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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