The appellant taxpayer, Avon Cosmetics Limited (Avon), the well-known cosmetics company,  sells its products to representatives who in turn make retail sales to their customers. The  representatives receive a discount on the products supplied from Avon of 20% or 25%. The  vast majority of the representatives have modest turnover and so are not registered for VAT  purposes. The consequence of this ordinarily would be that VAT would be charged on Avon  only on the consideration received by it on the sales to the representatives and no VAT would  be charged in respect of the retail sales. However, by a derogation approved by the EU Council,  HMRC is permitted to charge VAT on the supplies made by Avon by reference to the full  market value.

Avon argued 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 VAT  registered, in particular, the costs of demonstration products by which the representatives  present their products to the customers.

The First-tier Tribunal (Tax Chamber) (FTT) agreed with Avon that the grievance was  well founded and the terms in which the derogation was sought wrongly resulted in the  infringement of fundamental VAT principles. In the view of the FTT it had not achieved its  objects in a proportionate manner. The FTT said that it would prefer to insert the deduction of  expenses from the derogation rather than to declare it completely invalid. The difficulty facing  it, however, was that the relevant implementation of the derogation was by the EU Council and  enabled the UK to introduce a measure that simply adjusted the computation of consideration  and did not provide for costs to be brought into account. The FTT did not consider that it had  jurisdiction to effect an amendment to the derogation or to declare it invalid and decided  therefore to refer the matter to the European Court of Justice (ECJ). HMRC indicated in its  submissions that it would seek to appeal to the Upper Tribunal to prevent such a reference and  we wait to see whether the decision is subject to such an appeal by HMRC.

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