Avon loses anti-VAT court case against UK government

The direct selling cosmetics company must still pay VAT on sales via representatives, even if the sellers are not themselves subject to VAT, ruled the European Court of Justice

Avon Cosmetics has lost its anti-VAT court action against the UK Government at the European Court of Justice (ECJ).

The court backed the UK’s position that VAT is payable by Avon on goods sold to end users via Avon representatives, even if the representatives themselves are not subject to VAT.

Avon has been fighting the case since 2014.

In response to the recent ruling, which is the last court of appeal, the corporate simply issued a statement saying: “We acknowledge and respect the ruling made by the Court of Justice of the European Union regarding Avon Cosmetics Limited (Avon) v HMRC.”

"A form of tax avoidance"

The issue arose over the way in which Avon trades its products.

It sells the products to representatives, who in turn make retail sales to their customers.

The representatives are given a discount from the catalogue prices of around 20%-25% but the majority of them are not registered for VAT because their incomes are modest.

Her Majesty’s Revenue and Customs, however, considered this effectively a form of tax avoidance, and under a derogation approved by the EU Council, charged Avon VAT at the full market rate (£14.5m).

Avon appealed to the UK court First Tier Tribunal (FTT) for overpayment of VAT, arguing that the Government’s argument failed to take into account the seller’s costs, which would have been deductible if the representatives had been registered for VAT purposes.

It also claimed that the derogation itself resulted in the infringement of fundamental VAT principles.

The FTT ruled in favour of Avon but said it itself did not have enough jurisdiction to declare the derogation invalid and therefore referred the matter to the ECJ.

The ECJ has now ruled against Avon and that the derogation is “appropriate and proportionate to combat tax avoidance”.