VATSC06640 - Consideration: Change in Consideration: ECJ judgments
The European Court of Justice has heard a number of cases over the years where the question of the adjustment of consideration has been looked at. Of particular importance are Elida Gibbs (C-317/94) reinforced by Commission v Germany (C-427/98).
Elida was a UK case where the company manufactured toiletries which are purchased by consumers through High Street retail outlets and thus the consumer had no direct relationship with the manufacturer.
Two scenarios were looked at
- A manufacturer issues money-off coupons which are accepted by a retailer from a customer purchasing goods made by the manufacturer. The retailer is subsequently reimbursed for the vouchers by the manufacturer.
- A manufacturer includes a refund coupon within the packaging of the goods sold. The consumer subsequently claims the refund direct from the manufacturer.
Elida sought to adjust the Output tax accounted for on its sales to wholesalers by the amounts repaid in both scenarios. HMRC argued that Regulation 38 did not apply as there was no supplier/customer immediate relationship as required by regulation 38(2). Rather this was an outside the scope of VAT refund.
The ECJ concluded that the principle of “tax neutrality” meant that the amount of VAT accounted for must equate to what was actually paid by the consumer adjusted for any reductions:
31 ……It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person.
And thus the manufacturer was entitled to credit their Output tax to reflect the reimbursement or refund made.
34 & 35 …… the answer to the first [& second] question submitted must be that ………, the taxable amount is equal to the selling price charged by the manufacturer, less the amount indicated on the voucher and refunded. The same applies if the original supply is made by the manufacturer to a wholesaler rather than directly to a retailer.
In Commission v Germany , the ECJ infracted Germany for not implementing the Elida principle into their law. The court specifically looked at the case where a manufacturer, as part of a promotion scheme, paid an amount to a retailer (to whom they were not a direct supplier) that allowed a consumer to receive a price reduction on the sale of the manufacturer’s goods (Elida scenario 1).
The ECJ confirmed Elida allowed the Manufacturer to adjust the VAT on its original supply and decided that the refund to the retailer was in fact, in the hands of the retailer, further consideration for the retail supply to the consumer.
58. It follows that ……the subjective consideration …… received by the retailer comprises the whole of the price of the goods, which is paid in part by the final consumer and in part by the manufacturer. In fact, the coupons substantiate the retailer’s right to receive from the manufacturer a reimbursement in the amount of the reduction granted to the final consumer.
59. Consequently, it must be accepted that the retailer’s taxable amount for the sale to the final consumer is the full retail price, namely the price paid by the final consumer plus the amount reimbursed to the retailer by the manufacturer.
The ECJ also considered the position where the retail sale was exempt (zero-rated) from VAT but the previous supply chain was fully taxable and the potential for distortion; concluding that any VAT adjustment must be at the prevailing VAT rate of the final retail supply.
64. …… the reason why the manufacturer using sales promotion schemes such as those at issue in the main proceedings is authorised subsequently to reduce his taxable amount is that the price paid by the final consumer includes VAT, and accordingly any reduction in that price likewise includes a VAT element. Conversely, where, owing to an exemption, the value stated on the money-off coupon is not chargeable to tax in the member state from which the goods are despatched, no price invoiced at that stage of the distribution chain, or at a later stage, includes VAT, which means that a reduction or a partial reduction of that price cannot in turn include a VAT element capable of giving rise to a reduction of the tax paid by the manufacturer.
Going on to confirm that a VAT registered consumer who receives a refund must adjust their input tax:
66 …where the final consumer is a trader authorised to make deductions who uses the goods in his business, any over-deduction resulting from subsequent reimbursement of a voucher may be avoided by adjusting the deduction of input tax effected in respect of that final consumer
Following Elida HMRC revised its policy on business promotion reimbursements and published Business Brief 25/96 (VATSC06690).
The following guidance sets out the current accounting mechanisms for Elida Gibbs refunds, reimbursements and cash backs.
VAT Notice 700/7 Business Promotions and valuation guidance VATVAL also sets out our policy on Elida refunds, reimbursements and cash backs.