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HMRC internal manual

VAT Retail schemes guidance

Mail order traders: Time of supply under retail schemes

The question of the time of supply for VAT purposes was largely irrelevant when standard mathod of gross takings (SMGT) (see VRS4400) existed: the majority of sales by mail order houses were self-financed, and tax was therefore accounted for on the basis of payments received. The withdrawal of SMGT meant that the normal time of supply rules apply, with the result that VAT must be accounted for in the period in which the tax point arises.

The basic tax point for a supply of goods is determined by section 6(2) of the VAT Act 1994:

(2) … a supply of goods shall be treated as taking place -

(a) if the goods are to be removed, at the time of the removal;

(b) … ;

(c) if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time it becomes certain that the supply has taken place or, if sooner, 12 months after the removal.

Section 6(2)(c) applies in the case of goods on approval. It delays the basic tax point until the time when the goods are adopted by the customer or 12 months from the date they were originally despatched, whichever is the earlier (see VATTOS - Time of Supply).

What constitutes sale on approval was considered by the Tribunal in the case of The Littlewoods Organisation PLC [MAN/96/622]- decision released 19 June 1997. This case arose out of a dispute over the treatment of goods supplied at the time of the increase in the VAT rate from 15% to 17.5% in 1991. In calculating the rate of tax that should have been applied at that time, Littlewoods claimed that its terms of trading did not amount to the goods in question being on approval. The Tribunal agreed, finding that there was a contract of sale with a condition subsequent (allowing for the return of the goods). In other words there existed a bargain in which it is agreed that the property shall pass on or before delivery, subject to the right of the person taking the goods to return them and revest the property in the seller should they not suit him, either within a fixed period or a reasonable time [Benjamin on Sale of Goods 4th Edition, paragraph 1-056].

Whether or not goods are supplied on approval will depend on the facts in each case and will require consideration of a number of indicators which will have to be carefully weighed against each other.  Relevant indicators include the following factors but they are not exhaustive.

·         The terms and conditions of trading, and all contractual terms applying.

·         The time when title in the goods passes to the buyer.

·         The time at which the buyer has the right to dispose of the goods as owner.

·         The view presented to the customer in marketing literature, order forms, delivery notes, statements etc.

·         The rights of the customer to return unwanted goods.

·         The terms of any supply of credit finance provided with the goods.

·         The time when payment for the goods is demanded.

·         The time when payment for the goods is received.

·         The time when the buyer assumes responsibility for the upkeep and insurance of the goods.

·         Anything the buyer does to signify his adoption of the goods.

·         The calculation of the minimum payment due for goods delivered.

·         The time when a sale is recognised in the financial accounts of the business.

Any queries on this aspect of supplies by mail order industry should be directed either to the Retail Unit of Expertise or to Indirect Tax Directorate for further advice, following the instructions on the Indirect Tax Homepage.