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ECJ asked to consider UK’s VAT Treatment of Supplies made to Unregistered Sellers

May 22 2014

In the recent case of Avon Cosmetics Limited (Avon) v HMRC (LON/2004/1028) the First Tier Tribunal (“FTT”) considered the appellant’s claim for Value Added Tax (“VAT”) relating to the repayment of a significant amount of VAT, estimated at £14 million. The FTT stated that, as this matter related to the validity of Article 11 of the Sixth Directive (implemented in Paragraph 2 of Schedule 6 of the Value Added Tax Act 1994 (“VATA 1994”)), it should be referred to the European Court of Justice (“ECJ”).

Facts: Avon Cosmetics Limited (Avon) v HMRC

The appellant taxpayer, Avon Cosmetics Limited (Avon), sells its products to representatives who in turn make retail sales to their customers.  The Appellant’s trade involves selling not only toiletries, make-up, skincare products and perfumes but numerous other items such as clothing and children’s toys.

The appellant has operated the business model of selling its products to various representatives (commonly known as Avon Ladies) who would sell these products to customers. The representatives are given a discount from the “brochure prices” of either 20% or 25%. The vast majority of these representatives have modest income and are not registered for VAT purposes.

In accordance with VAT principles, the consequence of this is that VAT would only be charged on the consideration received from the sales to the representatives and no VAT would be charged in respect of the retail sales.  However, by way of derogation approved by the EU Council,  HMRC sought to charge VAT on the supplies made by Avon at the full open market rate.

Legal Dispute: Sch. 2 of Para. 6 of the VAT Act 1994 

Avon appealed to the FTT arguing that the treatment on valuation is incorrect because it fails to take into account the seller’s costs which would have been deductible had the representatives been registered for VAT purposes.

Avon raised a grievance relating to the way in which VAT can be charged, namely by selling to non-VAT registered individuals, who in turn sold to the ultimate customers.  Avon claimed that the derogation under Article 11 of the Sixth Directive (as implemented by paragraph 2 of Schedule 6 of the VATA 1994) resulted in the infringement of fundamental VAT principles.

Paragraph 2 of Schedule 6 of the Value Added Tax Act 1994 states where:

” (a) the whole or part of a business carried on by a taxable person consists in  supplying to a number of persons goods to be sold, whether by them or others, by  retail, and  (b) those persons are not taxable persons, the Commissioners may by notice in writing to the taxable person direct that the value  of any such supply by him after the giving of the notice or after such later date as may  be specified in the notice shall be taken to be its open market value on a sale by retail.”

FTT’s Decision: 

The FTT agreed with Avon and stated that the derogation did not achieve its objectives in a proportionate manner. The FTT said it would prefer to insert the deduction of expenses from the derogation, rather than declare it invalid.

However, the FTT did not consider it had jurisdiction to effect an amendment to the derogation or to declare it invalid. Therefore, the FTT referred the question as to the validity of the derogation to the ECJ.

HMRC have indicated that it would seek to appeal to the Upper Tribunal to prevent the question being referred to the ECJ.

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