Court upholds ruling against HMRC’s position in Sports Direct EU VAT case

The Upper Tribunal Court has upheld a ruling in favour of Sports Direct and against HMRC’s position that the retail company owed millions in EU VAT.

Typically companies selling goods to EU customers would have to adhere to the VAT rate of the buyer’s country. VAT varies quite drastically across the EU –  the 20% rate in Britain comes out middle of the pack, and it reaches 27% for Hungary, 25% for Denmark, Sweden and Croatia, and down to 17% for Luxembourg.

Sports Direct found a way to circumvent paying varying amounts of VAT by setting up a separate delivery company, Etail Services Ltd, which operated outside of its VAT group. When a non-UK customer purchased goods online, Etail would purchase the goods from Sports Direct, then make the delivery and charge the customer inclusive UK VAT. The retail company used this structure between 2010-2015.

While initially approved by HMRC, the structure was called into question in 2015, when HMRC requested non-binding guidance from the European Commission’s VAT Committee on the arrangement. The VAT Committee found that such structures were in violation of Articles 32 to 34 of the EU VAT Directive, which led to HMRC declaring Sports Direct had wrongfully charged Etail UK VAT which it could not reclaim until it had paid any outstanding foreign VAT.

In 2016 Sports Direct took the case to the First Tier Tribunal (FTT) to challenge HMRC’s position, and the FTT ultimately ruled in Sports Direct’s favour, and suggested referral to the European Court of Justice (ECJ).

HMRC appealed the ruling and took the case to the Upper Tribunal Court, who upheld the FTT’s ruling in favour of Sports Direct, although did not support a referral to the ECJ.

HMRC recently announced the appointment of two new director generals.