Editor | 10 February 2017
Strange tribunal decision for online jewellery business

Strange tribunal decision for online jewellery business

An unusual tax tribunal raises questions about online businesses paying VAT, particularly in cases involving multiple parties.

The case background

The recent tribunal case concerned the jewellery business, Avalaya.com Partnership, which had a very close working relationship with a sole trader – Alla Kisil T/A Jewellery 4 All.

In 2009, the two members of the Avalaya partnership lent US$60,000 to the sole trader, who was a personal friend of the partners. The loan was to be repaid in pounds sterling.

As security on the loan, the parties agreed that net sales from Jewellery 4 All’s Amazon business would be paid directly into a business account belonging to Avalaya.com. The partners would then deduct an amount for the loan repayments and give what was left to Alla Kisil.

This raised an important question about where the VAT liability lies, and it is a question that HMRC wasted no time in asking.

The gory details

Under normal circumstances, if a company sold products through Amazon, then it would expect to pay VAT on the net sales value (gross value less Amazon’s commission) paid into its bank account by Amazon.

The company would be liable to pay output tax on the sales made in the UK, and deal with the Amazon commission charge by doing a reverse charge calculation on its VAT return.

But this was not the case with Avalaya.com, and their decision was upheld by the tribunal.

The partnership didn’t account for any output tax on the payments made to them by Amazon, because the sales income belonged to the sole trader, and they were just taking a cut before passing it on. HMRC contended that there was only one business (the partnership) and Alla Kisil did not have her own company.

Accordingly, HMRC sought to collect nearly £140,000 in VAT for the period between October 2010 and September 2012, as well as a £22,000 penalty from Avalaya.com.

The partnership had to find a way to prove that the two companies were separate entities, and Avalaya.com was therefore not liable for the VAT.

The judgement

An Investment and Development Agreement drawn up by the two parties proved to be a key piece of evidence in the tribunal.

The report stated that: “We find that the Investment and Development Agreement does provide evidence that the appellant and Ms Kisil had separate businesses – they are consistently presented in it as distinct parties with distinct businesses.”

It went on to say : “We find … that the arrangement for payment of the proceeds of Ms Kisil’s business to the appellant’s bank account, whilst unusual, was included not because the two businesses were one, but rather to ensure repayment of the loan to the appellant.”

One fact that HMRC tried to use in the case against the appellant was that the payments from Amazon continued going into the partnership’s account after the loan had been settled. This suggests a very close relationship between the companies that goes beyond lender-creditor.

The partnership explained that the payments continued in this way after the loan was paid because of foreign currency issues and the needs of each business to trade in dollars or sterling. The tribunal recognised this ‘on the balance of probabilities’ to be true.

This was quite a complicated case where the taxpayer seemed to win over HMRC against the odds.

It could provide guidance to businesses that are involved in complicated online transactions, like those that are carried out through Amazon (or other online sales platforms) and transactions that involve multiple parties.

For more information please visit www.cloudaccountant.co.uk or email team@cloudaccountant.co.uk