HMRC has changed its policy relating to the VAT treatment of “goods supplied on approval”, in Revenue and Customs Brief (5) 2018 issued on 18th June 2018. The new guidance asserts HMRC’s revised position that mail order goods are supplied on approval more seldom than previously supposed. Consequently, up until now, companies may have been applying the goods supplied on approval rules incorrectly.
Going forward, under the new guidance companies may find that both the time from which they need to account for the VAT on their mail order supplies and the VAT rate applicable to the delivery charges for these supplies, have changed.
What are “goods on approval”?
Goods supplied on approval cover those supplies where this an agreement under which retail supplies are delivered to the customer for a pre-purchase trial period, with the right to return the goods in a saleable condition instead of adopting them at the end of the trial. These are different from a general supply of goods with a subsequent right to return them.
Brief (5) 2018: VAT liability on goods supplied on approval
HMRC decided to review its approach to supplies of mail order goods in response to the Tribunal’s decision in the case of Littlewoods Organisation plc (VTD 14977), which held that goods are supplied on approval if there is no contract of sale unless and until the recipient concerned adopts or is deemed to adopt the goods.
As to whether goods are supplied on approval or not depends on the facts of the individual case. Relevant indicators include factors such as the terms and conditions of trading, and all contractual terms that apply; the time when title in the goods passes to the buyer; and the time when a sale is recognised in the financial accounts of the business.
The tax point for supplies of goods with the subsequent right to return them is at the point of delivery, whilst in the case of supplies of goods supplied on approval, it is postponed to the time that the goods are adopted. From now on, businesses who were incorrectly treating their supplies of goods as on approval, will have to account for the VAT on those supplies on the date of delivery instead of adoption.
VAT Liability of Delivery Charges
More contentiously, the guidance states that the VAT liability of the delivery charge is different for supplies of delivered goods and for goods supplied on approval. For a supply of delivered goods, since the delivery service is supplementary to the main supply, the VAT liability for the delivery is the same as that for the goods being supplied. However, the delivery service for ‘on approval’ goods is not dependent upon the supply of goods and should be treated as a separate supply taxable at the standard rate.
Businesses have three months from 18th June 2018, to review their impacted transactions and make sure they are accounting for the VAT on these supplies at both the right time and with the application of the correct rate.
If you would like further advice on how this change affects you, please do get in touch to discuss how we can help.