Last year, we shared our victory before the Tribunal, in a case involving the export of luxury goods to China and the VAT reclaims HMRC attempted to disallow. We’ve since dealt with similar compliance checks, and what appears to be new tactics for HMRC to challenge these claims.

Background

Advisers that deal with these cases will be aware of HMRC’s dislike of the luxury export market. For those that are unaware, these are predominantly individuals or small owner-managed companies that purchase luxury items from retail stores in the UK (watches, jewellery and designer clothes) and export them to customers in China, often for onward sale and often to order.

Such exports are zero-rated for VAT purposes, which allows the exporter to claim the VAT incurred when they purchased the products, provided they meet the requirements of VAT Notice 703. This notice is long, but it predominantly deals with the need to evidence the export of the goods upon which VAT is being claimed. In practice, this usually includes purchase and sales invoices and shipping documents demonstrating those goods have been shipped overseas to the customer, but it can also extend to other supplementary evidence such as evidence of orders received, packing lists, payment confirmations etc.

These businesses generally have very high turnover, but claim a VAT repayment in most periods, due to their supplies (exports) being zero rated. While HMRC has not said so expressly, it’s clear this causes it some consternation, and it’s an area in which it is increasingly applying resources.

At the time of our Tribunal case, HMRC was taking the view that any understatement of the value of goods on shipping documents (which usually occurred because of concerns over theft in transit) contravened VAT Notice 703. HMRC argued this meant the value of the goods being exported was not clear (a requirement of VAT Notice 703) but lost on this point due to the other evidence available, which clearly demonstrated the value matched the VAT reclaim.

HMRC has learnt from this and has developed some new avenues to challenge these businesses. We have summarised these below, and included recommendations for actions businesses can take to reduce the risk they will fall foul of HMRC.

Services argument

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. 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.

No direct link between the business and its purchases/exports

HMRC also requests details of anybody the business has used to purchase goods for resale. Care needs to be taken here, and indeed in relation to how the business operates. If the business uses family members, friends, or any other individuals who are not formally employed by the business, HMRC may argue there is no direct connection between the business and the purchase.

On that basis, HMRC would conclude the individual purchasing the goods is acting as an undisclosed agent for the business, and so they themselves should be registering and filing VAT returns, and the business itself is unable to do so.

HMRC has also challenged businesses reclaiming VAT where the exports were themselves arranged by someone outside of the business, or at least where they were not arranged in the businesses name. If a direct link between the purchase and the export and the business cannot be demonstrated, HMRC is likely to take the view that the business is claiming VAT on goods that are either purchased and exported by another business or are actually being sent abroad for personal use (not for resale).

Avoiding this issue is relatively simple. All goods should be purchased in the name of the business, using funds from a business account or business credit card, and by employees (who are on payroll) of the business. All exports should be arranged in the business’ name, and again by employees.

Incorrect documentation

This final approach is a basic one, but due to the nature of these luxury export businesses, it could be the most problematic. This also appears to be a new tactic from HMRC, as we have seen exactly the same letter being sent to different businesses, by different inspectors.

To claim input VAT, businesses should hold a VAT invoice, and VAT Regulation 14 is very specific about the information a document has to contain to be considered a VAT invoice. The main issue for luxury goods exporters is that retail stores generally sell to non-taxable persons (consumers) and so they are not required to issue a VAT invoice, unless they are asked for such.

The till receipt will not, therefore, have the information necessary for the business to reclaim VAT on the purchase, and so the business has to rely on HMRC exercising its discretion to allow the VAT claim based on the other evidence available.

In the current climate and following the increase in public spending that occurred during the pandemic, persuading HMRC officers to exercise such discretion is going to be more difficult.

Businesses should, therefore, ensure they request a VAT invoice for every purchase. This may cause problems, as some retailers do not wish to sell to businesses, and so refuse to provide such an invoice. Although common sense would suggest HMRC should not punish an export business for such a refusal, that refusal in itself may provide further reason for HMRC to deny the VAT claim, as HMRC is using retailers accounting processes, and their desire to only sell to consumers, as a reason to deny businesses’ right to reclaim VAT on purchases from those stores.

Summary

Ultimately, any business which is consistently claiming repayments of VAT will come to HMRC’s attention and will almost certainly face a compliance check at some stage.

If that business is an exporter of luxury goods, our experience suggests HMRC will find any reason it can to deny the right to reclaim input VAT on purchases made. Businesses operating in this sector should be extremely careful to obtain all of the documentation necessary to make a VAT reclaim (including compliance with VAT Notice 703), most importantly always request a VAT invoice, and where possible do so at the time of purchase.