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Sofa companies take a stand in VAT appeal


Two companies selling sofas and insurance brought a case to reclaim VAT on online advertising costs. But how would the link between clicks and exempt supplies sit with the tribunal?

17th Jun 2022
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A recent first tier tribunal (FTT) case [TC2008480] involved whether VAT could be reclaimed on advertising costs by two partially exempt businesses.

This is a very long case with a lot of detail, but anyone with affected clients is encouraged to read it in full. For everyone else, please enjoy this potted version!

Sofology Limited (SL) and DFS Furniture Company Limited (DFS) jointly appealed assessments requiring the repayment of previously recovered input tax.

The companies made sales of sofas via various methods. They also supplied exempt intermediary services of sofa insurance and were therefore partially exempt (see Notice 706).

Both SL and DFS purchased “pay per click” (PPC) advertising from Google, meaning they paid Google each time someone clicked on an SL/DFS advert.

HMRC believed that the input tax incurred directly related to either: 

  1. both the taxable and exempt supplies, and so recovery should be split accordingly, or 
  2. neither, in which case it fell into the “pot” to be split as part of the partial exemption calculation.

DFS had previously taken a similar case to the FTT, involving various other types of advertising, which had found the advertising costs related directly to taxable supplies. Relying on this decision, SL/DFS recovered all of their PPC input tax.

However, were they correct to do so?

Direct and immediate link

The FTT believed the important question was whether there was a “direct and immediate link” between the expenses and a particular supply. They also noted that determining a supply would not have been made “but for” a particular cost did not necessarily create a direct and immediate link.

Having done so, the FTT considered HMRC’s arguments in reverse order.

General overheads

HMRC had argued that the PPC advertising was intended to benefit SL/DFS generally, not just to sell sofas. They also felt that the adverts merely enticed people to visit the respective websites and that the landing page of each website allowed the potential customer to access all products, not just taxable ones. The adverts therefore did not directly link to any particular supply.

The FTT disagreed. The content of the adverts had to be considered as it, along with the landing pages, heavily featured sofas. SL/DFS clearly intended to entice people in the market for a sofa to click the advert, visit their site and complete a sofa purchase. Ideally these customers would also purchase other items at the same time, but they had been drawn there by the sofa advert.

A direct and immediate link between the advert and the taxable sofa sales therefore existed.

Two direct and immediate links?

HMRC’s initial argument had been that while there was a link to the taxable supplies, there was similarly also a link to the exempt supplies. This would mean some manner of apportionment was required.

The FTT agreed with HMRC that the insurance intermediary supplies were important to SL/DFS, especially as they generated both high income streams and high margins. It also agreed that there was a substantial economic link between the adverts and the insurance intermediary sales, as the adverts increased sofa sales, which in turn increased insurance commissions. Finally, they agreed that there was a close link between the sofa sales and the insurance intermediary sales.

With that said, the FTT concluded that commercial and/or economic links, no matter how substantial, could never change an indirect supply into a direct and immediate one.

The sofa-insurance link

The marketing strategies used by SL/DFS were intended to get customers onto the website, or in store, to purchase a sofa. Where they appeared on the shopping tab on a Google search, the image and text were always sofa related, never insurance. The Google terms they bid for (to ensure customers searching those terms were directed to their sites) never included “insurance” and the relevant insurance page on their websites was always tucked away, never prominent.

Unsurprisingly it is impossible to purchase sofa insurance without a sofa, but the FTT noted that the subject of insurance was kept out of the discussion with customers until they had actually bought a sofa, for fear of souring the deal.

Finally, the FTT noted that in their opinion a customer’s decision as to whether to buy insurance occurred after the decision to purchase a sofa, and so was reliant on the selling skills of the staff, not directly the skills of the marketing team or quality of the PPC adverts.

The PPC costs were therefore not directly related to the exempt supplies.

As a side point, the FTT made a special note that there was no direct link between the PPC costs and the exempt supplies, rather than that the link to the taxable supply was merely closer.

Having disagreed with both of HMRC’s arguments, the FTT allowed the appeal.

Replies (2)

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By Justin Bryant
17th Jun 2022 14:47

Glad to see the taxpayer here did not take that sitting down.

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By Paul Crowley
17th Jun 2022 15:19

Why do HMRC try to turn common sense into an unjustifiable clever tax raising scheme
This is just the same deviousness as the tax avoiders creating fictions
Nobody goes to DFS other than to buy a sofa
The 'insurance' is just an extra money spinner that most people choose not to buy.

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