The First Tier Tribunal (FTT) has allowed the appeal of an Amazon trader’s VAT bill, ruling that while HMRC’s assessment was made to the best of its judgment, the flat rate scheme for VAT should have applied.

The appellant, Pierre Andrew Divisia (PAD), appealed against an assessment of VAT made under section 73 of the Value Added Tax Act 1994 (VATA) for the periods 04/18 to 04/20 for £7,612.00.

In the summer of 2019, there was correspondence between PAD and HMRC about his UK VAT liability. In the course of this PAD explained that from 2019 onwards some goods for sale were stored in the UK by Amazon in warehouses.

However, PAD did not have any say over this as Amazon arranged the storage. Communications between HMRC and PAD continued regarding the FRS and how to fill out VAT returns.

The FRS was introduced on 25 April 2002, allowing taxpayers within specific turnover limits to pay VAT as a percentage of turnover instead of working out the VAT on sales and purchases. PAD applied to join the FRS and was authorised to account for VAT under it from 28 February 2018.

On 11 July 2019, the tax authority responded to PAD’s questions about import VAT, place of supply of goods, despatches, distance sales and the FRS.

HMRC then started an online selling compliance check of PAD and on 14 August 2020 wrote asking for various documents. PAD responded two days later, and the reply included a statement confirming that he did not sell anywhere else in the UK – only the Amazon marketplace.

On 14 September 2020, HMRC sent an assessment for £7,612.00 VAT to PAD and terminated his authority to use the FRS. In October 2021, HMRC raised a further assessment for £16,151 on PAD for the early period 30 January 2015 to 27 February 2018.

Under Schedule 1A to VATA a person becomes liable to be registered for VAT when ‘the person makes taxable supplies, or there are reasonable grounds for believing that the person will make taxable supplies in the period of 30 days then beginning’.

HMRC observed that, in his answers to the questionnaire, PAD stated that he did not consider that he was making supplies from the UK. However, the transaction reports confirmed the goods were being supplied from the UK, either to UK or EU consumers.

HMRC was satisfied that PAD was liable to be registered under Schedule 1A as it was making taxable supplies of goods held in the UK in the course or furtherance of a business and had no business establishment in the UK.

Movements of goods from the UK to other Amazon warehouses elsewhere in the EU would be subject to VAT unless PAD was registered in another EU state, even though they were not sales. PAD was not VAT registered in any other EU jurisdiction.

At the tribunal, PAD criticised some of the transaction records HMRC used, stating that some related to periods outside the assessment period.

PAD explained that he was a self-employed person in France and was not required to be VAT registered. He was confident that he met all the UK VAT requirements up to 2018 and did not need to VAT register in the UK. Amazon forced him to register in the UK from February 2018 and he reported his sales activity as required by Amazon until April 2020, when he stopped all commercial activity.

In this period, he believed he could use the FRS, but realised that would have created a UK VAT liability where UK sales were fulfilled from the EU to the UK.

He later found out that Amazon had been ‘continuously moving a large part of inventory from France to the UK, and actually constantly moving inventory across Europe between fulfilment centres or for customer deliveries including UK to EU’.

PAD argued that these decisions were always internal and were done so without Amazon informing him.

The FTT referred to the case on ‘best judgment’ in Van Boeckel v CCE [1981], which addressed the principles inherent in the requirement that HMRC should exercise their best judgment, which stated that ‘that the Commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due’.

Judge Mark Baldwin said: ‘My task is to determine the correct amount of VAT due. I have a great deal of sympathy for the position PAD finds himself in, at least if I understood it correctly.

‘While HMRC calculated PAD’s outputs and assessed him to VAT to the best of their judgment, and there is nothing which comes anywhere near satisfying me that HMRC’s calculation of PAD’s outputs was incorrect.

‘It failed to take into account the effect on PAD of excluding him from the FRS in the light of his inability to recover the VAT he had incurred in France on acquiring the goods. HMRC may have thought that terminating PAD’s authority to use the FRS was reasonable in the light of his compliance failure, although I do not share that view.

‘Accordingly, the assessment must be reduced so that it reflects PAD’s output as determined by HMRC but calculates VAT on those amounts using the applicable FRS rates. The appeal is allowed.’