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HMRC internal manual

VAT Time of supply

Tax points for specific types of supply: Sale or return and goods on approval


Under a sale or return agreement, goods are supplied on terms that allow the customer to return them at any point up until the time they are adopted. In the meantime ownership remains with the supplier. In some cases the agreement will lay down a time limit within which the goods must either be returned or adopted. As the name implies, sale or return is a term generally applied to agreements between commercial entities where the goods are intended for resale. Retail supplies on these terms are generally referred to as being “on approval”.

The following rules apply only in cases where the customer has an unequivocal right to return the goods in question. They do not apply in circumstances where the customer does not have this option, even though title may remain with the supplier until the goods are paid for, as in a Romalpa type agreement.

Basic tax point

Section 6(2)(c) of the VAT Act 1994 (see VATTOS2215) provides an alternative (delayed) basic tax point in these circumstances. This occurs either on adoption or 12 months after removal of the goods where this is earlier.

Adoption is not defined and can take various forms. In practice it normally occurs when the holder of the goods does something to indicate that the option to return them is not going to be exercised. For example the goods

  • become the subject of an offer for resale by the holder
  • the holder allocates them to a customer
  • they are hired out by the holder to a customer
  • the holder uses them otherwise than for display purposes, or
  • they are permanently modified or adapted by the holder or to the order of the holder.

This is by no means an exhaustive list and is included for illustrative purposes only. The point at which it can be said that the supply has taken place in a particular case, will inevitably depend on the facts. Suppliers must ensure that their customers notify them promptly when they have adopted goods supplied on these terms.

Payments in advance of adoption

A payment received by the supplier before the basic tax point does not, of itself, create a tax point in these circumstances. This is because section 6(4) (see VATTOS2225), insofar as it covers payments, does not apply to goods that are subject to the basic tax point rules contained in section 6(2)(c) (see VATTOS2215). That is not to say that a payment cannot create the tax point. It may serve to indicate that the goods have been adopted, and thus establish a basic tax point at that time.

But in some circumstances, for example the type of sale or return arrangements that generally exist between car manufacturers and their dealers, it is a condition of the agreement that the recipient of the goods is required to pay an amount to the supplier in order to receive the goods in the first place. Provided this does not affect the unfettered right of the recipient to subsequently return the goods, the payment in these circumstances has no time of supply significance.

Supplies that do not amount to sale or return or goods on approval

Goods may also be supplied in circumstances where title is retained by the supplier until the goods are paid for, but without the customer necessarily having any right to return those goods. This can be the case for example with “call-off” stocks. In these circumstances the supplier delivers goods to the customer on terms that allow the customer to pay for them as and when they are used or consumed. This is common in the car industry where component suppliers frequently deliver components to car manufacturers on these terms. Title may, or may not, be retained by the supplier pending payment. This type of arrangement amounts to no more than a supply on extended credit terms, to which the normal tax point rules apply. In the normal course of events, tax becomes due at the basic tax point - that is to say at the time of delivery.

The only exception to this is where the price payable for the goods is not agreed, either wholly or in part, until they are appropriated by the buyer. In these circumstances regulation 88 of the VAT Regulations 1995 applies (see VATTOS2345) and the tax point does not occur until the earlier of the following times

  • the date of appropriation
  • the date of issue of a VAT invoice, or
  • the date of receipt of payment.

Under these arrangements, the tax point may also be delayed until the issue of a VAT invoice where it is issued within 14 days of the date of appropriation. In other words, on a similar basis to the 14 day rule as it applies in the case of supplies subject to the normal tax point rules (see VATTOS5235).