One tactic is questioning whether the business is, in fact, supplying goods, or whether they are instead providing services, namely buying and shipping the goods on behalf of someone else. HMRC’s view is that if the taxpayer is providing such services, they do not take ownership of the goods and so they cannot reclaim VAT on the goods purchased for their customer.
As part of this new tactic, HMRC has even begun sending out a questionnaire when it opens a compliance check into exporters of luxury goods, an example can be found here. The questions in the schedule are clearly designed to provoke responses that fit into HMRC’s narrative of a business providing services. For example, on page four of the form, where HMRC asks for an explanation as to how sales are arranged and made, the points to also consider include:
- Do you always make a purchase of goods before you have a customer?
- How do customers know what products you have for sale?
- Provide your online or physical shop address.
- Is there always a set price for goods sold and what mark-up do you apply to products sold?
- How is stock supplied to your customer?
- Who pays any postage charges, including duties and taxes in the exported country?
So, what action should be taken by businesses receiving such a questionnaire?
While there is no statutory obligation to complete these questionnaires, they are often sent in cases where a repayment claim has been made, and HMRC is deciding whether to grant it. As such, some response to the questions will be required in order to obtain the reclaim.
Care must, therefore, be taken with regards to how HMRC’s queries are addressed to reduce the likelihood of HMRC being able to argue the business is providing services, not goods. HMRC appears to be challenging businesses that buy goods to order and/or take instructions from customers, often in store, regarding what to buy. HMRC has taken the view that such activity means the business never actually takes ownership of the goods and is instead providing services akin to a personal shopper.
There are changes that can be made to the way in which the business operates, which will make it harder for HMRC to make such an argument. Examples include having a clear contract for the sale of the goods. This can be a simple document but should include terms that make it clear the goods are owned by the supplier until they are delivered to the purchaser.
If you or your client has received such a questionnaire or are involved in a compliance check in relation to the export of luxury goods, we can help you resolve that check, and assist you in making your business, and the VAT reclaims you make, more robust going forward.