UK Sports Direct wins right to EU VAT appeal
On 11 August 2017, UK retailer, Sports Direct, won an appeal ruling on HMRC’s position that it owes millions to dozens of EU tax authorities for VAT for online sales to consumers. However, an request by Sports Direct to refer the case to the European Court of Justice (ECJ) was turned down.
Avoiding higher EU VAT rates and costs
Businesses selling to consumers in other EU countries generally have to VAT register in the buyer’s country, and levy and pay local VAT. This can lead to charging higher VAT rates, depending on the target country, and incurring up to €150,000 per annum in foreign tax compliance costs.
Between 2010 and 2015, Sports Direct operated a separate (not part of its VAT group) delivery service company, Etail Services Ltd, for online customers. When a non-UK customer bought goods online from the retailer, the delivery company purchased the goods from Sports Direct, made the delivery and charged the consumer VAT inclusive. In this way, Sports Direct circumvented the requirement for it to charge foreign VAT – instead charging UK VAT to the delivery company.
Discussions with HMRC and the EU
Initially, HMRC approved the structure in 2010. In 2015, it requested non-binding guidance from the European Commission’s VAT Committee on the arrangement, and whether is side-stepped EU VAT rules. In January 2016, HMRC raised its concerns to Sport Direct. However, it was unable to conclusively confirm if Sports Direct had incorrectly charged Etail Services UK VAT, and not the EU customers with foreign VAT. HMRC had advised Sports Direct to consult with foreign tax authorities on their view. The VAT Committee then ruled that such structures were not in compliance with Articles 32 to 34 of the EU VAT Directive. HMRC concluded that Sports Direct had wrongly charged UK VAT, and could not reclaim it until it had confirmed and paid any foreign VAT.
Sports Direct challenged HMRC’s position at the First Tier Tribunal (FTT). But it found in favour of Sports Direct in October 2016, and proposed a referral to the European Court of Justice (ECJ). HMRC applied for an appeal against this ruling.
UK Upper Tribunal Court backs Sports Direct
On 11 August 2017, the Upper Tribunal Court backed the FTT result. However, the Upper Court did block a reference to the ECJ.
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