Advocate General (AG) Bobek has issued his opinion in Avon Cosmetics (Case C-305/16, reported in Tax Journal, 14 September 2017), a UK case concerning the application of a derogation to the usual rule whereby the value of the supply is the sale price charged by the supplier. This derogation relates to sales by large businesses to small, and thus unregistered, sellers, who apply a mark-up and sell to the general public. Such is the case with Avon. It has to account for VAT on the general final selling price almost as if the ‘Avon ladies’ (as they are repeatedly referred to in the opinion) were agents for Avon (even though they are not).
The derogation is accepted by Avon in general terms, but they have a quibble. This is that the tax calculation based on final selling price by the unregistered retailer does not take account of notional input tax foregone on costs, particularly the supply by Avon to the sellers of demonstrator cosmetics which are consumed in that role and therefore neither used by the seller as private allowance nor sold on the doorstep.
The failure of the derogation to take this into account has been described by the UK tribunal as an unarguable distortion, but as the issue relates to a derogation from the usual rule, the matter has been referred to the CJEU.
This first round has not gone well for Avon. The AG is not sympathetic. He has said that the derogation was only intended to deal with output values and cannot be re-jigged to take notional input tax into account. Avon cannot expect the result to be identical to what the case would have been had the individual sellers all registered for VAT. As long as the approximation is close enough, the derogation simply applies as it stands. The AG thinks that the £16m claim by Avon represents an immaterial sum, whether compared with the value of all sales in the member state, or compared with the values of the tax burden arising under the Avon business model. The derogation does not concern itself with trifles, so he thinks the CJEU ought to reject Avon’s case.
All of that seems logical; even sensible. But there is a nagging undertone of concern raised by his central proposition that this has only arisen because of the UK’s very high registration threshold, allowing Avon ladies not to need to register for VAT, but giving them the choice to if they wish. If these people exercised the right to register, the tax burden would be a little lower and that would solve the problem. That they need not do so must have consequences, and one of those is a slightly higher tax burden.
Avon had somewhat unhappily said that HMRC was trying to have its cake and eat it (little knowing, no doubt, how notorious such phraseology has recently become). But the AG is not interested by whether anyone is getting ‘free cake’. The solution to the problem is in the hands of the Avon ladies, or, (if only implicitly) in the hands of business which can press the government to reduce the VAT registration threshold and thereby do away with the need for the derogation altogether. One detects that he thinks that it is those who want a more accurate derogation to go with the very high threshold that are wanting to have their cake and eat it.
Which means that the AG is making a round-about point. The UK is out of line in respect of its registration threshold, and has to make do with blunt instruments to solve the problem. Business cannot complain about the consequences unless it seeks to address the underlying anomaly.
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Avon: no deviation from the derogation
Advocate General (AG) Bobek has issued his opinion in Avon Cosmetics (Case C-305/16, reported in Tax Journal, 14 September 2017), a UK case concerning the application of a derogation to the usual rule whereby the value of the supply is the sale price charged by the supplier. This derogation relates to sales by large businesses to small, and thus unregistered, sellers, who apply a mark-up and sell to the general public. Such is the case with Avon. It has to account for VAT on the general final selling price almost as if the ‘Avon ladies’ (as they are repeatedly referred to in the opinion) were agents for Avon (even though they are not).
The derogation is accepted by Avon in general terms, but they have a quibble. This is that the tax calculation based on final selling price by the unregistered retailer does not take account of notional input tax foregone on costs, particularly the supply by Avon to the sellers of demonstrator cosmetics which are consumed in that role and therefore neither used by the seller as private allowance nor sold on the doorstep.
The failure of the derogation to take this into account has been described by the UK tribunal as an unarguable distortion, but as the issue relates to a derogation from the usual rule, the matter has been referred to the CJEU.
This first round has not gone well for Avon. The AG is not sympathetic. He has said that the derogation was only intended to deal with output values and cannot be re-jigged to take notional input tax into account. Avon cannot expect the result to be identical to what the case would have been had the individual sellers all registered for VAT. As long as the approximation is close enough, the derogation simply applies as it stands. The AG thinks that the £16m claim by Avon represents an immaterial sum, whether compared with the value of all sales in the member state, or compared with the values of the tax burden arising under the Avon business model. The derogation does not concern itself with trifles, so he thinks the CJEU ought to reject Avon’s case.
All of that seems logical; even sensible. But there is a nagging undertone of concern raised by his central proposition that this has only arisen because of the UK’s very high registration threshold, allowing Avon ladies not to need to register for VAT, but giving them the choice to if they wish. If these people exercised the right to register, the tax burden would be a little lower and that would solve the problem. That they need not do so must have consequences, and one of those is a slightly higher tax burden.
Avon had somewhat unhappily said that HMRC was trying to have its cake and eat it (little knowing, no doubt, how notorious such phraseology has recently become). But the AG is not interested by whether anyone is getting ‘free cake’. The solution to the problem is in the hands of the Avon ladies, or, (if only implicitly) in the hands of business which can press the government to reduce the VAT registration threshold and thereby do away with the need for the derogation altogether. One detects that he thinks that it is those who want a more accurate derogation to go with the very high threshold that are wanting to have their cake and eat it.
Which means that the AG is making a round-about point. The UK is out of line in respect of its registration threshold, and has to make do with blunt instruments to solve the problem. Business cannot complain about the consequences unless it seeks to address the underlying anomaly.
