HMRC says it has reviewed the guidance in this area and concluded that the previous statement ‘normally’, in that mail order retailers ‘normally supply goods on approval terms’ is not correct. Such companies may supply goods on approval terms but often this will not be the case.

The change is in response to a tribunal involving the Littlewoods Organisation plc (VTD 14977) which considered the issue of ‘sale on approval’. The tribunal held that goods were supplied on approval where there is no contract of sale unless and until the recipient concerned adopted or was deemed to have adopted the goods. This is different from a supply of goods with a subsequent right to return them. The tribunal found in that case that Littlewoods did not supply goods on approval.

HMRC says whether or not goods are supplied on approval will depend on the facts in each case, and it is possible that if retailers and others have incorrectly treated the goods they supply as being on approval terms, they may have accounted for VAT at the wrong time.

In such cases HMRC will not require suppliers to correct past VAT returns for time of supply discrepancies but says businesses that are incorrectly treating goods as supplied on approval must cease to do so, and should take steps to ensure that they are accounting for VAT correctly by the end of a transitional period, which is three months from the publication of the updated brief. This means by 18 September.

As regards the liability of the delivery charge, in a single supply of delivered goods, the delivery is ancillary to the supply of the goods. Therefore the liability of the delivery charge follows that of the goods being supplied.

Where goods are supplied on approval, the delivery service is not ancillary. As delivery happens before the customer or the mail order retailer know whether there will be a supply of goods, delivery is an aim in itself. If the goods are sent on approval, the purpose of the delivery service is to facilitate the customer inspecting the goods to decide whether or not they wish to purchase them.

The supply of the delivery service is therefore not dependent upon the supply of the goods. Consequently the delivery of goods supplied on approval terms is always a separate supply that is taxable at the standard rate. Any VAT due because of delivery charges previously treated as zero-rated should be corrected under normal error correction procedures.

Revenue and Customs Brief 5 (2018): VAT liability on goods supplied on approval is here.

Report by Pat Sweet