Tag Archives: tribunal

VAT: More on agent or principal – The All Answers Limited case

By   9 December 2018
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Latest from the courts

In the All Answers Limited (AAL) First Tier Tribunal (FTT) case the issue was whether AAL acted as an agent as it contended, or was a principal as HMRC argued. It also considered the position of contracts in certain situations. There have been a huge number of cases on this point, many of which I have commented on. Some of them here here and here

Background

AAL runs an online business which provides essays, coursework and dissertations to students. The FTT found many euphemisms used for this service, but the service which the student paid for effectively passed off other peoples’ work as the students own in order to obtain a certain grade which was decided by the student. Or in other words; cheating. AAL arranged for one of its circa 400 writers, which were usually other students, teachers or lecturers etc (who should have known better) to provide the required work.

Technical

AAL contended that it was acting as the students’ agent in respect of making arrangements to provide the written work. Consequently, it would only account for output tax on the “commission” retained, rather than on the full value of the amount paid by the student – a significant difference. The contracts produced as evidence fully supported the agency analysis. The Terms and Conditions between AAL and the writer provided that the appellant acts as the writer’s agent to sell his/her services and to enter into “relationships” with clients on the writer’s behalf and to collect payment on the writer’s behalf.

HMRC’s view was that there were no agency services supplied and that the economic reality should be examined rather than relying solely on the relevant contracts. The respondent argued that the notion of agency, so carefully woven into the AAL’s Terms and Conditions, lacked both factual and economic reality because the only service provider was the appellant who choose to use a sub-contractor to provide it with the work which AAL ultimately supplied to the client as principal.

The Decision

Unsurprisingly, the judge concluded that the appellant was acting as principal, not agent and so AAL’s appeal was dismissed. In the ruling, certain comments were made which illustrate how the decision was arrived at and are useful to consider when looking at agency/principal positions.

In respect of the T&Cs, the judge observed “…an agreement which is not a sham may nonetheless be artificial and intended to deflect attention from the true positions taken by both the client and the writer, to whom the appellant profitably lends a willing hand, with no concern for ethics or morality”. 

And in respect of the business model: “It could not be stressed more strongly during the appeal before us, and in the documents emanating from the appellant, that its business model is based upon the identity of the client and the identity of the person who is to write the requested piece of academic work, not being made known to one another…” In such circumstances it is difficult to conclude that any agency services are being carried out.

 Commentary

As in nearly all agent/principal cases, the VAT position is determined according to the facts of each individual case. Slight variations may produce different VAT outcomes, so it is crucial to look at the detail of each business activity. Contracts are a useful starting point, but as this case shows, if a contract is deliberately drafted to produce a VAT outcome that is not supported by the actual facts of a transaction then it must be disregarded in favour of an analysis of the economic reality. It seems that in this case, AAL desired agency treatment in order to significantly reduce its output tax (which was sticking tax as the recipient was unable to recover it as input tax). Its advisers drafted the relevant contract with this in mind. The FTT saw through that and, came to this sensible decision.

VAT: Time of supply (tax point). Baumgarten Sports case

By   4 December 2018
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Latest from the courts

In the Baumgarten Sports EJEU case, the matter was the time of supply of a German football agent’s services.

Background

As is common in the football world, clubs make payments to agents in order to obtain the services of footballers. When the agent places a player with a football club, it receives commission from that club, provided that the player subsequently signs an employment contract and holds a licence issued by the Deutsche Fußball Liga GmbH (German Football League). The commission is paid to the company in instalments every six months for as long as the player remains under a contract with that club.

The arguments

The German tax authorities took the view that a tax point was created when Baumgarten Sports services were complete – when the contract was signed, and that output tax was due in full at that time The appellant contended that the rules for “successive payments” applied and that VAT was due on each six monthly payment.

Legislation

The issue is covered by Articles 63 and 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’).

Decision

The supply of services gave rise to successive payments, the chargeable event for VAT occurs and VAT becomes chargeable on expiry of the periods to which those payments relate (re; Asparuhovo Lake Investment Company, C‑463/14).

The chargeable event (tax point) and chargeability of a tax on the supply of the agent’s services must be regarded as occurring, not when the player is placed, but on expiry of the periods to which the payments made by the club relate.

Commentary

It is useful to look at the UK tax point rules for services, which I have summarised here:

VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

  • calculating turnover for VAT registration purposes
  • establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
  • establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest, or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The basic tax point for a supply of services is the date the services are performed.

Actual tax point

Where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule

There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services 

If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

  • A VAT invoice is issued
  • a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

  • The date an invoice is issued
  • The date payment is received
  • The date title to goods is passed, or services are completed.

Planning

Tax point planning can be very important to a business. the aims in summary are:

  • Deferring a supplier’s tax point where possible
  • Timing of a tax point to benefit both parties to a transaction wherever possible
  • Applying the cash accounting scheme (or withdrawal from it)
  • Using specific documentation to avoid creating tax points for certain supplies
  • Correctly identifying the nature of a supply to benefit from certain tax point rules
  • Generating positive cashflow between “related” entities where permitted
  • Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
  • Planning for VAT rate changes
  • Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

As always, please contact us if you have any queries.

VAT: Are sales from Student Union shops exempt?

By   5 November 2018
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Latest from the courts

In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here

The two issues before the UT were:

  • were the shops eligible bodies, and
  • were the sales closely related to education supplies?

 Background

The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.

Legislation

The legislation (where relevant to this case) is:

VAT Act 1994, Group 6, Item No 1, item 4

1 The provision by an eligible body of (a) education; …

4 The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply…

Decision

Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.

Commentary

The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.

Our offering to education bodies here

VAT: Valuation – interest free credit

By   15 October 2018
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Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

  • a consumer purchases goods in a Dixon store and pays a deposit to Dixon
  • the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
  • the customer gives authority to the loan company to pay the money borrowed to Dixon
  • the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
  • the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
  • the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms.  As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.

VAT – When is chocolate not chocolate (and when is it)?

By   4 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Kinnerton Confectionery Ltd the issue was whether a product could be zero rated as a cooking ingredient, or treated as standard rated confectionary (a “traditional” bar of chocolate.)

Background

The product in question was an allergen free “Luxury Dark Chocolate” bar. It was argued by the appellant that it was sold as a cooking ingredient and consequently was zero rated via The Value Added Tax Act 1994, section 30(2) Schedule 8. HMRC decided that it was confectionary, notwithstanding that it could be used as a cooking ingredient.

Decision

The judge stated that what was crucial was how the chocolate bar was held out for sale. In deciding that the chocolate bar was confectionary the following facts were persuasive:

  • the Bar was held out for sale in supermarkets alongside other confectionery items and not alongside baking products
  • it was sometimes sold together with an Easter egg as a single item of confectionery
  • although the front of the wrapper included the words “delicious for cakes and desserts”, it contained no explicit statement that the Bar was “cooking chocolate” or “for cooking”
  • the back of the wrapper made no reference to cooking. It also stated that the portion size was one-quarter of a bar. Portion sizes are indicative of confectionery, not cooking chocolate
  • Kinnerton’s website positioned the Bar next to confectionery items, and did not say that it was cooking chocolate, or that it could be used for cooking
  • neither the wrapper nor Kinnerton’s website contained any recipes, or any indication of where recipes could be found
  • the Kinnerton brand is known for its confectionery, not for its baking products. All other items sold by Kinnerton are confectionery, and the brand is reflected in the company’s name
  • the single advertisement provided as evidence positioned the Bar next to confectionery Items, and did not say that the Bar was “cooking chocolate”; instead it made the more limited statement that it was “ideal for cooking”
  • consumers generally saw the Bar as eating chocolate which could also be used for cooking 

Commentary

Clearly, the FTT decided that consumers would view the chocolate bar as… a chocolate bar, so the outcome was hardly surprising. This case demonstrates the importance of packaging and advertising on the VAT liability of goods. Care should be taken with any new product and it is usually worthwhile reviewing existing products. This is specifically applicable to food products as the legislation is muddled and confusing as a result of previous case law. This extends to products such as pet food/animal feedstuffs which while containing identical contents have different VAT treatment solely dependent on how they are held out for sale. And we won’t even mention Jaffa Cakes (oops, too late).

VAT – Catering at a university campus; exempt?

By   3 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Olive Garden Catering Company Ltd (OGC) the mian issue was whether catering which was provided to the University of Aberdeen (UOA) students was an exempt supply. The specific issue was whether the catering was a supply “closely connected to education” which in turn depended on which entity was actually making the supply to students. For exemption to apply, OGC would need to be a principal in purchasing the food and other goods and an agent of UOA (pictured above) in delivering the catering (the exemption could not apply to a supply by OGC to the students).

Background

The central issue was whether the supply of food and staff by the appellant to UOA was a single supply of catering services at the standard-rate for VAT purposes (HMRC’s case) or that the main supply was for food at the zero-rate, with the supply of staff being a separate supply and eligible for staff wages concession which was the appellant’s stance. I comment that the procurement as principal and the delivery of catering as agent is common practice in the education sector and this case focussed on whether the relevant documentation actually reflected the economic reality.

Decision

The HMRC internal VAT manual VTAXPER64300 sets out the general principles for determining the VAT treatment of supplies made under a catering contract, which in turn depend in some situations on the capacity in which the caterer supplies its service, whether as principal or agent in the agreement. Of relevance in this case were the following statements:

(1) In general, it has been established practice that agency contracts are most often used in the education sector.

(2) Under agency contracts for the provision of catering it is accepted that:

  • The client makes a taxable supply of catering to the consumer, or the catering is subsumed within an overall exempt supply, eg; of education
  • VAT is not charged to the client on wages of the catering staff employed at the unit
  • VAT is charged on any management fee plus taxable stock and other services
  • Schools may only exempt supplies which are closely related to the overall provision of education

(3) This contributes to fair competition with in-house providers, and the contract catering industry acknowledges the value of that.

In respect of the contract for the supply of catering services, UOA was the principal and OGC was the agent by reference to the control exercised over; menu specifications, pricing, and the premises in which catering was carried out. The relevant contracts set out that the terms were set by UOA and were indicative of its status as the principal in the catering contract. The judge stated that the catering contracts between UOA and OGC appeared to be an agency contract with OGC acting as the agent. Consequently, the food produced OGC and served by its staff at UOA’s halls of residence was potentially a supply of food in the course of catering that can be subsumed within the overall exempt supply of education by UOA.

Commentary

A win for the appellant, but only after comprehensive consideration of all points and the substantial detailed documentation by the judge. There has been a run of Tribunal cases on the agent/principal point (not just in education and which I have covered in previous articles) and this case serves to demonstrate that each case will be determined on its merits. There can be no blanket VAT treatment and certain factors will point one way and others to a different VAT treatment. In my experience, HMRC are always eager to challenge agent/principal treatment and it is an area which has an enormous tax impact on a business. I always recommend that any contracts/documentation which cover potential agent/principal issues are reviewed to avoid unwanted attention from HMRC. Slight adjustments to agreements often assist in reaching the desired tax treatment. Don’t leave it to chance!

VAT: Adecco Court of Appeal case. Agent or principal?

By   6 August 2018
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Latest from the courts

In the recent Court of Appeal (CA) case of Adecco here the issue was whether the services provided by Adecco – an employment bureau which supplied its clients with temporary staff (temps) were by way of it acting as principal or agent.

Background

Details of the issues as considered in the FTT and UT were covered here 

Overview

As is often the case in these types of arrangements, there are some matters that point towards the appellant acting as agent, and others indicating that the proper VAT treatment is that of principal. The important difference, of course, being whether output tax is due on the “commission” received by Adecco or on the full payment made to it (which includes the salaries of the relevant workers).

Decision

The CA decided that the supply of temporary staff by Adecco was as principal and consequently, VAT was due on the full amount received, not just the commission retained.

Reasoning

The CA focussed on the contractual position. Among the reasons provided for this decision were as follows (I have somewhat summarised). I think it worthwhile looking in some detail at these:

  • There was no question of the temps having provided their services under contracts with the clients: no such contracts existed. The contractual position must be that the temps’ services were provided to clients in pursuance of the contracts between Adecco and its clients and Adecco and the temps.
  • Although the contract between Adecco and a temp referred to the temp undertaking an assignment “for a client” and providing services “to the client”, it also spoke of the client requiring the temp’s services “through Adecco” and of the temp being supplied “through Adecco”.
  • While temps were to be subject to the control of clients, that was something that the temps agreed with Adecco, not the clients. The fact that the contract between Adecco and a temp barred any third party from having rights under the Contracts (Rights of Third Parties) Act 1999 confirms that the relevant provisions were to be enforceable only by Adecco, which, on the strength of them, was able to agree with its clients that the temps should be under their control. Adecco can fairly be described as conferring such control on its clients. (Broadly; the employment regulations required Adecco to treat itself as a principal with the result that that it could not therefore treat itself as an agent).
  • Adecco paid temps on its own behalf, not as agent for the clients.
  • Adecco by did not drop out of the picture once it had introduced a temp to a client. It was responsible for paying the temp (and for handling national insurance contributions and the like) and had to do so regardless of whether it received payment from the client Adecco also enjoyed rights of termination and suspension. It is noteworthy (as the UT said) that the contract between Adecco and a temp proceeded on the basis that a temp’s unauthorised absence could “result in a breach of obligations which we owe to the client”.
  • Adecco did not perform just administrative functions in relation to the temps. The temps, after all, were entitled to be paid by Adecco, not the clients.
  • Adecco charged a client a single sum for each hour a temp worked. It did not split its fees into remuneration for the temp and commission for itself.
  • The fact that Adecco had no control over a temp in advance of his taking up his assignment with the client did not matter.
  • Adecco undoubtedly supplied the services of employed temps to its clients.
  • In all the circumstances, both contractually and as a matter of economic and commercial reality, the temps’ services were supplied to clients via Adecco. In other words, Adecco did not merely supply its clients with introductory and ancillary services, and VAT was payable on the totality of what it was paid by clients.

Action

Clearly this was not the outcome the appellant desired, and it may impact similar arrangements in place for other businesses.  Although found on the precise nature of the relevant contracts, the outcome of this case is not limited to employment bureaux and similar but must be considered in most cases where commission is received by an “agent”. These may include, inter alia; taxi services, driving schools, transport, travel agents, training/education, online services, repairs, warrantee work and many other types of business. It is crucial that contracts are regularly reviewed the ensure that the appropriate VAT treatment is applied and that they are clear on the agent/principal relationship. If there is any doubt, please contact us as it is often one of the most ambiguous areas of VAT.

VAT – Zipvit Court of Appeal decision

By   18 July 2018
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Latest from the courts

The Zipvit Court of Appeal (CA) case here

Background

A full background of this long running case may be found here

In summary: It was previously decided that certain supplies made by Royal Mail (RM) to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services made retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price. HMRC maintained that the absence of a VAT invoice showing that VAT was charged to Zipvit by RM, and giving details of the rate of tax and the amount charged, was fatal to Zipvit’s claim to recover input tax.

The decisions in the First Tier Tribunal (FTT) and the Upper Tribunal (UT) went against Zipvit so the appeal went to the CA.

Decision

The CA upheld the decisions in the previous courts. The appellant failed to demonstrate that the relevant VAT had been “due or paid” on the supplies received from RM. It further appeared that evidence which was not present at earlier hearings showed that the amounts paid were exclusive of VAT which meant that VAT was not embedded in the consideration paid.

Importance

In the words of the judge Lord Justice Henderson the appeal raised some important questions of principle in the law of VAT. They arise when supplies of goods or services, which were wrongly assumed by the parties to the relevant transactions and by HMR to be exempt from VAT at the time of supply, are later discovered to have been subject to the standard rate of tax when they were made, following a decision to that effect by the Court of Justice of the European Union. Where the recipient of those goods or services was itself a registered trader which made taxable supplies on which it accounted for output tax, the basic question is whether, once the true position has become known, the recipient is in principle entitled to recover as an input tax credit the tax element of the consideration which it paid for the original supplies. If so, does it make any difference if the supplier has failed to pay the tax which should have been paid on the original supplies, and if the recipient is in consequence unable to produce a tax invoice from the supplier showing the amount of the input tax which it seeks to recover?

So a fundamental tenet of VAT was considered, as well as the matter of this being the lead case behind which many others were stood. I understand that the quantum of claims submitted is circa £1 billion in total so there was a lot riding on this decision.

Commentary

In my view, this is an important case for the above technical reasons and the whole decision bears reading in order to understand some of the intricacies of a business claiming input tax.

Beyblades – a Customs Duty case

By   17 July 2018
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Latest from the courts

In the Court of Appeal (CA) case of Hasbro European Trading BV (Hasbro) the issue was whether Customs Duty (CD) was due on the import of Beyblades. If they fall within the definition of a toy CD is payable at 4.7%. However, if they are more accurately classified as a game they are treated as duty free – so a significant difference in import cost dependent on what, superficially, appears to be a somewhat question of semantics.

Beyblades 

For the purposes of the case, it is important to understand what a Beyblade is and how it is used.

Beyblade is the brand name for a line of spinning tops originally developed and manufactured by Tomy in Japan. The main novelty is that they are a series of items which are customisable, with interchangeable parts. A Beyblade is set in motion by means of a rip-cord powered launcher.

A “game” is played with two players. Each player is allowed  a number of Beyblades to choose from during a match. Players may use any parts available to them to make their Beyblades), but may not switch parts once a match has started. The first player to reach seven points wins. Points are awarded to the player based on how their Beyblade knocks out the opponent’s

  • One point is awarded if the opponent’s Beyblade stops spinning
  • One point is awarded if the opponent’s Beyblade is knocked out of the stadium or into a pocket on the edge of the ring
  • Two points are awarded if the opponent’s Beyblade breaks during a game

The Arguments

The case concerned the classification of Beyblades’. The appellant, Hasbro contended that Beyblades are correctly classified as “articles for … table or parlour games” under heading 9504 of the Combined Nomenclature. In contrast, HMRC maintained that Beyblades should be classified as “other toys” under heading 9503,  The First-tier Tribunal FTT and the Upper Tribunal (U’) both previously agreed with HMRC’s analysis.

Classification

There are “explanatory notes” to the Harmonised System (HSENNs). The CA ruled that the classification rule which prefers the most specific description does not apply at the level of the HSENs: they are an important guide to interpretation, but do not have force of law.

The Decision

The CA allowed the appeal and went against the decisions in the FTT and UT. The judge concluded that “In the circumstances, it seems to me to fall to us to decide which of the alternative headings provides the more specific description. In my view, it is heading 9504. As I see it, “articles for … parlour games” encompasses a more limited range of goods than “toys” and “more clearly identifies Beyblades”, particularly since, as I say, “articles for … parlour games” reflects the fact that Beyblades are meant to be used in games…”. The fact that Beyblades are used in a competitive scenario seems to have swung the decision which knocked out HMRC. Consequently, there was no CD payable as they fell to be duty free.

Commentary

It does beg the question; why did this issue need to get to the CA for the appellant to finally win (but of course, this isn’t the first case which has raised that question). Perseverance was clearly the key word here. If you are convinced that HMRC is wrong on ay matter, it really does pay to challenge any ruling.

New RCB 5 – VAT treatment of goods supplied on approval

By   25 June 2018
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Goods supplied on approval

Meaning

Goods supplied on approval is an arrangement under which items of durable nature are provided to a prospective customer for a pre-purchase trial. These items are returnable after a specified period in re-saleable condition if not accepted for purchase.

New publication

HMRC has announced via Revenue and Customs Brief 5 (2018) “RCB 5” changes to the way goods supplied on approval are treated for VAT purposes.

The broad thrust of RCB 5 is that, in HMRC’s opinion, taxpayers are using the rules for goods supplied on approval when this treatment is inappropriate.

The goods supplied on approval rules

Output tax is due at the end of the approval period. That is, tax is deferred until a time the goods are adopted (if they are). These rules are distinct from a supply of goods with a subsequent right to return them. In these cases the tax point is when title passes.

Sale on approval was considered by the Tribunal in the case of Littlewoods Organisation plc (VTD 14977). The Tribunal held that goods were supplied on approval where there is no contract of sale unless, and until, the recipient concerned adopted or was deemed to have adopted the goods. The judge in that case decided that Littlewoods did not supply goods on approval. This case appears to have triggered an HMRC initiative to look at the number of businesses which may be incorrectly deferring output tax by using these rules. It concluded that a lot fewer taxpayers were actually providing goods on approval than previously thought.

Technical

The basic tax point for a supply of goods in these situations is determined by the VAT Act 1994 section 6(2) (c) which applies in the case of goods on approval. It delays the basic tax point until the time when the goods are adopted by the customer or twelve months from the date they were originally despatched, whichever is the earlier

Section 6(2)

(2) … a supply of goods shall be treated as taking place –

(a) if the goods are to be removed, at the time of the removal;

(b) … ;

(c) if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time it becomes certain that the supply has taken place or, if sooner, 12 months after the removal.

The guidance

HMRC has published the RCB to provide guidance on how businesses should review their transactions in order to establish whether they are using sale on approval treatment correctly.

Indicators of goods supplied on approval

Whether or not goods are supplied on approval will depend on the facts in each case and will require consideration of a number of indicators which will have to be carefully weighed against each other.  Relevant indicators include the following factors but they are not exhaustive.

  • The terms and conditions of trading, and all contractual terms applying.
  • The time when title in the goods passes to the buyer.
  • The time at which the buyer has the right to dispose of the goods as owner.
  • The view presented to the customer in marketing literature, order forms, delivery notes, statements etc.
  • The rights of the customer to return unwanted goods.
  • The terms of any supply of credit finance provided with the goods.
  • The time when payment for the goods is demanded.
  • The time when payment for the goods is received.
  • The time when the buyer assumes responsibility for the upkeep and insurance of the goods.
  • Anything the buyer does to signify his adoption of the goods.
  • The calculation of the minimum payment due for goods delivered.
  • The time when a sale is recognised in the financial accounts of the business.

(these indicators are not featured in RCB 5).

Deadline

HMRC state that from 18 September 2018 all business must change their accounting systems and accurately apply the appropriate VAT treatment. However, no action will be taken for past inaccuracies and taxpayers will not be required to make any changes to records or declarations.

Delivery charges

In normal circumstances, the fee charged for delivery follows the VAT liability of the goods being supplied (it is a single supply of delivered goods). However, the RCB somewhat controversially, states that when goods are supplied on approval the delivery charge is not ancillary. HMRC conclude that as delivery occurs before the customer or the supplier know whether there will be a supply of goods, delivery is an aim in itself, represents a separate, independent supply and is not dependent upon the supply of goods. The purpose of the delivery service is to facilitate the customer inspecting the goods to decide whether or not they wish to purchase them. This is always a standard rated supply and consequently, output tax is due on this fee, whether or not the goods are adopted (and with a tax point prior to adoption or return). I expect that this analysis will be challenged at some point as it does not, in my mind, sit comfortably with previously decided case law.

Action 

Businesses which consider themselves to be supplying goods on approval (usually mail order businesses) need to review their terms and manner of trading to identify whether that is indeed the case. Consideration must be given to the above indicators, the ruling in the Littlewoods case and the information in RCB 5. If what is being provided falls outside the definition of a supply on approval, the necessary changes are required in order to recognise a sale at an earlier time. Even if goods are supplied on approval, the VAT treatment of delivery charges need to be reconsidered and adjusted if need be. We can assist if required.