The recent European Court of Justice (ECJ) decision in the case of Avon Cosmetics Limited v HMRC has highlighted a little known but important VAT derogation known as the ‘Retail Sale Direction’.
Put simply, the derogation allows HM Revenue & Customs (HMRC) to enforce a VAT charge based on the ultimate selling price of a product rather than on the amount charged by the seller. This is best explained using Avon’s own selling model where Avon Cosmetics Ltd sells products to Avon representatives who onward sell to the public.
The representatives are predominantly not registered for VAT and so the VAT charged to them by Avon is irrecoverable but, if Avon sold directly to the public, this would be a greater sum as the ‘Avon lady’ adds a mark up to the price paid.
Avon argued the validity of the derogation and specifically whether it was lawful, given that it took no account of the notional input tax which the Avon representatives would be able to reclaim on expenses connected with the business and in particular on demonstrator items, if they were VAT registered.
Effectively Avon’s argument was that HMRC wanted to have its lipstick and wear it which was unfair or, as they put it, infringed the principles of proportionality and fiscal neutrality.
In our opinion, Avon clearly had a valid point but the ECJ found in HMRC’s favor that the derogation was valid and lawful and therefore Avon are required to account for VAT on the ultimate selling price of their goods, without any allowance for the VAT which the representatives would notionally be able to recover.
This case was first heard in 2014 and the First Tier Tax Tribunal then found in Avon’s favor but referred the case to the Advocate General for an opinion, hence why it ended up in the ECJ.
HMRC has steadfastly maintained its view throughout and has not entertained claims for notional input tax made by businesses involved in this type of on-selling, perhaps not surprising given the sums involved as Avon’s claim alone amounted to around £14m.
If you or your clients are affected by the Retail Sale Direction and need assistance, please contact the team at UK VAT Advice.