The UK’s Upper Tribunal (UT) has rejected an appeal by HMRC which would have resulted in a case brought by Sportsdirect.com (SDC) being struck out.
SDC is an online retailer based in the UK making B2C sales of goods to consumers across the EU. Its business model involves SDC selling the goods but consumers then engaging with a third party (associated to SDC) which arranges for the delivery of the goods. Consequently, SDC does not treat its supplies as “delivered” goods. This is an arrangement that has been adopted by a number of online retailers and is sometimes referred to as the “delivery scheme”.
The benefit of this arrangement is that SDC has not had to register and account for local VAT in EU Member States where the Distance Selling (DS) thresholds have been breached. Instead, UK VAT has been accounted for on the supplies made of both the goods and the delivery service.
HMRC provided a ruling to SDC in 2010 that they were of the view that the DS rules did not apply so the supplies were liable to UK VAT. However, this ruling was caveated in that HMRC advised SDC to check on the position taken by Member States in the country of delivery. SDC asked for a further ruling in 2015 and it is HMRC’s response to this request that was considered by the UT and, before it, the First Tier Tribunal (FTT).
SDC’s case was that they understood HMRC had ruled that the supplies were subject to the DS rules with the result that VAT was due in the Member State of delivery of the goods. HMRC contested that they had not given a decision on this matter which is why they asked for the case to be struck out as there was no appealable decision. As both the FTT and UT ruled that they had given an appealable decision, the matter will be referred back to the FTT for consideration of the VAT position.
Interestingly, SDC had asked for a reference to the European Court of Justice (ECJ) but this was turned down by the UT because it did not need to make a reference to reach the decision that SDC’s appeal should not be struck out. However, it remains possible that there will be a reference to the ECJ when the case returns to FTT.
Despite no legal issue being resolved, the case is significant as both the FTT and UT refer in their judgements to guidance issued by the EU’s VAT Committee (VC) in 2015 (the VAT Committee is an advisory body set up by the European Commission to provide guidance on the application of the European VAT Directive). This guidance focused on whether a business such as SDC could still be deemed to be making a supply of delivered goods despite engaging the use of an arrangement like the delivery scheme.
Although not legally binding, the VAT Committee’s guidance does carry significant weight on the matters commented on. Therefore, it’s almost unanimous agreement that goods shall be considered to have been “despatched or transported by or on behalf of the supplier” in any cases where the supplier intervenes “directly or indirectly” in the transport or despatch of the goods is important to note.
The guidance goes on to provide comments for scenarios where an indirect intervention can be deemed to take place. There was unanimous agreement that situations where subcontracting, legal responsibility or collection of fees for the transport could create an intervention. Whilst there is no guarantee that a UK or European court would reach the same conclusion, this guidance provides an insight into what the decision of those legal bodies might be when asked about them.
As mentioned, there is currently no legal judgement on the application of DS when arrangements such as the delivery scheme are applied. However, given that ultimately it is other EU Member States which are losing out on tax revenues when UK businesses apply these practices, the looming presence of Brexit may see a focus from those countries on this issue before the UK splits from the EU.
This could lead to significant tax demands and penalties from EU tax authorities which, if not managed correctly, could have detrimental impacts for traders. Therefore, businesses which involve third parties to help with making their supplies of transport are strongly advised to review their arrangements and consider if there is risk of the DS rules still applying in order that any risks can be identified and managed in a sensible manner.