Neil Warren explains why Sports Direct were entitled to appeal against HMRC’s VAT letter, and why the rules about distance selling were so relevant in this case.
In general, a taxpayer can only appeal against a decision made by HMRC about its tax affairs. Sometimes businesses, particularly large groups like Sports Direct, will write to HMRC asking for a ruling or advice on a particular VAT point.
Sports Direct wrote to HMRC in 2010 asking whether the VAT distance selling rules would apply to sales of goods it makes to customers in other countries. Sports Direct was happy with HMRC’s reply, until another HMRC letter arrived in January 2016, which appeared to reverse the advice given in 2010.
The Upper Tribunal ( UKTT 0327) agreed with the First-tier Tribunal (FTT) that the 2016 HMRC letter could be the subject of an appeal, although that letter did not give any specific ruling about UK VAT.
The distance selling rules rarely form the topic of a VAT tribunal hearing. The rules tend to be quite clear cut and apply when an EU business sells goods to non-VAT registered customers in other EU member states.
The basic rules are set out in VAT Notice 725, section 6:
- VAT is charged on the goods according to the VAT regulations in the seller’s country – so a UK business selling cutlery to a private customer in France would charge 20% UK VAT.
- If total sales into a country (only to those customers who are not VAT registered) exceeds either €35,000 or €100,000 on a calendar year basis (checking the total figure at the end of each calendar month), the seller stops charging his own country’s VAT and registers for VAT in the customer’s country. He or she then charges the rate of VAT that applies to the goods in question in that country and completes VAT returns each period. So sales of cutlery in Denmark would be subject to 25% Danish VAT and those in Poland would be charged at 23% Polish VAT.
- Each EU country can choose which of the two limits it adopts, eg France and Germany apply the higher threshold of €100,000, but Denmark and Ireland use the lower figure of €35,000.
Sports Direct situation
I sympathise with the taxpayer; registering for VAT in 28 different countries and completing 28 different VAT returns is an administrative challenge to say the least. So Sports Direct’s strategy was to bring in a separate company (Barlin) to deliver the goods, because the distance selling regulations basically only apply to goods delivered by the seller – which was Sports Direct.
Sports Direct did not deliver the goods because this task was carried out by Barlin Delivery Ltd, the latter being outside of the Sports Direct VAT Group. Then the Sports Direct companies didn’t have to worry about the distance selling rules. This meant all its sales were subject to UK VAT, as was confirmed by the 2010 letter from HMRC.
EU VAT Committee
The plot thickened in 2015 when HMRC asked the EU VAT Committee for its thoughts about the above arrangement. That committee considered that the ‘delivered goods’ scenario “should be construed by reference to the economic reality of the situation and not by adopting the literal approach of looking at the contractual structure.”
In other words, if the customer ordered goods from Sports Direct and received them as requested, this was a distance selling supply covered by the €35,000 and €100,000 limits. The fact that the seller arranged delivery by a separate company was a red herring.
In January 2016, HMRC wrote to Sports Direct and suggested that the company take up the place of supply issue with the various EU countries where it sold goods, to see if the country in question expected domestic VAT as far as the Sports Direct and Barlin arrangement was concerned. If those countries expected their own VAT to be paid on the sales under the distance selling rules, then HMRC would consider a refund of UK VAT.
HMRC’s argument in the First-tier Tribunal had been that there could be no appeal made by Sports Direct because the January 2016 letter did not make any decision or give any ruling on UK VAT. In other words, all that HMRC had done was suggest that the taxpayer should approach the tax authorities in other EU countries, and then the UK VAT issues would naturally follow that outcome.
The FTT disagreed and concluded that HMRC had effectively decided that the place of supply was the customer’s country, ie the arrangement was subject to the distance selling rules. HMRC appealed this decision.
Upper Tribunal verdict
The UT supported the FTT’s decision but for different reasons.
The FTT had been wrong to conclude that HMRC had ruled that the place of supply was in the customer’s country – this was not correct because all that HMRC had done was suggest that the taxpayer approach the overseas tax authorities. However, VATA1994, s83(1)(b), still gave Sports Direct the right of appeal because the dispute related to “the VAT chargeable on the supply of any goods or services.”
To quote from the report: “The FTT has jurisdiction with respect to the decision on HMRC in the January 2016 letter, namely as to the application to Sports Direct’s internet sales to other members states.”
The score on this VAT dispute is now Sports Direct 2 HMRC 0!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.