The ECJ has backed HMRC and ruled that catalogue companies cannot retrospectively deduct commission payments made to agents when calculating their VAT liability.

The case hinged on reductions in consideration that took place before the sixth VAT Directive took effect on 1 January 1978.

The court heard how Grattan agents had been able to earn a 10% commission on purchases made through the catalogue, irrespective of whether they were ordered by customers through their agents or by individual agents.

The court ruled that because the agents claimed the money back at a later date, via a cheque or as a credit against goods they had previously bought from the catalogue themselves, Grattan should not have treated these payments as a discount on the goods' purchase price.

HMRC had received a request from the company for a repayment of the VAT it paid between 1973 and 1978, which it had accounted for on the full catalogue price of the goods, which included the commission then paid out the agents.

Stanley Dencher, CCH senior tax writer, said: 'The ECJ ruled on 19 December 2012 that HMRC had correctly argued that, before the sixth VAT Directive took effect on 1 January 1978, if the consideration for a supply was reduced, eg, by giving credit to a commission agent, then the second VAT directive did not enable a taxpayer to adjust the output tax liability in order to obtain a VAT repayment.

'Following the ECJ ruling on 19 July 2012 in Littlewoods Retail Ltd v R & C Commrs (Case C-591/10) on whether simple interest on refunds due to errors by HMRC was sufficient recompense, this case is further bad news for those claiming VAT repayments going back many years.'

The court said that the commission was mostly paid to the agent and not to the end-consumer that had placed an order from the catalogue.

'In those circumstances it must be held that the consideration for the supply corresponded to the full unreduced catalogue price and that the basis of assessment was therefore that price,' the court said.

The Second VAT Directive from 1978 was replaced by the sixth VAT Directive, which empowered companies to deduct discounts for customer discounts accounted for at the time the supply of goods was made from the taxable amount, and for early payment.