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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 non-registered representatives.

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 1994.

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.

Avon judgment

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.

HMRC's position

We remain of the view that the derogation has been applied correctly.

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 decision.

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.

ECJ reference

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.

Future Implications

HMRC will issue an update once the ECJ has issued its judgment.

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

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