On 16 April 2014, HMRC set out its position following the Avon Cosmetics1 First-tier Tribunal (FTT) decision to make a reference to the European Court of Justice (ECJ).

At issue in this case was the adjusted mechanism for charging VAT on companies effecting their sales by selling to non-VAT registered individuals, who in turn sold to the ultimate customers. The UK implementation of the derogation disregards any costs incurred by the representatives, and thus disregards any input tax in respect of these costs which would have been deductible had the representatives been VAT-registered.

The FTT did not have jurisdiction to make a declaration to the effect that the act which authorised the derogation was invalid, but considered that the derogation:

“exceeded its proper scope, needlessly breached fundamental principles of the VAT scheme … and has produced an incoherent result. Our own view is accordingly that unless the derogation can be saved by the importation of the wording canvassed in this Decision, the derogation should be declared invalid by the ECJ.”

The Brief states that HMRC remains of the view that the derogation has been applied correctly and will not object to questions being referred to the ECJ that go beyond whether the authorisation of the derogation was valid. HMRC will not be appealing the FTT decision.

In the meantime, HMRC policy remains that VAT incurred by unregistered representatives of Avon on their purchase of demonstration items cannot be offset against VAT on the sales to final consumers.

To read the Brief click here.

To read the decision in Avon Cosmetics click here.