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HMRC internal manual

VAT Valuation Manual

Special valuation provisions: non-resale goods and goods applied to own use

A Notice of Direction issued under paragraph 2 of Schedule 6 only applies to the supplies made by the trader to whom it is issued. When the trader makes sales to an unregistered customer, the customer will not necessarily sell them on, for example he may keep the goods himself or use them as gifts. These supplies cannot be regarded as having been sold on by retail and are therefore not covered by the notice.

The value of these supplies depends upon whether or not the customer is giving any non-monetary consideration in addition to the monetary consideration he has provided. VAT is only accountable on the money paid by the customer when this is the only consideration. If there is non-monetary consideration as well, VAT is accountable on both the money paid and the non-monetary consideration. You can find out more about this in VATVAL08300.

Some traders will claim that many of their customers do not resell by retail all of the goods that they buy. In some cases agreement has been reached with traders on the proportion of goods to be treated as non-resale and so excluded from the effects of the notice. Claims of this nature should be investigated. The trader’s proposals and source of calculations, eg customer surveys or trade statistics, should be examined carefully.

An appeal was heard by the House of Lords in which a trader has claimed that a Notice of Direction cannot apply when the volume of non-resale goods is not known by him at the time he supplies goods to his customer. This is the case of Fine Arts Developments Plc (LON/87/190X).

Fine Arts Developments (FAD) is the parent company of a group of trading companies. Notices of Direction were issued against two of the subsidiaries that were carrying on mail order businesses. Both businesses were run in a similar fashion; one of them Express Gifts Ltd., operating under four different brand-names. Two catalogues for each brand-name were produced each year and distributed to agents who were not registered for VAT. The agents were then expected to solicit for goods contained in the catalogues. Agents ordered goods for themselves and other customers, being able to obtain goods for themselves at lower prices. Some agents sold goods on at prices somewhere between the prices shown in the catalogues and the prices that they had to pay.

The case was concerned with the meaning of the words “goods to be sold by retail”. FAD contended that Express Gifts, when selling goods to the agents, was not supplying goods to be sold by retail because this was to be determined from the supplier’s point of view at the time he made the supply. Since Express Gifts did not know what the agents would be doing with the goods when the supply was made, it therefore followed that they were not goods to be sold by retail because this was indeterminable at that point in time. FAD also contended that, even if the Notice of Direction was not invalid for that reason, it was otherwise invalid because it was impossible to comply with its terms, ie to determine to which goods it was to apply.

Both the Tribunal and High Court rejected FAD’s arguments. However, the Court of Appeal found in FAD’s favour by a majority decision. The House of Lords overturned the Court of Appeal decision in February 1996.

The trader may also purchase some goods that they do not sell at all but use themselves. These “own use goods” are therefore supplies for no consideration and VAT is due when input tax was deducted upon their purchase. The relevant valuation provision is contained in VAT Act 1994 Schedule 6 paragraph 6. This is discussed in detail in VATVAL08700 and VATVAL08900.