In Avon Cosmetics Ltd C-306/16, the Court of Justice of the European Union (CJEU) has rejected a claim that a derogation from EU law which authorised the UK to charge VAT on sales by direct selling companies based on their open market value, was unlawful.


Avon Cosmetics Limited (Avon), sells beauty products in the UK to representatives, known as “Avon ladies”, who in turn make the retail sale to their customers. Avon sells its goods to the Avon ladies at a discount from the “brochure prices” of either 20% or 25%, so that unless they pass on some of that discount to their customers, the 20% or 25% represents gross profit. The majority of the Avon ladies have modest turnover and are not therefore registered for VAT. 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 HMRC’s treatment on valuation was incorrect because it failed 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 their customers. The result was that the disregarded notional input tax in relation to such costs “sticks” in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

Avon challenged the UK’s method of calculating its VAT liability and the lawfulness of the derogation for direct selling. It argued that the derogation should be applied with modifications so as to enable the Avon ladies to recover input tax.

The First-tier Tribunal (FTT) agreed with Avon but said that it did not have jurisdiction to amend the derogation or declare it invalid. The FTT therefore decided to refer the matter to the CJEU to consider the validity of the derogation and whether its implementation infringed the principles of fiscal neutrality.

Advocate General Bobek released his opinion on 7 September 2017, in which he considered that the derogation for direct selling could not be applied with modifications so as to enable the Avon ladies to recover input tax.

CJEU’s judgment

The CJEU followed Advocate General Bobek’s earlier opinion and concluded that the derogation did not infringe the principle of fiscal neutrality and could not be modified for the Avon ladies.

The CJEU said that neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 nor national measures implementing that decision, infringed the principles of proportionality and fiscal neutrality. The UK’s derogation properly ensures that VAT is not avoided on the final retail sales value.

In the view of the CJEU, adding extra rules to adjust for input tax on demonstration items would introduce unnecessary complexity. Output tax was due on the ultimate retail sale value and there is no credit for any VAT incurred by the Avon ladies.

Finally, the CJEU said that there is nothing wrong with the way that the UK has sought the derogation. It was not necessary for it specifically to point out the potential input tax consequences which reflect the normal operation of the VAT system. HMRC was therefore correct to refuse Avon’s claim.


The CJEU’s judgment in this case was keenly awaited by the direct selling sector. In reaching its decision, the CJEU considered that choosing the “direct selling model” meant accepting the derogation without modifications. If businesses want to address the underlying anomaly regarding the recovery of input tax, then individual sellers should exercise their right to register in order to reduce the tax burden.

A copy of the judgment is available to view here.