Andrew Needham looks at tax points for VAT purposes on selling goods on sale or return.
Under a sale or return agreement, goods are supplied on terms that allow the customer to return them at any point up until the time they are adopted. In the meantime, ownership remains with the supplier. In some cases, the agreement will lay down a time limit within which the goods must either be returned or adopted. As the name implies, sale or return is a term generally applied to agreements between commercial entities where the goods are intended for resale. Retail supplies on these terms are generally referred to as being ‘on approval ‘.
Tax points
Under the basic ‘tax point’ rules, VAT is due on the earliest of the supply of the goods, the receipt of payment or the issue of an invoice. If the invoice is issued within 14 days of the supply of the goods, the invoice date creates an actual tax point. When goods are sold on a sale or return basis, the VAT legislation (VATA 1994, s 6(2)(c)) provides an alternative (delayed) basic tax point in these circumstances. This occurs either on adoption or 12 months after removal of the goods where this is earlier.
Adoption is not defined in the legislation and can take various forms. In practice, it normally occurs when the holder of the goods does something to indicate that the option to return them is not going to be exercised. Suppliers must ensure that their customers notify them promptly when they have adopted goods supplied on these terms.
A payment received by the supplier before the basic tax point does not necessarily create a tax point in these circumstances. For example, under the type of sale or return arrangements that generally exist between car manufacturers and their dealers, it is a condition of the agreement that the recipient of the goods is required to pay an amount to the supplier in order to receive the goods in the first place. Provided this does not affect the right of the recipient to subsequently return the goods, the payment in these circumstances does not create a tax point.
Sales to other EU member states
The supply of goods on sale or return are deemed to be a supply of goods (transfer of own goods) in the country from which the goods are sent and an acquisition in the EU country to which the goods are transferred. The business sending the goods must, therefore, register for VAT in the destination country or appoint a tax representative (subject to the rules on tax representatives in the destination country) and account for acquisition tax in that Member State.
The goods should be declared in box 8 of the VAT return and on an EC sales list. The cost price should be declared on the Intrastat Dispatches SSD. If the goods are then sold, the sale (at whatever price) is a domestic supply within the destination country and does not affect the cost price declared on the Intrastat SSD or in box 8 of the VAT return.
If the goods are returned to the UK, an Intrastat Arrival SSD will need to be completed and an entry in box 9 of the VAT return is required. Acquisition tax will also need to be accounted for.
Practical Tip:
If you sell goods on a sale or return basis you can postpone the tax point for 12 months or until the goods are adopted, whichever is sooner. If you sell goods on a sale or return basis to other Member States, you may need to register for VAT in that Member State.
