Revenue and Customs Brief 5 (2018): VAT liability on goods supplied on approval
Published 18 June 2018
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1. Purpose
The purpose of this brief is to explain HMRC policy on when goods are supplied on approval, and the liability of the delivery charges for these goods.
2. Readership
This brief should be read by mail order retailers and anyone supplying goods delivered on approval.
3. Background
We recently reviewed our guidance in this area and concluded that in our guidance (VRS9150) the statement ‘normally’, in that mail order retailers ‘normally supply goods on approval terms’ is not correct. Such companies may supply goods on approval terms but often this will not be the case.
‘Sale on approval’ was considered by the Tribunal in the case of Littlewoods Organisation plc (VTD 14977). The Tribunal held that goods were supplied on approval where there is no contract of sale unless and until the recipient concerned adopted or was deemed to have adopted the goods. This is different from a supply of goods with a subsequent right to return them.
The Tribunal found in that case that Littlewoods did not supply goods on approval.
4. Goods supplied on approval
Whether or not goods are supplied on approval will depend on the facts in each case. Relevant indicators can be found in the updated guidance at VRS9150: Mail order traders: Time of supply under retail schemes.
If you have incorrectly treated the goods you supply as being on approval terms, you may have accounted for VAT at the wrong time. We will not require you to correct past VAT Returns for time of supply discrepancies but you should take steps to ensure that you are accounting for VAT correctly by the end of the transitional period referred to below.
5. The liability of the delivery charge
In a single supply of delivered goods, the delivery is ancillary to the supply of the goods. Therefore the liability of the delivery charge follows that of the goods being supplied.
Where goods are supplied on approval, the delivery service is not ancillary. As delivery happens before the customer or the mail order retailer know whether there will be a supply of goods, delivery is an aim in itself. If the goods are sent on approval, the purpose of the delivery service is to facilitate the customer inspecting the goods to decide whether or not they wish to purchase them.
The supply of the delivery service is therefore not dependent upon the supply of the goods. Consequently the delivery of goods supplied on approval terms is always a separate supply that is taxable at the standard rate.
Updated guidance can be found at:
- paragraph 8.3 of VAT guide (Notice 700)
- paragraph 6.10 titled delivery charges of VAT point of sale retail scheme (Notice 727/3)
- paragraph 6.10 VAT direct calculation retail schemes (Notice 727/5)
- paragraph 7.10 of How to use the VAT retail apportionment scheme (Notice 727/4)
If you’ve incorrectly treated delivery charges as zero-rated you should follow the normal error correction procedures, as set out in VAT Notice 700/45.
6. Transitional period
Businesses that are incorrectly treating goods as supplied on approval must cease to do so. HMRC is allowing a period of 3 months from the date of this brief within which affected businesses must change their accounting systems to account for VAT on these supplies correctly and at the right time.