CJEU: Avon Cosmetics Ltd v The Commissioners for Her Majesty's Revenue and Customs (C-305/16)
On 14 December 2017, the CJEU ruled in Avon Cosmetics (C-305/16), holding that the UK's derogation for direct selling is in line with EU law.
Facts in Avon Cosmetics
Avon Cosmetics is a manufacturer of cosmetics and sells its products on the UK market through a direct selling system. Products are sold below retail price to independent representatives, including VAT. The representatives in turn make sales to their customers at retail price. These supplies are in most cases not subject to VAT, as the representatives are non-taxable resellers.
Under the standard rule that VAT is charged on the actual amount received by Avon, the UK Treasury would lose VAT revenue. No VAT would be levied on the profit margins of the representatives. To avoid this, the UK obtained a derogation from the EU Council to charge VAT on sales of a direct sales company's products to final consumers made by non-taxable resellers, by determining the taxable amount of that company in the light of the open market value of the goods sold by those resellers.
The legal issue in the Avon case
Avon also sold demonstration items known as demos - which are used to increase sale volumes - to the representatives with VAT. Since the representatives were not VAT registered they could not recover the VAT charged on these demos, which they could have recovered if they had been VAT registered.
Thus, the total VAT burden throughout the supply chain while selling through non-registered representatives is higher than when selling through VAT taxable persons. Because of this, Avon decided to apply for a refund of the irrecoverable input VAT borne by the representatives.
The CJEU considers that derogations should be interpreted strictly and that therefore Avon should not be able to recover the VAT charged on the demos to representatives. This is because the derogation only allows the UK in specific circumstances to deviate from the standard rule regarding the taxable amount and not to deviate from the rules regarding the right to deduct input VAT.
Also, the CJEU rules that the derogation is compatible with the principles of proportionality and fiscal neutrality. First, because the derogation does not go beyond what is necessary in order to avoid tax avoidance. Second, because the overpayment of VAT in the direct sales model is merely a consequence of the choice made by Avon to use the direct sales model to market its products.
This case illustrates clearly that national derogating measures should always be interpreted strictly. Provided that the derogating measure is compatible with the principles of proportionality and fiscal neutrality, this equally applies when derogative measures lead to an overpayment of VAT in the supply chain.