On December 14, 2017, the ECJ issued its decision in the case C-305/16 (Avon Cosmetics).
Context: Reference for a preliminary ruling — Value added tax (VAT) — Sixth Directive 77/388/EEC — Article 11A(1)(a) — Taxable amount — Article 17 — Right to deduct — Article 27 — Special derogating measures — Decision 89/534/EEC — Marketing structure based on the supply of goods through non-taxable persons — Taxation on the open market value of the goods as determined at the final stage of the marketing chain — Inclusion of the costs incurred by those persons
Article in the EU VAT Directive
Articles 17 and 27 of the Sixth VAT Directive
Article 17 of the Sixth Directive, headed ‘Origin and scope of the right to deduct’, provided:
‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) [VAT] due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;
Article 27 of the Sixth Directive was worded as follows:
‘1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption.
2. A Member State wishing to introduce the measure referred to in paragraph 1 shall send an application to the Commission and provide it with all the necessary information.
Facts
- Avon is engaged in the manufacture and sale of products, mostly cosmetics. Their retail sale is carried out through independent female representatives (‘representatives’), almost all of whom operating in the United Kingdom are not subject to VAT, as they are not registered for VAT and their turnover is not sufficient to make it compulsory for them to be subject to it.
- Avon’s sales to those representatives are at a price below the retail price envisaged by it and are subject to VAT. On the other hand, as the representatives are not accountable for VAT, the retail sales which they make are not subject to VAT.
- The effect of that system is that the difference between the retail selling price and the price paid by the representatives to Avon is not subject to VAT.
- To remedy that situation, the United Kingdom, in particular by the Finance Act 1977, granted the Commissioners the power to issue persons liable to pay VAT with directions so that the tax payable by them would be calculated by reference to the retail selling price.
- In accordance with Article 27(5) of the Sixth Directive, the United Kingdom notified the Commission of the European Communities of that measure, as a special derogating measure, within the meaning of Article 27(1), which it intended to retain after the Sixth Directive entered into force on 1 January 1978.
- By Council Decision 85/369/EEC of 13 June 1985, entitled ‘Application of Article 27 of the Sixth Council Directive of 17 May 1977 on [VAT] (Authorisation of a derogation requested by the United Kingdom to enable certain types of tax avoidance to be prevented)’ (OJ 1985 L 199, p. 60, and corrigendum at OJ 1987 L 93, p. 17), the derogation was authorised for a period of two years, subsequently extended by a further two years.
- When requests were made to the Court for a preliminary ruling relating to the implementation of the derogation authorised by Decision 85/369, it found no factors of such a kind as to affect the validity of that decision (judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs, 138/86 and 139/86, EU:C:1988:383).
- By Decision 89/534, the Council extended the authorisation given to the United Kingdom to derogate from Article 11A(1)(a) of the Sixth Directive with the aim of avoiding non-taxation at the stage of final consumption.
- Under paragraph 2 of Schedule 6 of the 1994 Act, adopted on the basis of that decision, and the individual notice, Avon’s taxable amount for VAT purposes corresponds to the sale value at the stage of final consumption of the goods supplied by it to non-taxable persons. In other words, under that system the VAT on the products sold by Avon to the representatives is calculated on the basis not of the price excluding tax at which Avon sells them those products, but of the price at which the representatives are deemed to resell them to their customers, that excess VAT being borne by Avon. However, in practice the Commissioners make two adjustments to that calculation in order to take account of the fact that some products are purchased by non-taxable representatives for their personal use and that the latter sell some products at a discount.
- Avon brought proceedings before the referring tribunal for the refund of overpaid VAT totalling in the region of GBP 14 million (approximately EUR 15 792 000) on the ground that the system of taxation which is applicable to it, on the basis of the individual notice, does not take into account the tax relating to the cost of the representatives’ purchase of demonstration items, which are intended to help them to increase their sale volumes and are sold to them by it at a discount greater than that applied to the other products. According to Avon, as purchases of the demonstration items amount to business expenditure, the VAT relating to those purchases would have been deductible by those representatives if they had possessed the status of taxable person.
- Consequently, the individual notice is said to go beyond what is necessary in order to achieve the objective pursued and involves the overpayment of VAT because of the absence of an adjustment to take account of the VAT incurred by the representatives on the purchase of demonstration items. There is thus a breach of the principles of proportionality, equal treatment and fiscal neutrality, and also a competitive disadvantage between Avon and economic operators using traditional selling methods, who do not bear that VAT burden.
- Avon also submits that, in its application to the Commission for a derogation, the United Kingdom failed to provide all relevant information for the purposes of Article 27(2) of the Sixth Directive, although the problem of disparity of treatment regarding VAT applicable to demonstration items was already known. Accordingly, the purpose of its claim before the referring tribunal is that the VAT payable should be adjusted to take account of the VAT applicable to those demonstration items or, in the alternative, that Decision 89/534, paragraph 2 of Schedule 6 of the 1994 Act and the individual notice should be declared invalid.
- The Commissioners note that that provision is intended to prevent a loss of revenue on sales which escape VAT on their retail price. They take the view that the failure to take account of the VAT paid by the representatives in respect of the purchase of the demonstration items does not offend against the principles of proportionality, equal treatment and neutrality and does not create a distortion of competition, since Avon has chosen an operating structure and an approach to the market that are different from those of traditional retailers and Avon and those retailers operate in different markets, even though the products sold are similar. Those circumstances justify a different tax treatment.
- Furthermore, in the Commissioners’ submission, the calculation and levying of VAT should not be complicated unnecessarily for taxpayers or tax authorities. Acceptance of Avon’s arguments would make the non-taxable representatives bear a significant administrative burden.
- The Commissioners contend that they cannot interpret paragraph 2 of Schedule 6 of the 1994 Act as meaning that Avon might deduct the VAT paid by the representatives in respect of the purchase of the demonstration items without going beyond the authorisation given by the Council, its own legislation and the principle that an exception to the normal VAT mechanism must be interpreted narrowly.
- By interlocutory decision of 19 February 2014, the referring tribunal held that the terms in which Decision 89/534 is couched, reproduced in paragraph 2 of Schedule 6 of the 1994 Act, do not permit account to be taken of the tax paid by the representatives in respect of the purchase of the demonstration items, thereby giving rise to ‘sticking’ tax, that is to say, input tax paid that cannot be recovered. It inferred from this that that provision creates unfair competition between Avon and entities which sell through taxable retailers. Therefore, paragraph 2 of Schedule 6 of the 1994 Act goes further than is necessary in order to achieve its objective of preventing any tax avoidance.
Questions
(1) Where a direct seller sells goods (“Sales Aids”) to unregistered resellers or the unregistered reseller purchases goods and services from third parties (“Third Party Goods and Services”) which are in both cases used by the unregistered resellers to assist their economic activity of selling other goods which are also purchased from the direct seller and the subject of administrative arrangements issued pursuant to a derogation most recently authorised by … Decision [89/534] …, do the relevant authorisations, implementing legislation and/or administrative arrangements offend any relevant provisions and/or principles of European Union law in so far as they require the direct seller to account for output tax on the unregistered resellers’ sale price of the other goods with no reduction for the VAT incurred by the unregistered reseller on such Sales Aids and/or Third Party Goods and Services?
(2) Whether the [United Kingdom] was under any obligation to inform the Commission when seeking authorisation from the Council for the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act], that unregistered resellers incurred VAT on purchases of Sales Aids and/or Third Party Goods and Services used for the purposes of their economic activities and that, accordingly, an adjustment to reflect that irrecoverable input tax, or overpaid output tax, should be accommodated in the derogation.
(3) In the event that the answer to questions 1 and/or 2 above is in the affirmative:
(a) Whether any of the relevant authorisations, implementing legislation or administrative arrangements can and should be interpreted so as to make an allowance in respect of either (i) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (ii) VAT in excess of the tax avoided being collected by [the Commissioners] or (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.
(b) Whether
(i) the authorisation of the [United Kingdom]’s derogation from Article 11A(1)(a) of the Sixth Directive was unlawful;
(ii) a derogation from Article 17 of the Sixth Directive is necessary alongside the derogation from Article 11A(1)(a) [referred to in paragraph 2 of Schedule 6 of the 1994 Act]. If so, whether the [United Kingdom] acted unlawfully by failing to ask the Commission or the Council to authorise it to derogate from Article 17;
(iii) the [United Kingdom is] acting unlawfully by failing to administer VAT in such a way as to allow direct sellers to claim a credit for either Sales Aids or Third Party Goods and Services VAT incurred by unregistered resellers for the purposes of their economic activities;
(iv) all or any part of the relevant authorisations, implementing legislation or administrative arrangements are therefore invalid and/or unlawful.
(c) Whether the appropriate remedy is, from the Court of Justice … or from the national Tribunal or Court:
(i) a direction that the Member State is required to give effect to the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act] in domestic law by providing for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (b) VAT in excess of the tax avoided being collected by [the Commissioners]; or (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses; or
(ii) a declaration that the authorisation of the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act], and by extension the derogation itself, is invalid; or
(iii) a declaration that the domestic legislation is invalid; or
(iv) a declaration that the [individual notice] is invalid; or
(v) a declaration that the [United Kingdom] is obliged to apply for authorisation for a further derogation so [as] to provide for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (b) VAT in excess of the tax avoided being collected by [the Commissioners]; or [(c)] the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.
(4) Under Article 27 of the Sixth Directive (Article 395 of … Directive [2006/112]), is the “tax eva[ded] or avoid[ed]” to be measured as the net loss of tax (taking account of both the output tax paid and input tax recoverable in the structure giving rise to the tax evaded or avoided) to the Member State or the gross loss of tax (taking account of only the output tax in the structure giving rise to the tax evaded or avoided) to the Member State?’
AG Opinion
First question
Neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11(A)(1)(a) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes nor, subject to the referring court’s final assessment, national measures implementing that decision — to the extent that that decision and those national measures result in the imposition of VAT on the open market value of products sold via non-VAT registered resellers without taking into account irrecoverable input VAT on demonstration items or other goods and services purchased from third parties by those resellers — infringe the principles of proportionality and fiscal neutrality or Article 27(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment or Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.
Second question
When seeking authorisation for the derogation granted by virtue of Council Decision 89/534, the United Kingdom was not under an obligation to inform the Commission that unregistered resellers incurred VAT on purchases of goods used for the purposes of their economic activities.
Third and fourth questions
In the light of the answers given to the first and second questions, there is no need to reply to the third and fourth questions.
Decision
1. Articles 17 and 27 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2004/7/EC of 20 January 2004, must be interpreted as not precluding a measure, such as that at issue in the main proceedings, authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11A(1)(a) of the Sixth Directive, pursuant to Article 27 of that directive, which derogates from Article 11A(1)(a) of that directive and under which the taxable amount for valued added tax (VAT) purposes of a direct sales company is the open market value of the goods sold at the stage of final consumption, where those goods are marketed through resellers not subject to VAT, even if that derogating measure does not take account, in one way or another, of the input VAT relating to demonstration items purchased by those resellers from that company.
2. Examination of the first question has disclosed no factor of such a kind as to affect the validity of Decision 89/534.
3. Article 27 of Sixth Directive 77/388, as amended by Directive 2004/7, must be interpreted as not requiring the Member State which seeks authorisation to derogate from Article 11A(1)(a) of that directive to inform the European Commission that non-taxable resellers incur VAT on purchases of demonstration items from a direct sales company that are used for the purposes of their economic activity, in order that account be taken, in one way or another, of that input tax in the detailed rules of the derogating measure.
Summary
Sales system based on goods deliveries via non-taxable persons – Special derogation measures
Avon Cosmetics produces and sells cosmetics. Avon sells its products through self-employed agents who, for the most part, if they operate in the United Kingdom, are not subject to VAT because they have not identified themselves for VAT purposes and do not achieve a sufficiently high turnover to be subject to VAT. fall. Avon Cosmetics sells its products to these agents at a price lower than the retail price determined by Avon Cosmetics and is subject to VAT. By contrast, since those representatives are not subject to VAT, their retail sales are not subject to VAT. This sales system implies that the difference between the retail price and the price paid to Avon Cosmetics by the representatives is not subject to VAT.
Therefore, the United Kingdom has granted the tax authorities the power to instruct VAT payers that the VAT payable by them is calculated on the basis of the retail price. This special deviating measure has been authorized by the EU. In other words, under that scheme, the VAT on the products sold by Avon to the agents is not calculated on the basis of the price excluding VAT at which Avon sells its products, but on the basis of the price at which those agents are deemed to sell those products to their customers. resale, with this VAT being charged to Avon in greater detail.
The United Kingdom’s authorization to apply, in respect of certain supplies to non-taxable resellers, a measure derogating from the VAT Directive under which the taxable amount for a direct sales company is equal to the normal value of the goods sold at the final consumption stage when these goods are sold through non-taxable resellers is permitted under the ECJ. Even though this derogating measure does not somehow take into account the input tax paid on the demonstration products that these resellers purchase from this company (this also does not have to be reported to the EU). No facts or circumstances have emerged that could affect the validity of the authorization.
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