VATF62400 - Contrivance: The way the taxable person trades: Mark-ups
Analysing the mark-up added to the goods and services as they are bought and sold through the transaction chain can provide you with a view as to whether the transactions are credible and, if not, contrived (see VATF33300).
Aspects to consider
- Does the variation in the mark-ups reflect value added?
- Do the mark-ups have any commerciality in the sense that true value has been added before the goods are exported?
- Has the taxable person applied a far larger mark-up than the rest of the parties, despite adding no value to the goods? If so, what is the explanation for this and is it credible?
- Are the mark-ups applied by each party in the transaction chains similar, regardless of whom the supplier or customer was, the type or value of the goods or the quantity?
- Is there evidence that negotiations took place to determine the price?
- Were any discounts given by any party within the transaction chain?
- Was price paid or received by the taxable person inconsistent with prevailing market prices for those goods or services at the relevant time?
The above list is not exhaustive.
Differences in the mark-ups in the chain of supply
What are the mark-ups at various points in the supply chain? If the mark ups are substantially higher than those applied further up/down the transaction chains then this (when considered alongside other features of the transaction chains) is an indicator that the chains themselves were contrived.
It may be argued that the significantly higher mark-up is due to:
- additional costs incurred by exporters (freight, handling, insurance etc.), and/or
- the cost of financing the VAT element of the payment to suppliers, until the relevant VAT refund is received from HMRC.
In relation to (a), consider the actual level of such costs incurred, to see how they compare in monetary terms to the level of mark-up.
With regard to (b), this might be seen as an acknowledgement by the taxable person of the high risk of the transactions being connected with fraudulent evasion of VAT, and hence the likelihood of delay in receiving a VAT refund. (Under normal circumstances, the financing of the VAT element would only be for a short period of time.) It would also mean that in effect the overseas customer is funding (by means of paying an inflated price) the costs incurred by the exporter/dispatcher in relation to UK VAT. It is hard to see why the overseas customer would be willing to do this if the transactions were taking place within a competitive industry subject to market forces. If they were to source the goods within their own EU Member State, they would of course be charged domestic VAT, which they would be able to recover, as opposed to incurring irrecoverable costs in the form of the UK taxable person’s additional mark-up.
The significance of consistent mark ups
In a market that is competitive and volatile, we would expect to see fluctuating mark-ups determined by market forces, which are likely to vary due to a number of factors including:
- overheads;
- the type of goods;
- the quantity of goods;
- the selling price that can be obtained.
The most important factor would normally be supply and demand; i.e. the popularity of a particular goods in relation to the level of stock available in the market at the particular time.
The consistency in the mark up is an indicator that the deals have been pre-arranged.