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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 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.

It is normal mail order industry practice for goods to be supplied on approval terms: this gives customers a right of return before property in the goods passes to them, and recognises that the customer has not had the opportunity to examine the goods prior to delivery.

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. 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]. The decision was not appealed since it turned on the particular circumstances of the case. Nevertheless, it remains our view that mail order traders normally supply goods on approval.

Whether or not goods are supplied on approval is significant as it determines the basic tax point under 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).

In many cases, the approval period adopted by individual mail order houses is specified in the terms of trading: the industry standard is normally a minimum of 14 days. The goods are deemed to have been adopted if they have not been returned within that period: and the basic tax point therefore becomes the date of expiry of the approval period. Adoption can occur earlier, however, where the customer notifies the supplier, either expressly that the goods are to be adopted, or implicitly by doing something, such as commencing to pay for them where this is only required if the goods are to be retained.

These latter indications are also important in cases where the approval period is unspecified. In such cases, account should also be taken of the time at which the supplier regards the goods as having been adopted if this occurs earlier. Whatever the circumstances, however, the normal trading arrangements of mail order houses are such that it is virtually impossible for the basic tax point to be delayed for anything approaching the 12 month cut-off otherwise provided for in section 6(2)(c).

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 for further advice, following the instructions on the Indirect Tax Homepage.