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HMRC internal manual

VAT Valuation Manual

Special valuation provisions: supplies of goods for no consideration (deemed supplies) - Paragraph 6, Schedule 6, VATA 1994

Paragraph 6 of Schedule 6 to the VATA 1994 provides:

6(1) Where there is a supply of goods by virtue of -

(a) A Treasury order under section 5(5); or

(b) Paragraph 5(1) or 6 of Schedule 4 (but otherwise than for a consideration); or

(c) Paragraph 8 of that Schedule, then, except where paragraph 10 below applies, the value of the supply shall be determined as follows,

6(2) The value of the supply shall be taken to be -

(a) Such consideration money as would be payable by the person making the supply if he were, at the time of the supply, to purchase goods identical in every respect (including age and condition) to the goods concerned; or

(b)Where the value cannot be ascertained in accordance with paragraph (a) above, such consideration in money as would be payable by that person if he were, at that time, to purchase goods similar to, and of the same age and condition as, the goods concerned; or

(c) Where the value can be ascertained in accordance with neither paragraph (a) nor paragraph (b) above, the cost of producing the goods concerned if they were produced at that time.

6(3) For the purposes of sub-paragraph (2) above the amount of consideration in money that would be payable by any person if he were to purchase any goods shall be taken to be the amount that would be so payable after the deduction of any amount included in the purchase price in respect of VAT on the supply of the goods to that person.

This provision was introduced from 1 August 1992, in what was then paragraph 7 of Schedule 4 to the VATA 1983 and replaced a valuation provision for such disposals based upon the historic cost of the goods. This is explained in VATVAL08800. The provision implemented Article 11A1(b) of the EU Sixth VAT Directive, now Article 74 of Dir. 2006/112 which provides that:

Where a taxable person applies or disposes of goods forming part of his business assets, or where goods are retained by a taxable person, or by his successors, when his taxable economic activity ceases…. the taxable amount shall be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application, disposal or retention takes place.

Sub-section (1) of paragraph 6 sets out the supplies to which this valuation principle applies. Specifically excluded from its ambit are supplies made by employers to their employees that meet the criteria of paragraph 10 of Schedule 6. Before considering the valuation position, you should first satisfy yourself that a supply has actually taken place. You should refer to VATSC: VAT Supply and Consideration in the first instance. If you are still unable to decide whether or not there has been a supply, the VAT Supply Team have responsibility for overall policy in this area.

Sub-section (2) of paragraph 6 contains the actual valuation provision.

The three values contained in this sub-section are not optional choices. A trader is expected to take as the value the purchase price of identical goods if possible. If it is not possible to value the supply on that basis, he must then attempt a valuation on the basis of the purchase price of similar goods. Only if neither of those methods can be applied, is the cost of production to be used.

You should remember that we are not looking at what the goods actually cost to purchase or produce but at what they would have cost to purchase or produce at the time of their disposal. Sometimes the disposal may be close enough to the time when the goods were obtained by the trader for the value to have remained unchanged. Often, however, you may need to take into account depreciation or appreciation over the intervening period.

Any claims that the goods are of nil value should be resisted initially and referred for consideration by the VAT Supply Team. Traders may raise the argument that the goods have no value because, for example, they have not been able to sell them. There are a number of Tribunal decisions which may be quoted in support of this contention. All of these cases were based upon the valuation provision prior to 1 August 1992 and are dealt with in VATVAL08800.

Sub-section (3) of paragraph 6 operates in conjunction with sub-section (2) to ensure that the value is calculated upon a VAT-exclusive basis. Normally, under section 19(2), the value is an amount representing part only of the consideration (the other part of the consideration being represented by the VAT itself). Under paragraph 6, however, the value is all of the consideration that would have to have been paid to purchase the goods, apart from any VAT that would have been included in that purchase price. For example, if the goods disposed of would have cost £1,200 to purchase, including VAT, then sub-section (3) results in the consideration being treated as the £1,000. Upon the disposal, the trader would have to account for £200 VAT.