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Commission payments cannot be retrospectively deducted from sales for VAT calculation purposes

Catalogue companies cannot retrospectively deduct the value of commission payments made to their agents from their total sales for the purposes of calculating their VAT liability, the EU's highest court has said.21 Dec 2012

Agents of mail order company Grattan earned a 10% commission on purchases made through the catalogue, whether these were placed by third party customers who ordered through the agents or by the agents themselves. In its ruling, the Court of Justice of the European Union (CJEU) said that as the agents claimed this money back at a later date, either in the form of a cheque or by applying it as a credit against goods they had purchased from the catalogue themselves, the company could not treat these payments as a traditional discount on the purchase price of the goods.

Grattan had claimed a repayment from HM Revenue and Customs (HMRC) of VAT paid between 1973 and 1978. At the time, it had accounted for VAT on the full catalogue price of the goods including the amount of the commission later paid to the agents.

"[The Second VAT Directive] provided that '(t)he chargeable event shall occur at the moment when delivery is effected'," the CJEU said in its ruling. "No provision of the Second Directive provided for occurrence of the chargeable event to be set at a subsequent time, or its deferral in another manner. Nor did the directive provide for the alternation of a tax debt that has arisen."

"Accordingly ... a taxable person's tax debt arose in an amount derived from the basis of assessment, a basis which was to be determined at the time of the delivery."

The Court said that it was also relevant that, in the majority of cases, the commission was paid back to the agent and not to the final consumers of the goods that were ordered from the catalogues.

"In those circumstances ... it must be held that the consideration for the supply corresponded to the full unreduced catalogue price and that the basis of assessment was therefore that price," the CJEU said.

The Sixth VAT Directive, which replaced the Second VAT Directive from 1978, specifically allowed companies to deduct discounts for early payment and customer discounts accounted for at the time the supply of goods was made from the taxable amount.

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