UK continues Avon cosmetics VAT policy

The UK’s tax office, HMRC, has confirmed that it will continue to levy VAT on Avon agents’ transactions despite a challenge at the European Court of Justice

In general, VAT should be levied on the final, discounted price to consumers. Avon’s party-plan business model is to direct sell through part-time agents (party representatives) who are mostly not VAT registered. Avon sells its goods to the agents at a discount to the retailer price, allowing the agents to make a margin through marking back-up the prices. However, since there is no VAT charged for the non-registered agents, HMRC would lose out.

The UK has had an EU VAT Directive derogation in place since 1985 which enables it to levy VAT on the full sales price between Avon (and other network retailers) and its agents. However, Avon has challenged this through to the First Tier Tribunal tax appeal court, and won. Their case is that it is unfair disadvantage compared to Avon’s high street competitors. Avon also argued that the VAT discount compensated for the lack of right of deduction on VAT on expenses incurred by its non-VAT registered agents. The FTT held that the derogation did not achieve a proportionate correction to Avon’s VAT model

The case has now been referred to the European Court of Justice (ECJ) as the highest court of appeal on EU VAT issues.

HMRC last week restated that it will continue to operate the derogation, and UK VAT will be liable at the full price. Any reversal of the measure would likely cost the UK £14m per annum.