Sports Direct wins tribunal over HMRC VAT claims
Retailer Sports Direct has scored a second victory against HMRC in a dispute over VAT rules relating to distance selling, with the Upper Tribunal agreeing with an earlier First Tier Tribunal (FTT) that HMRC was wrong to say the appeal should be struck out
29 Aug 2017
The case centred on the interpretation of the place of supply rules in EC Directive 2006/112, the 2006 VAT directive, articles 32-34, which were implemented into UK law by Value Added Tax Act 1994, s. 7(5). [The Commissioners for Her Majesty’s Revenue and Customs and SDI (Brook EU) Ltd, Sportsdirect.com Retail Ltd,  UKUT 0327].
In 2010, Sports Direct wrote to HMRC outlining its intention that fulfilment services would be carried out by a subsidiary, Etail Services Ltd, and that there would be a single supply of goods by Sports Direct which would be subject to UK VAT, with a separately contracted supply of delivery services by Etail Services Ltd. It sought confirmation from HMRC that the distance selling rules would not apply where there was no supply of delivered goods.
HMRC agreed that if Sports Direct did not supply and deliver the goods there would be no distance sales and, accordingly, its supply would be subject to UK VAT. However, HMRC’s letter advised Sports Direct to contact the overseas authorities to discuss the arrangements to confirm their satisfaction that the supplies did not take place within their jurisdiction. Following that response, Sports Direct accounted for UK VAT on cross-border intra-EU sales to non-VAT registered customers.
The position remained the same until 2015 when, at the request of the UK and Belgium, the VAT Committee of the European Commission considered whether arrangements of the kind undertaken by Sports Direct were in breach of article 33. It decided that, with reference to the economic reality of the situation rather than the literal interpretation of the legislation, such transactions would fall within article 33 so that the place of supply of the goods would be the EU member state in which the consumer was located.
In September 2015, Sports Direct wrote to HMRC about a corporate restructuring involving the creation of three new companies for the purpose of making supplies to customers purchasing goods online. EU customers would contract with SDI (Brook EU) Ltd but delivery would be provided by a third party delivery company, Barlin Delivery Ltd.
HMRC responded by letter on January 2016 stating that the effect of the arrangements appeared contrary to the purpose art. 32 and 33, which were introduced to maintain the 'destination' principle of taxation within the single market and prevent distortions of competition arising from differences between national VAT rates.
Sports Direct sought clarification of HMRC’s response, asking whether their letter meant that its EU sales did fall within article 33 and had done since the time of the delivery arrangements with Etail Services Ltd and whether this conclusion had been reached taking account of the discussions that preceded the EC VAT Committee's guidance, and in light of the guidance itself. HMRC answered in the affirmative.
First Tier Tribunal
Sports Direct appealed to the First Tier Tribunal on 12 February 2016 and characterised the decision under appeal as having been contained in HMRC’s January 2016 letter. An application was made by HMRC to strike out the appeal for lack of an appealable decision, and thus for lack of jurisdiction under s. 83 of the Value Added Tax Act.
HMRC’s argument was that there could be no appeal made by Sports Direct because the January 2016 letter did not make any decision or give any ruling on UK VAT. It claimed that all it had done was suggest that the taxpayer should approach the tax authorities in other EU countries, and then the UK VAT issues would naturally follow that outcome.
However, the First Tier Tribunal concluded that the January 2016 letter had given rise to an appealable decision, namely that the supplies in question should be regarded as having been made in the destination EU member state and that no refund of UK VAT previously paid would be made until evidence of the VAT paid in each member state was provided. Accordingly, the First Tier Tribunal held that the appeal would not be struck out. HMRC appealed this decision.
At the Upper Tribunal, HMRC relied on two grounds of appeal: that the First Tier Tribunal had failed to direct itself to whether HMRC had decided that all the requirements of s. 7(5) of the Value Added Tax Act had been met; and that the First Tier Tribunal had erred in concluding that HMRC had decided that no refund of UK VAT previously paid would be made until evidence of the VAT paid in each destination state was provided.
Having considered the January 2016 letter in its context, and having regard to the conclusions reached by the First Tier Tribunal and the respective submissions of the parties, the Upper Tribunal concluded that the First Tier Tribunal was wrong in finding that HMRC had decided that the supplies in question should be regarded as being made in the destination EU member state.
The January 2016 letter went no further than to set out HMRC’s view that, to the extent art.33 was applicable, it would have the effect that the place of supply in the case of Sports Direct’s arrangements would be in the destination EU member state, but that was subject to article 34. If the conditions of article 34 were met, with the result that the place of supply could not be in the destination state, then it would be in the UK.
The Upper Tribunal found that the First Tier Tribunal made an error of law when it decided that the January 2016 letter was a decision of HMRC that, in the circumstances described by Sports Direct, the supplies in question should be regarded as being made in the destination state.
However, the Upper Tribunal’s findings did not resolve this appeal in HMRC’s favour. Although this tribunal decided that HMRC did not, by the January 2016 letter, make a decision that the place of supply of the goods in question was in the destination state, it was unequivocal in saying that, subject only to article 34, HMRC’s decided view, in reliance on the guidelines issued by the EC VAT Committee, was that article 33 applied.
That was a decision which, unless the conditions in article 34 were shown to have been met, determined that the place of supply would be in the destination state and not in the UK. Accordingly, for a different reason from those given by the First Tier Tribunal, the Upper Tribunal reached the same conclusion that the First Tier Tribunal had jurisdiction with respect to the decision of HMRC in its January 2016 letter. It followed that, in the judgment of the Upper Tribunal, the First Tier Tribunal was right to refuse HMRC’s application to strike out Sports Direct’s appeal. HMRC’s appeal was duly dismissed.
The Commissioners for Her Majesty’s Revenue and Customs and SDI (Brook EU) Ltd, Sportsdirect.com Retail Ltd,  UKUT 0327 is here.