There are special VAT rules that must be followed when you sell goods on a sale or return basis. Goods sold on a sale or return basis (sometimes known as ‘on approval’) are goods that are effectively supplied to a customer free of charge and the supplier is only paid when the product has been sold. If the product remains unsold then it can be returned to the supplier without any charge.
This type of sale is most often seen in the retail sector where a supplier is eager to work with a new retailer, perhaps one who needs a range of merchandise available for retail sale but does not want to purchase a large amount of stock upfront or where a supplier is trying to launch a new product and the retailer is unsure if there will be a demand.
From a VAT point of view, the goods have not been sold by the supplier until such time as they are adopted by the customer. This is the point in time when the customer indicates a wish to keep the goods. By agreement, the supplier can put in place an agreed maximum time limit that the customer has to return the goods.
If a time limit has been fixed for a period of 12 months or less then the basic tax point is the date when that time limit expires. If there is no time limit or the limit has been fixed more than 12 months in the future, then the basic tax point is 12 months from the date when the goods were sent.
In either case if the customer adopts the goods before the time limit expires, the date of adoption becomes the basic tax point. The basic tax point is overridden by the issue of a VAT invoice.