HM Revenue and Customs Brief 19/14 - Avon Case
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Avon Cosmetics Limited First-tier VAT Tribunal decision on
the UK's "party-plan" derogation
Issued 16 April 2014
Purpose of the Brief
To explain HM Revenue & Customs's (HMRC's) position
following the Avon Cosmetics Ltd First-tier Tribunal (FTT) VAT decision
[LON/2004/1028] to make a reference to the European Court of Justice
(ECJ) on the United Kingdom's (UK) "party-plan" derogation which
ensures that VAT is declared on retail sales made through
Who needs to read this?
Businesses involved in direct selling through independent
individuals who are not registered for VAT.
We directed Avon that it must account for VAT on sales, by
its non VAT registered representatives, at their open market value.
This was to ensure that VAT is accounted for on the full price charged
to final consumers. The UK has the authority to issue such a direction
under a derogation granted by the EU Council in 1985 (under Article 27
of the 6th Directive), which was extended in 1989. The authorisation is
given effect by what is now paragraph 2 of Schedule 6 of the VAT Act
As part of their business Avon sell samples and demonstration
items ("demo items") to their representatives. These can be used as
sales aids. Representatives pay VAT on these supplies. Avon invited the
FTT to interpret the UK legislation and/or the Notice of Direction to
allow it to recover the input tax its representatives incurred on the
demo items on the basis that these were costs of the supplies on which
it was obliged to account for output tax. Avon also argued that the
authorisation given by the EU Council was unlawful as it put them at a
competitive disadvantage compared to high street retailers.
The case Avon initially presented to the First-tier Tribunal
was that HMRC had the power to give an input tax credit for demo Items.
Our case was and continues to be that HMRC has no such power. The FTT’s
decision has confirmed that it appears to it that there is a very
respectable argument that HMRC do not have that power.
We remain of the view that the derogation has been applied
However the ECJ decision in Foto-Frost established that the
ECJ alone has the power to rule on the validity of an act of a
Community institution. Given this HMRC’s will not object to questions
being referred to the ECJ, that go beyond whether the authorisation of
the derogation was valid. Accordingly HMRC is not appealing the FTT
HMRC policy remains that, VAT incurred by unregistered
representatives of Avon on their purchase of demo items cannot be
offset against VAT on the sales to final consumers.
The precise scope of the reference has yet to be determined.
But it is expected that the questions will address the validity of
authorisation made by the Council; Parliament’s implementation of that
authorisation; and HMRC’s administration of that authorisation through
the Notice of Direction served on Avon.
HMRC will issue an update once the ECJ has issued its
About the Author
© Crown Copyright 2014.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2014-04-23 10:25:21 in Tax Articles