The lawyer’s view on VAT and promo CDs

The Opinion in the EMI case has no legal force by itself, but if followed by the European Court of Justice (ECJ) it may open the door to claims by various businesses for overpaid VAT. It will also reduce VAT costs going forward, which will become increasingly important next year when the main VAT rate increases to 20%.

The UK rules currently provide that, where a number of identical samples are given to the same person, VAT has to be accounted for on the cost of all the samples apart from the first one. So a record company which provides large numbers of CDs to various intermediaries and pluggers will have a large VAT bill under current law.

The Advocate General of the ECJ has taken the view that the UK rules on samples are too draconian. If the ECJ follows this Opinion, many taxpayers will be able to rely on their ‘directly effective’ EU law rights, which effectively allows them ignore the restrictive provisions of the UK’s domestic rules. So it would allow businesses to avoid a VAT cost on future supplies of samples, and would allow them to reclaim VAT incorrectly paid to HM Revenue & Customs in previous years.

The case is of direct relevance to companies which provide large numbers of CDs to the media and pluggers (and who have in the past accounted for VAT on the value of these samples - a significant cost).

These businesses should takes steps now to quantify potential claims. But the case is also of wider application - indeed any business which has supplied significant samples to customers or intermediaries should consider their position carefully (eg the computer games industry, the fashion industry and various manufacturers).

VAT reclaims can only be made in respect of the preceding four years, so businesses should consider putting in claims to HM Revenue & Customs now in order to avoid any amounts becoming time barred. That is, if businesses wait until the ECJ decision (which may be several months away) then it should be noted that the four years will only run from the date the VAT reclaim is submitted to HM Revenue & Customs.

Jonathan Legg, Partner, Mishcon de Reya can be contacted on 020 7440 7092 or at jonathan.legg@mishcon.com.

To read this article on the Music Week website, please click here.