VAT Credit Notes – Court of Appeal decision
A recent Court of Appeal decision concerned the validity of credit notes. The specifics of the case involved a car dealer who went into administrative receivership. Prior to this event the dealer was supplied with cars by a car manufacturer on what was called a “dealer sold” basis. In essence this meant that VAT was accounted for by both parties whilst payment and title were not transferred until the sale of a car was completed by the dealer.
When the dealer went into administration, the manufacturer repossessed the cars and issued a credit note with the text “cancels previous billings”. HMRC considered the credit notes had been properly issued and repaid the VAT to the manufacturer of the cars. The dealer appealed this decision, lost in Tribunal and then appealed to the Court of Appeal.
The Court of Appeal stated that the taxable consequences of the original supply “can only be discharged by some subsequent contractual rescission or novation which is evidenced by the credit notes”.
The case was remitted back to the Tribunal to be reheard and determined accordingly. This time the Tribunal will need to examine whether the manufacturer had acted within the terms of the supply agreement in issuing credit notes. Interestingly, the Court of Appeal did not specifically comment on whether the credit notes were invalid or ineffective. The final result from the Tribunal is awaited.