The appellants specialised in the sale of both antique and contemporary jewellery and watches were assessed by HM Revenue and Customs (HMRC) for underpaid VAT following a mutual assistance request from the Italian tax authorities wanting information on the destination of a number of new watches supplied by an Italian trader. The assessment was based on the argument that the company had incorrectly applied the secondhand margin scheme to its sales of new watches. The VAT margin scheme allows businesses to pay VAT only on the difference between the purchase price and the selling price of secondhand goods rather than on the full selling price. 

HMRC contended that the company had misapplied the VAT margin scheme by including items that did not qualify as secondhand goods. Specifically, HMRC argued that some of the watches sold were newly manufactured and thus should have been subject to standard VAT rules. 

Another critical issue was the