(5) Finance Act 1997) have to be disapplied to allow BT’s claim?
3. Could BT make its claim under section 80 of the Value Added Tax Act 1994, which allows recovery for overpaid VAT?

The Upper Tribunal found the 2009 claim was not time-barred as BT was not given adequate notice that the Old Scheme would be abolished. On issue 2, it agreed that section 39(5) had to be disapplied to allow BT’s claims. On issue 3, it was found that section 80 did not assist BT.

Both parties appealed to the Court of Appeal.

The Court of Appeal Decision

The Court of Appeal overturned the Upper Tribunal’s finding on issue 2. It held that the 4-month notice period for abolishing the Old Scheme was adequate and not contrary to EU law. BT’s claims under the Old Scheme were therefore barred with effect from 1997.

On issue 1, it upheld the Upper Tribunal’s conclusion that BT’s claims were short-lived as of 2009. However, it’s finding on issue 2 meant the Old Scheme route was closed.

On issue 3, the Court agreed that section 80 did not provide BT with an alternative route for its claims. BT could not retrospectively re-characterize its VAT payments as overpayments under section 80 because debts later became bad.

Permission to appeal to the Supreme Court was refused, ending the litigation.

Back to the FTT and the 2020 Decision

With the preliminary issues decided in 2015, the case returned to the First Tier Tribunal for a full factual hearing. But HMRC applied to strike out BT’s appeal, arguing the Court of Appeal’s findings left no prospect of success.

In 2020, the FTT agreed and struck out BT’s appeal. BT appealed that decision to the Upper Tribunal, bringing us to the present case.

The 2023 Upper Tribunal Decision

BT argued that the Court of Appeal had yet to resolve whether its 2009 letter could be a claim under section 80 and whether such a claim would be time-barred.

It claimed two routes made section 80 relevant:

1. Retrospectively treating VAT accounted for on bills subsequently unpaid as overpayments.
2. Arguing unpaid VAT on bad debts automatically sets off against later payments, making those payments overpayments.

BT said that as the Court of Appeal only addressed Route 1, route 2 remained open. It was prevented from making this argument fully before, so the Tribunal could depart from the Court of Appeal decision under the later Iveco case on section 80.

The Upper Tribunal firmly rejected BT’s arguments. It found:

• The Court of Appeal considered and rejected BT’s section 80 arguments on routes 1 and 2.
• Issue estoppel prevented BT from re-litigating issues the Court of Appeal decided in these proceedings.
• Res judicata meant all routes for claiming under section 80 were barred.
• Decisions in Iveco, GMAC and other cases supported section 80 not applying to bad debt relief.
• EU law required BT to make its claim under the Old Scheme, suitably adapted to allow its EU law right. Section 80 was not the prescribed mechanism.

The Upper Tribunal upheld the First Tier Tribunal’s decision to strike out BT’s appeal. The Court of Appeal judgment was conclusive – with no remaining issues to litigate, BT’s appeal could not succeed.

Analysis

This case highlights the difficulties taxpayers can face enforcing EU law rights when domestic legislation is incompatible. BT was caught in a “catch-22”. UK law prevented relief through stringent conditions. But as the UK had implemented a relief scheme, BT had to use that route rather than claim directly under EU law. BT had to unsuccessfully challenge UK law over decades to benefit from its EU right.

The preliminary issue shortcut proved risky. Seeking a quick win, BT agreed to limited Upper Tribunal findings rather than full evidence-based decisions. When those findings were overturned, BT was exposed without a fallback. It left BT arguing on a narrow technical point – whether a letter could be interpreted as a claim under specific UK legislation – rather than exposing the full injustice caused by incompatible domestic law.

BT’s section 80 arguments were inventive but futile once the Court of Appeal ruled that route out. The Upper Tribunal decision shows the high bar to overturn a Court of Appeal judgment in the same proceedings.

With its routes via domestic law blocked, BT’s only potential remedy was Francovich damages against the UK for failing to implement the Sixth Directive properly. But given the long delay before bringing its claim, BT may have struggled to meet the Francovich requirements.

Overall, the case illustrates how hard it can be for taxpayers to exercise EU rights when member states fail to transpose directives into national lawfully. Taxpayers face high hurdles in arguing that domestic legislation should be interpreted to lift restrictions preventing EU rights from being granted. Even navigating the system properly over decades may not result in redress.

For VAT Tax Investigations, tax resolution or compliance, please contact Tax Advisors at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.