The above newly issued brief explains HMRC's position following the Avon First Tier Tribunal decision to make a reference to the European Court of Justice on the United Kingdom's “party-plan” derogation which ensures that VAT is declared on retail sales made through non-registered representatives. The brief is relevant to businesses involved in direct selling through independent individuals who are not registered for VAT.

The background to the case is that HMRC 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.

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. HMRC's view is 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 and 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. HMRC will issue an update once the ECJ has issued its judgment.