The ruling overturns a tribunal decision that said the e-tailer was liable to account for VAT only on the expiry of the cooling-off period.
The case, brought by HM Customs and Excise, concerned the VAT liability of Scottish firm Robertson’s Electrical Limited in respect of goods sold online and, in particular, goods sold and paid for prior to the end of an accounting period, but not accounted for until the next accounting period.
Customs and Excise argued that the VAT should have been accounted for at the time the payment was made or the goods sent.
Robertson’s, on the other hand, argued that the sales, as they had been made over the internet, were subject to the cooling-off period required under the Distance Selling Regulations – which had not passed by the date the accounting period ended. Accordingly, the VAT liability fell into the next accounting period.
The Distance Selling Regulations came into force on 31st October 2000 and gave new rights to consumers in the area of home shopping.
Under the Regulations, consumers shopping for goods and services by telephone, mail order, fax, digital television, the internet and other types of distance communication have additional rights including rights to clear information, further protection against fraudulent use of a credit card and a cancellation period of seven days – although there are exceptions.
Robertson's argued that, because of the statutory cancellation requirement, the payments made by customers were treated as a refundable deposit until the cancellation period had expired.
Considering the matter in 2004, a three-member tribunal panel looked to a provision in the 1994 Value Added Tax Act which provides that, in general:
"a supply of goods shall be treated as taking place if the goods (being sent or taken on approval or sale or return or similar terms) are removed before it is known whether a supply will take place, at the time when it becomes certain that the supply has taken place or, if sooner, 12 months after the removal."
The tribunal found that a supply of goods in the circumstances faced by Robertson’s was a supply on similar terms to goods sent on approval or sale or return, and that the firm was accordingly not accountable for VAT on the goods until the statutory cancellation period had expired.
But three judges of the Second Division of the Inner House of the Court of Session (Scotland’s highest civil court) overturned this ruling last week.
Giving the opinion of the court, Lord Justice Clerk said that the tribunal had “overlooked the meaning and effect of the respondent's online terms and conditions.”
The tribunal had taken the view that the Distance Selling Regulations amended the nature of the contract between online buyer and seller by transforming it into a contract of sale on approval – but this view was mistaken, according to Lord Justice Clerk.
The terms and conditions of the contract had created a contract of outright sale, and the Regulations only impacted on this “to the extent of conferring on the purchaser an unqualified right of cancellation of the sale,” he wrote.
Robertson’s therefore became liable to VAT either at the date of delivery or – as was the case under this contract – on the date on which the customer paid for the goods online.
Stephen Lane, a corporate tax partner at Pinsent Masons, the law firm behind OUT-LAW.COM, said: "The impact of this case will be increased administration for retailers in the event of cancellation by customers within the seven days and an actual carry cost of accounting for VAT and waiting for recovery where the seven day period spans a VAT return period."
