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HMRC internal manual

VAT Valuation Manual

Special valuation provisions: direct selling - Paragraph 2, Schedule 6, VATA 1994

Where a trader’s business involves direct or party-plan selling through unregistered sellers, we have the power to issue a Notice directing VAT to be accounted for on the basis of the open market value of the goods on a sale by retail. This is designed to avoid:

  • loss of revenue through failure to tax the margin of the unregistered sellers.

Our policy is that this power is only to be used where the direct sales are a regular feature of a trader’s business. It should not normally be applied to direct sales to charitable organisations, church bazaars and suchlike.

The type of business we are concerned with is where sales are made through domestic outlets by unregistered persons by methods other than the normal retail systems.

Normal outlets comprise shops, street and market traders or mobile shops (eg ice cream vendors, fish and chip mobiles, hot dog sellers, individuals selling goods on the internet through own or hosted sites).

The sales methods are party plan, door-to-door, catalogues or similar methods in which the principal’s name, trading style or trademark are involved throughout the sales chain. This will easily be identifiable because the retailer of the goods will use the principal’s catalogues, price lists, order forms and stationery. Where party plan sales are involved, the party host will often be expected to promote the principal’s trade-name (eg a “Tupperware” party). Door-to-door sales will usually involve the use of the principal’s catalogue (eg Avon Cosmetics). Some companies (mail order companies) specialise in sales through catalogues. These are sent to applicants who show them to their friends, take orders and obtain the goods from the principal at a discount from the catalogue prices.

The legal provision can be found in paragraph 2 of Schedule 6 to the VATA 1994:

  1. Where-

(a) The whole or part of a business carried on by a taxable person consists in supplying to a number of persons goods to be sold, whether by them or others, by retail, and

(b) Those persons are not taxable persons,

The Commissioners may by Notice in writing to the taxable person direct that the value of any such supply by him after the giving of the notice or after such later date as may be specified in the notice shall be taken to be its open market value on a sale of retail.

All evidence of the proper authorisation should be retained on the traders records for at least as long as the direction stays in force.

The UK has authority to issue Notices of Direction in respect of direct selling cases because derogations have been obtained under Principle VAT Directive Article 394-395. The UK’s vires was challenged in the ECJ case of Direct Cosmetics and Laughtons (C-138/86) and ruled to be valid.