UK VAT on Marketplace Sales: HBS Enterprises Ltd v HMRC

For the online vendors that make their supplies through the likes of eBay UK or Amazon UK, determining to whom the VAT accountability belongs in the specific sale scenario is of pivotal importance. The marketplace supply chain involves at least three parties: online vendor(individual or legal person), marketplace operator, and customer(business person or consumer). 

For UK marketplace sales, specific VAT rules apply when the conditions are met. The UK First-tier Tribunal(FTT) had the privilege to determine in the case HBS Enterprises Ltd v HMRC, to whom VAT accountability belongs on the deemed marketplace sale facilitated through Amazon Marketplace. 

HBS Enterprises Ltd became accountable for VAT due to the administrative error made by HMRC, which wrongly updated the company’s business address, which led to the reclassification of the taxable person into a Non-Established Taxable Person(NETP). 

HBS Enterprises Ltd is a UK-established taxable person that makes sales exclusively through electronic marketplaces, such as eBay UK and Amazon UK. 

Background of the Case 

During four consecutive VAT quarters beginning with the period to May 2023, the firm accounted correctly for VAT due on all eBay transactions, and most of the Amazon sales. 

After some time, HBS Enterprises Ltd changed its business address, remaining in London. However, Amazon mistakenly reclassified HBS as a trader that wasn’t established in the UK. (non-established taxable person) 

The mistake was sourced in the wrongful instructions, previously “shared” by HMRC, that erroneously updated the business address of HBS not in London, but in Aberdeen, Scotland. 

When it comes to the applicability of the deemed supplier provision for online marketplaces, under the UK VAT Act,  reclassification from a UK-established business into a NETP person entirely changes who is responsible for VAT collection and remittance. 

Based on the administrative “documentation,” HBS was classified as a NETP, so Amazon treated it as such and, under the deemed supplier provision, acted as a person accountable for VAT on the underlying supply. 

HMRC later raised assessments for underdeclared output VAT, arguing the company was domestic and responsible for VAT collection under standard rules. 

The UK FTT considered whether HBS was responsible for accounting for VAT on sales made through Amazon, where the platform had incorrectly treated some transactions as falling within marketplace rules and therefore subject to the deemed supplier UK rules (rather than HBS’s).

HBS argued that certain sales were processed on the basis that Amazon would collect and pay VAT(since the HMRC classified the firm as NETP), so the firm treated those transactions as zero-rated in its VAT return to avoid double taxation. (Amazon as principal was responsible for VAT collection)

When the incorrect VAT treatment was identified, HMRC argued that the HBS remained legally responsible for accounting for VAT on those sales. The HBS disputed that perspective, arguing that Amazon had assumed VAT responsibility on those sales(considering that HBS was classified as NETP), and that assessing the VAT again would result in double taxation. 

HBS Enterprise Ltd v HMRC Arguments 

The HBS summarized its position into four arguments, which substantively emphasize why its assessment of the VAT accountability was correct: 

1. HMRC’s standpoint effectively calls for double taxation and VAT collection on the same basis, considering that, factually, some of those transactions should be zero-rated 
2. Considering the deemed supplier provision, Amazon should(and probably did) act as a VAT principal, so the HBS correctly zero-rated those transactions
3. Standard-rated VAT isn’t applied to transactions where the place of supply is outside the UK 
4. Considering that the HMRC officer couldn’t provide solid documentation on whether Amazon had accounted for VAT, the HMRC assessment was lacking sufficient support for the “best possible review” 

HMRC’s perspective was the following: 

1. Even though it was unintentional, the double taxation was made
2. Taking into account that Amazon may have accounted for VAT doesn’t change the legal position of the HBS when it comes to VAT accountability, and an error by HMRC doesn’t change the statutory position 
3. No input tax was due on the non-UK transaction 
4. The assessments were made to the best of the officer’s judgement 

First-Tier Tribunal Decision

The Tribunal acknowledges that the decision could seem unfair to the taxable person, but it took the part of the HMRC, ruling that the VAT liability is strictly governed by the statutory legislation, and not by the platform’s misclassification. 

The Tribunal stated that HMRC’s assessments met the “best judgement” standard, even though acknowledging the errors made by HMRC, and pointed out that it decided that the total VAT liability should be significantly reduced. (around 70% of the preliminary assessment)

The appeal was partially allowed, while emphasizing that the HRMC administrative error doesn’t influence the VAT accountability under statutory regulations. 

Takeaway 

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