VAT Basics
Consideration – background
There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.
The expression “consideration” means everything received in
return for the supply of goods or the provision of services, including
incidental expenses (packing, transport, insurance etc). Consideration
is a payment for the supply of goods or services. It is usually a payment in
money, but can also be of a “non-monetary” nature, such as goods or services
supplied in return.
The phrase “in return for the supply” is interpreted to mean
that there must be a direct link between the supply and the consideration.
Therefore, in order that a supply for a consideration can be
made, there must be at least two parties and a written or oral agreement
between them under which something is done or supplied for the consideration.
There is a direct link between the supply and the consideration because the
supplier expects something in return for his supply and would not fulfil his
obligation unless he thought that payment would be forthcoming.
Profit
It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes.
Importance
If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.
if there is no consideration, there is no supply.
Consideration hallmarks
- Consideration is defined widely to bring within the
tax everything which the taxable person receives as consideration for the goods
or services supplied.
- The consideration must be capable of being
expressed in money.
- There must be some form of bargain or transaction
between the parties.
- A payment should be related to what the payer
receives although the fact that people pay the same amount for varying benefits
does not stop it from being consideration.
Consequently, if
the provision of goods or services is incapable of being expressed in money, it
is not consideration and is outside the scope of VAT.
Indicators of no consideration
- The absence of any consensual element on the part
of the payer.
- A lack of control by the payer over the services
provided.
Valuation of consideration
This
may seem obvious, but as the amount of case law demonstrates, this is not always
the case. The starting point is:
Monetary consideration
Monetary consideration includes cash and payment by cheque, credit
card, bank transfer, contactless payment, deduction from pay, etc. This
is set out in The VAT Act 1994, section 19(2).
Non-monetary consideration
Non-monetary
consideration includes goods or services supplied as payment, for example in a
“barter” (including part exchange) agreement. Services provided include the
giving up of a right, refraining from doing something, agreeing to suffer some
loss etc in return for the supply. At first sight these may appear to be merely
conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly
consisting of money, its value shall be taken to be such amount in money as,
with the addition of the VAT chargeable, is equivalent to the consideration.
Where a supply of any goods or services is not the only
matter to which a consideration in money relates, the supply is deemed to be for such
part of the consideration as is properly attributable to it.
In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.
What is not consideration
Donations
If a monetary donation is freely given, it is not consideration
for any supply and so is outside the scope of VAT. In this situation, the
donation has to be unconditional, and the following points dictate whether this
is the case.
- Does
the donor receive anything in return for the payment?
- Are
there any conditions attached to the payment?
- What
will the payments be used for?
- If
the donor does not benefit directly, does any third party receive a benefit?
- Is
there a contract and what are the terms and conditions?
Donations
must be contrasted to sponsorship.
It is necessary to distinguish between donations
and sponsorship payments. Whereas a donation means the donor does not expect
anything in return, sponsorship involves the sponsor receiving identifiable
benefits. These benefits may include advertising, publicity or use of
facilities and any sponsorship payment is within the scope of VAT.
Open
Market Value
The
VAT Act 1994, section 19 (5) states that “…the open market
value of a supply of goods or services shall be taken to be the amount that
would fall to be taken as its value …if the supply were for such consideration
in money as would be payable by a person standing in no such relationship with
any person as would affect that consideration”.
Difficult
areas
Commonly,
areas which give rise to VAT consideration problems include, but are not
limited to:
- when consideration is provided in return for supplies of differing VAT liabilities
- Special Valuation Provisions in The VAT Act 1994, Schedule 6
- supplies to staff or goods for own use
- discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
- barter transactions – when each supply has a different value
- part-exchange
- apportionment of monetary consideration
- separate/composite supplies
- supplies between connected parties
- direct selling structures
- gifts, prizes, and reward goods.
- imports
- prompt payment discounts
- deemed supplies
- non-business use of business assets or of services supplied to a business
- reverse charges
- reduced rate accommodation
- supplies expressed in foreign currencies
- transfer pricing
- business gifts/samples
- caravans sold with contents
- self supplies
- club membership benefits
- correspondence courses
- opticians and hearing aid dispensers (exempt services vs standard rated goods)
- rebates/refunds
- disbursements
- tour operators (TOMS)
- partial exemption
Further reading
For
purposes of research or interest, the following cases on consideration are
worth reading:
Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!
BAZ
Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften
Apple
& Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)
Tolsma
C-16/93 (1994 STC 509)
Naturally Yours Cosmetics Ltd
Empire Stores Ltd