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HMRC internal manual

VAT Valuation Manual

Special valuation provisions: issuing a Notice of Direction under Paragraph 2 of Schedule 6, VATA 1994

In order to decide whether a Notice should be issued, you should work through the following 13 procedural steps:

  If Then
1 Your trader sells to customers who take title to the goods (earning a discount) Go to 4
2 Trader sells through agents (earning a commission) who never take title to the goods. Go to 9
3 You are uncertain of the situations described above; Go to VTAXPER Taxable person. Then ask VAT Supply team
4 Is your trader a taxable person? If yes go to 5, if not go to 10
5 Your trader supplies goods to unregistered persons who sell them on by retail If yes go to 6, if not go to 11 below.
6 Is your trader’s business of a kind described in paragraph 2.5 as appropriate to the issue of a Notice? If yes continue, if not go to 12
7 Do your trader’s sales to unregistered persons for resale exceed £50,000 per annum? If yes continue if not go to 13
8 If you have reached this stage, your trader requires a Notice of Direction. If the trader is already accounting for tax as though subject to a Notice, a Notice is still required to formalise the position. Ignore 9 - 13 and proceed as at VATVAL07700   
9 If your trader sells through agents, a Notice is not required as the trader is already liable to account for tax on the price paid by the final customer. Ensure your trader accounts for tax on this basis Ignore 10 - 13.
10 Trader has no tax liability A Notice is not required. Ignore 11 - 13.
11 Your trader’s sales are presumably either to registered traders or to unregistered persons who do not sell the goods on. No Notice is required. The trader must account for VAT on the price charged to the immediate customer. Ignore 12 and 13
12 Your trader does not require a Notice, and may therefore account for tax on the price charged to the immediate customer Ignore 13.
13 Your trader is not regarded as being in a substantial way of business. A Notice is not required where the £50,000 limit is not exceeded. You should monitor traders who may become eligible for a Notice at a later stage No further action is required

Unlike Notices of Direction issued under paragraph 1 of Schedule 6, Notices of Direction issued under paragraph 2 cannot be made retrospective. They should therefore be issued as soon as possible after registration of the trader. Where a trader is already subject to a Notice and there is a transfer of a going concern involving a change of legal entity or a complete take-over of the business, a new Notice should be issued as quickly as possible. If your trader is a group registration which is subject to a Notice you should take special care to determine whether a new Notice has to be issued when a member company leaves the group. Similarly, a new Notice may need to be issued when a company that is subject to a Notice joins a group registration.