BT incurred bad debts from both business and private customers between January 1978 and March 1989, and wrote to HMRC in March 2009, some 20 years after the end of the period, with a claim for Bad Debt Relief (BDR) which totalled £62.5m.

In legal argument at earlier tribunals, BT relied on EU law and maintained that this provision was contrary to European regulations in the 6th Directive. The company held that it was entitled to exercise its rights under EU law to have BDR in 2009 in spite of later UK legislation which time-barred any further claims under UK law.

The Upper Tribunal looked at whether BT had been unfairly barred from making a claim for BDR because of the way the regulations of the Finance Act 1997 affected the company’s right to rely on the general principles of EU law.  It held that BT’s claim failed as a matter of national law, a conclusion which HMRC did not dispute.

However, HMRC disputed the view that EU law entitled BT to bring its claim in March 2009. The Court of Appeal in the latest case [The Commissioners for Her Majesty's Revenue And Customs v British Telecommunications Plc [2014] EWCA Civ 43] agreed with BT’s argument that UK legislation during that period infringed EU law. Before the law was changed in 1997, taxpayers claiming bad-debt relief had to prove the insolvency of the debtor, a provision the Court said ‘illegitimately deprived a wide class of creditors of their rights’.

BT lost the argument that the 1997 legislation unfairly closed the door to pre-1990 claims. The court took the view that ‘a prudent and circumspect operator’ would have known it had a right to make claims under EU law and would have acted before its claim ran out of time.

The judge in the case said: ‘I do not understand how such unawareness can be a relevant consideration. EU law has been flowing up our estuaries since 1972 and BT had every opportunity to obtain the most expert advice as to its rights. I therefore fail to understand how BT can now say that the eventual demise by the Finance Act 1997 of a bad debt scheme that had included provisions that infringed its directly enforceable EU rights was a change in the law that also infringed its directly enforceable EU rights. It did not.’

‘BT had literally had almost decades in which to enforce its rights, but did nothing towards doing so. The suggestion that the four-month warning of the impending change in the law was too short a warning for BT, or those in a like position, is one with which I also disagree. BT could in fact have sought to enforce its directly enforceable EU rights during that period, although in the event it still did nothing towards doing so for a further 12 years. It is in my view counterintuitive that BT should now be entitled to bring such a stale claim.’

Commenting on the appeal decision Michael Steed, CCH tax contributor, said: ‘This is an important decision about the interaction between EU and UK legislation, and importantly about implicit time limits. The implication for BT is that it should have taken action much earlier and not being aware of its rights is not an adequate defence.’

The ruling is likely to close the door on a number of other VAT claims relating to bad debts incurred several decades earlier.

In a statement, HMRC said: ‘We welcome the Court’s confirmation that UK law, which in 1997 ended a seven-year transitional period for making VAT claims prior to the 1989 change, did not infringe BT’s EU law rights. As the court noted, BT had literally had almost two decades in which to enforce its rights, but did not do so. BT’s claim was submitted 12 years after the transitional period to make claims had expired and was therefore made too late.’

The ruling is here: http://www.bailii.org/ew/cases/EWCA/Civ/2014/433.html