Consultation outcome

VAT and value shifting: summary of responses

Updated 20 July 2021

1. Introduction

1.1. Businesses often sell a number of goods or services for a single price as part of a package (or bundle). One or more items in the bundle may be advertised as discounted, but the discount is only available if all the bundled items are purchased together. The separate elements of the package may have different VAT liabilities, for example standard-rated and zero-rated items.

1.2. The consideration for items bundled together in a single transaction must be apportioned between the different items in order that the correct amount of VAT is paid, however the current law in Section 19(4) VAT Act 1994 does not prescribe a method of apportioning the consideration.

1.3. Section 19(4) states: ‘Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it’. In other words, where there is a bundle of supplies for a single consideration, the consideration must be apportioned between the supplies properly.

1.4. Some businesses seek to exploit this non-prescriptive law by manipulating values to reduce the amount of VAT they account for. They do this by apportioning less of the total bundle price to products that are standard-rated than appears to be justified, given the normal price a customer would pay for those items if sold individually.

1.5. On 5 January 2021 the government published a consultation titled ‘VAT and value shifting’. The consultation sought views on a proposed revision of the rules for apportioning consideration between items with mixed VAT liabilities when supplied for a single price. The consultation closed on 30 March 2021.

1.6. The consultation proposed amendments to the current rules to prevent businesses from manipulating values of items sold in a bundle and ensure a level playing field for all businesses.

1.7. The consultation proposed new legislation, which would Introduce mandatory valuation methods. The legislation would:

• not permit estimates of market value
• mandate that, where each item in a bundle is also sold separately by the supplier, an apportionment based on the separate sale price of each item be used
• mandate that, where none of the items in a bundle are sold separately, cost-based apportionments be used.
• mandate that, where one or more items in a bundle are also sold separately and one or more of the other items in the bundle are not sold separately, the consideration be apportioned between the sale price(s) where known and the greater of:
  • the remainder of the consideration
  • the cost of the item(s) not sold separately
• where the cost of the item(s) not sold separately is used, the known sale price(s) will need to be adjusted so that the value given to all the items in the bundle equates to the consideration

1.8. A copy of the consultation is available at: https://www.gov.uk/government/consultations/vat-and-value-shifting

2. Summary of responses

Overview

2.1. Seven responses were received in total, of which:

• 5 were from representative bodies
• one was a joint response from 3 representative bodies
• one was from a tax advisor

2.2. The government is grateful to all those who took the time to respond.

2.3. Where responses were received which covered subjects outside the scope of the consultation, these were noted and may be considered as part of any future reviews of this area. As all respondents were representative bodies or tax advisors, they generally reflected on the broader impacts of the proposal rather than answering the specific business-based questions asked in the consultation.

2.4. Whilst some respondents were supportive of the government’s objectives to address value shifting, there were mixed feelings about the proposed legislation.

2.5. Some respondents agreed that the proposed changes would provide certainty and one respondent fully supported the proposals. However, most respondents thought the proposed changes would increase complexity and place additional administrative burdens on businesses.

2.6. The majority of respondents did not feel value shifting was an issue in their sector. A respondent was supportive of tackling value shifting in sectors where zero-rated and standard-rated goods are bundled, but they did not want sectors where this does not apply to be faced with extra administrative burdens.

2.7. A number of views were given about the size of the issue, with some respondents commenting that they have not seen sufficient evidence that value shifting occurs on a scale to warrant the proposed changes. One respondent thought the proposals were not proportionate to the behaviours of a small number of businesses in particular sectors.

2.8. As an alternative to a broad measure, some respondents suggested it would be more proportionate to mandate the methods of apportionment only in cases where value shifting was known to occur. One respondent suggested further targeting, such as applying a threshold based on the size of the organisation to relieve smaller suppliers from unnecessary burdens.

2.9. Most respondents sought confirmation on which sectors the proposed legislation would apply to and requested this be made clear in any legislation. Their understanding was that the changes would affect the retail sector, but they were uncertain on whether other sectors would be impacted.

2.10. The need for the change was also challenged in light of HMRC’s success in tackling value shifting through litigation on a case-by-case basis.

2.11. Another theme centred on legal issues. One respondent commented that current legislation provides limited scope for HMRC to apply a market value to supplies at below value where parties are not connected. Another suggested that, if the disclosure of avoidance schemes’ provisions for value shifting are insufficiently clear to enable HMRC to receive disclosed information about value shifting, then a solution would be to change the scheme disclosure rules, not the approach proposed in the consultation.

2.12. Part 4.2 of the consultation states that, if a single consideration for multiple mixed supplies was not liable to be apportioned to items held out as ‘free’ within the bundle, the provisions in Schedule 6 VATA paragraphs 6 – 8 would apply. A respondent stated that it was not clear if part 4.2 would exclude the business gift provisions of Schedule 4, 5(2)(a), while another stated that any changes to legislation may require bespoke VAT retail schemes to be rewritten.

2.13. Respondents also provided insight into specific areas of concern or where further consideration was required. It was commented that the consultation focuses on the bundling of zero-rated and standard-rated goods, especially those that can be sold separately, but that this should be viewed differently from combinations of clinical services and medical devices in healthcare where they are bundled out of necessity because they cannot be supplied separately.

2.14. Real estate transactions with bundles of supplies with mixed VAT liabilities were also highlighted. The respondent did not suggest that those areas were particularly at risk from value shifting but highlighted the importance of considering the impacts of the proposals on real estate transactions.

2.15. Another respondent stated that, where agreed bespoke methods were already in place for apportioning the consideration, any new measures should not supersede these agreements. They added that this should include businesses that adopt the Extra Statutory Concession (ESC) 3.7, which concerns minor promotional items supplied in linked supplies schemes, and ESC 3.35, which concerns VAT apportionment of certain membership subscriptions to non-profit making bodies.

2.16. Respondents informed us that they were willing to be contacted should we have any further questions.

Sales price apportionment

2.17. One respondent acknowledged that adopting a market value apportionment would remove complexity in instances where the sales prices are known. They noted that, in their experience, this method was already being used in most instances.

2.18. There was a concern that the proposed changes could create more opportunities for manipulation and it might be necessary to define what is meant by ‘sold separately’ and introduce specific anti-abuse measures to prevent such behaviour.

2.19. A respondent questioned whether selling prices could be used when items were available for separate sale, even though very few customers would purchase them individually, or whether businesses would have to prove scale to use separate selling prices.

2.20. One respondent questioned the concern raised in part 3.18 of the consultation, which reads: ‘Some businesses seek to use a market value method, which applies all of the discount to the standard rated item in a bundle, thus accounting for less VAT. This is compared to apportioning the discount across all items in the bundle based on their individual sale prices’.

The respondent’s view was that HMRC guidance is already clear on this matter. They referred to Section 31 of Public Notice 700: The VAT Guide, which sets out 2 examples of how to apportion output tax. The respondent stated that both examples result in the consideration, and therefore any discounts, being equally apportioned across the supplies.

2.21. It was suggested that, where goods or services were not sold separately by a charity but were sold separately by a third-party, then the third-party price could be used in the apportionment calculation.

Cost price apportionment

2.22. One respondent’s view was that cost-based apportionments, arrived at on a fair and reasonable basis, will accurately reflect the associated costs in supplying the individual items that are sold when goods are packaged together for genuine promotional purposes.

2.23. This respondent also highlighted the complexity of mandating a cost-based apportionment when supplies in the bundle include services. They stated that, with goods, the cost can often be easily identified, but significant additional analysis would likely be needed to calculate the cost of providing a service.

2.24. Another respondent commented that a cost-based approach would be difficult where services in the bundle are derived from overhead costs, rather than direct costs. The respondent added that the components are often drawn from the same cost pool and can only be fairly valued by estimation.

2.25. A specific comment was made regarding the aftercare aspect in healthcare packages that can last for many years and where some patients need more rehabilitative support than others. They did not consider the healthcare setting as analogous to retail businesses.

2.26. It was also highlighted that a cost-based apportionment causes difficulties where goods or services are acquired for a reduced charge or at no cost, such as donations, rendering valuations unrealistic unless an exception is made and the fair and reasonable principle is allowed.

Mixed apportionment

2.27. One respondent expressed concern that the mixed apportionment method, particularly the principle where the sale price is reduced so that all item values equate to the consideration, will increase uncertainty, complexity, and lead to disputes. They added that paragraph 4.1.2 does not explain how the remainder of the consideration would be apportioned between multiple cost-valued items.

2.28. Another respondent commented that, whilst they appreciated a prescriptive approach would provide certainty, they considered the mixed apportionment method to be complicated and that there may be instances where the VAT amount declared for an item may differ depending on whether it was sold separately. They also thought this method would create administrative burdens, including complications with electronic till systems.

3. Next steps

3.1. The government is grateful for the time respondents took to engage with the consultation and for providing such comprehensive and thoughtful responses.

Respondents generally provided their views on the impacts of the proposals rather than giving specific answers to the questions in the consultation. This is possibly because most of the questions were business-based questions, whereas all the respondents were representative bodies or tax advisors.

3.2. Though the consultation stated that the broad principles of the proposed legislation were set, HMRC is using the feedback from the consultation to evaluate the issues further and carefully consider the scope of the proposed changes.

3.3. HMRC is actively engaging with stakeholders to gain a fuller understanding of the range of views on the proposals set out in the consultation. HMRC has contacted all respondents to fully discuss their concerns about the proposals and welcomes engagement from others who may have missed the opportunity to respond to the consultation. As part of this engagement HMRC will keep under review the changes proposed in the consultation.

Annex A: summary of consultation questions

Current treatment scenarios

Scenario 1: All items in the bundle are also sold separately

Question 1

a. Does your business sell items of different liabilities in bundles and also sell those items separately? If no, please go to Scenario 2.

b. If yes, what goods or services are involved?

c. Are these bought in or developed (or partly developed) in-house?

Question 2

a. Do you use a cost-based apportionment? If no, please go to Q3.

b. If yes, how do you calculate the costs of any goods or services that are developed (or partly developed) in-house?

c. Do you include overheads or indirect costs e.g., transportation or refrigeration? Please provide details

Question 3

a. Do you use a market value-based apportionment? If no, please go to Scenario 2.

b. If yes, please provide details.

Scenario 2: One or more items in the bundle are not also sold separately

Question 4

a. Does your business sell bundles where one or more items are not also sold separately? If no, please go to Scenario 3.

b. If yes, what goods or services are involved?

c. Are these bought in or developed (or partly developed) in-house?

Question 5

a. Do you use a cost-based apportionment? If no, please go to Q6.

b. If yes, how do you calculate the costs of any goods or services that are developed (or partly developed) in-house?

c. Do you include overheads or indirect costs e.g., transportation or refrigeration? Please provide details

Question 6

a. Do you use a market value-based apportionment? If no, please go to Scenario 3.

b. If yes, do you use actual market values or estimated market values? Please provide details

Scenario 3: None of the items in the bundle are sold separately

Question 7

a. Does your business sell bundles where none of the items in the bundle are also sold separately? If no, please go to Q10.

b. If yes, what goods or services are involved?

c. Are these bought in or developed (or partly developed) in-house?

Question 8

a. Do you use a cost-based apportionment? If no, go to Q9.

b. If yes, how do you calculate the costs of any goods or services that are developed (or partly developed) in-house?

c. Do you include overheads or indirect costs e.g., transportation or refrigeration? Please provide details.

Question 9.

a. Do you use a market value-based apportionment? If no, go to Q10.

b. If yes, do you use actual market values or estimated market values? Please provide details.

Coupons

Question 10

a. Does your business currently offer such money-off coupons? If no, please go to Q11

b. If so, are these coupons issued for specific items or multiple items in a bundle?

c. In each case, how do you apportion the consideration when coupons are issued; and when they are redeemed?

Bundles sold by more than one entity

Question 11

a. Does your business currently sell bundles involving more than one entity? If no, go to the next section on changes to UK legislation.

b. If so, please provide details.

Changes to UK legislation

Question 12

a. How do you envisage the new rules working in the scenarios outlined in the consultation document at 4.1.1 – 4.1.3 and with regard to 4.1.3, taking into account 4.3 a) – d)?

b. Will applying the new methods of apportionment to bundles increase the administrative burdens or cost for your business?

c. Please provide details of both one-off and ongoing costs.

Question 13

a. How do you envisage the new proposal working with ‘money-off coupons’ described at Q10?

b. Does this raise any concerns for your business or organisation?

c. Will applying the new methods of apportionment to bundles increase the administrative burdens or cost for your business in terms of issuing ‘money-off coupons’ to your customers?

d. Please provide details of both one-off and ongoing costs.

Question 14

a. The new rules will apply to bundles supplied by more than one entity. How do you envisage this working?

b. Does this raise any concerns for your business or organisation?

c. Will applying the new methods of apportionment to bundles sold by more than one entity increase the administrative burdens or cost for your business?

d. Please provide details of both one-off and ongoing costs.

Question 15

a. Please suggest any methods of apportionment other than those proposed that you think would better to address the unfair outcomes caused by ‘value shifting’?

Annex B: list of organisations and stakeholders who responded

Association of Accounting Technicians (AAT)

British Property Federation (BPF)

Charity Tax Group (CTG)

Chartered Institute of Taxation (CIOT)

Deloitte LLP

Joint response from The Association for Eye Care Providers (FODO), Association of British Dispensing Opticians (ABDO), and Association of Optometrists (AOP).

National Community Hearing Association (NCHA)