Cross-Border VAT (1): How Do I Deal With B2B EU Supplies Of Goods?
Even before Brexit and its attendant concerns began to stalk the land, cross-border VAT was a tricky area.
In practice, of course, most cross-border movements of goods are zero-rated, but businesses must meet certain strict conditions in order to benefit from the zero rate.
Moreover, there are also administrative requirements which must be met by taxpayers when they move goods across borders, whether as a supplier or as a customer. These administrative requirements can include a requirement to register for VAT in a particular jurisdiction.
All of this adds up to an environment where – for most businesses most of the time – matters are reasonably straightforward to understand, but ducks have to be kept very firmly in a row.
However, the environment also includes certain scenarios where matters are much more complex and advice is needed.
After all the excitement of 2020, 2021 will bring the world of trade and moving goods an injection of change (and decay?) in all around we see – but mainly with respect to moving goods across the Irish Sea.
This month’s blog post therefore focuses, to refer again to Donald Rumsfeld, on “known knowns” and “known unknowns”. As ever, we must leave the unknown unknowns alone…
On that basis, I have started I hope logically with what will not be changing, or at least, not much, namely, EU trade for NI businesses. The position will of course be different for GB businesses trading with the EU, but that is largely outside the scope of this blog post…!
I finish up with a brief overview of the impact of the NI Protocol and Brexit. I first addressed this in August’s blog post, and will only look at what is new. And, happily, if very late on, clarity is being given on some of the known unknowns. Of course, clarity doesn’t necessarily mean we will like what we find…
As usual, a quick summary of the main points then follows.
In next month’s blog post, I will move on to look at imports and exports (that is, trade with countries outside the EU), which again, should not be changing dramatically after 1 January 2021. Of course, that doesn’t mean we don’t need to think about it…
What Is An EU Acquisition? And Why Does It Matter?
In order to help bring what is fairly unexciting material to life, I have used a number of examples about an NI company imaginatively called TradeCo Ltd, a French company called Les Bleus S.A., and one or two others. I have mixed these examples liberally throughout what follows. And now, as Brian Potter of Phoenix Nights would say, “Avanti!”
“Imports” and “exports” for VAT purposes refer to transactions with countries outside the EU, although in everyday practice, it is often used to refer to any movement of goods into or out of a given state. After 1 January 2021, this is going to be a bit more convoluted, but that is a topic for another day.
By contrast, the concept of an “Intra-EU Acquisition” (henceforward referred to as “acquisitions”) was developed as a transitional step between imports and exports, and the completion of the EU Single Market.
Unfortunately, the transitional period has continued from 1993 up to date, and there is no realistic sign of the Single Market being completed any time soon. This means that acquisitions continue to be the description applied to intra-EU movements of goods.
Strictly speaking, intra-EU movements of goods are divided between acquisitions, which is the term used to describe the movement of goods arriving in a particular country, and dispatches, which is the term used to describe the movement of goods leaving a particular country.
Dispatches and the related zero-rating rules are discussed in section 3 below.
A brief outline of how the acquisition/dispatch rules work in practice follows. For convenience’ sake (and because it reflects typical practice in real life), the term acquisition is used in this section to cover both sides of the transaction.
The basic idea of the acquisition rules is that the customer accounts for the VAT due on the supply on the VAT return in the country where the goods are received (or “acquired”). The supplier can therefore zero-rate the supply in the country from which the goods are dispatched.
An example of how this works is as follows:
- Example 1: The French Connection
Les Bleus S.A., a French manufacturer, agrees to sell £10,000 worth of widgets to TradeCo Ltd.
All of the necessary conditions for zero-rating are met, and so Les Bleus S.A. does not charge VAT on the supply. TradeCo Ltd then accounts for UK VAT on the supply on its UK VAT return. As TradeCo Ltd is able to reclaim all of its input VAT, it reclaims the acquisition VAT in full.
In practice, therefore, neither company bears any real VAT cost.
This scenario covers the vast majority of acquisitions, as goods are moved between two VAT-registered entities.
However, it is important to note that (apart from some specific exceptions), the acquisition rules mean that any movement of goods meeting the following conditions will be treated as a supply for VAT purposes (and hence potentially subject to VAT):
- Goods belonging to a business are
- Removed from any EU member state, by or under the direction of the person carrying on the business, and
- Removed in the course or furtherance of the business, for the purpose of being taken to another EU member state
It is vitally important to note that, even where there is no consideration for the movement of goods, the acquisition rules will still apply in principle.
To adjust the example above:
- Example 2: The French Connection II: The Revenge
Les Bleus S.A. has decided to cut TradeCo Ltd out of the supply chain, and start selling widgets directly to NI customers.
Accordingly, it rents warehouse space near Belfast, and ships £10,000 worth of widgets from France to the warehouse. It retains title to the goods at all times. It does not have any establishment in the UK.
Under the acquisition rules, Les Bleus S.A. has now made an acquisition of goods in the UK.
This example highlights a crucial aspect of the acquisition rules. For “taxable persons”, VAT registration is often required in the country of acquisition. The rules governing registration for acquisitions in the UK are discussed in detail below.
Similar provisions apply in all of the EU member states subject to the acquisitions rules. These rules will continue to apply in NI after 1 January 2021, assuming the NI Protocol comes into force as planned.
Acquisitions give rise to a requirement to register for two main reasons, which differ for established and non-established persons. Each is discussed in turn.
Generally speaking, businesses which make significant acquisitions will already be registered for VAT in the UK.
However, the UK VAT rules also require registration where a person is not registered under the “standard” registration rules, but is making acquisitions.
If a person established in the UK makes “relevant acquisitions” of goods from a taxable person in another EU member states which exceed the standard registration threshold of £85,000 in a given calendar year, this will give rise to a requirement to register for VAT in the UK.
Note that the practical application of these provisions is fairly narrow. An example would be a business making solely exempt supplies in the UK which acquired the goods for use in its business rather than for resale.
- Example 3: Big Trouble in Little Belfast
PiggyBank Ltd is a new challenger bank based in Belfast . Its supplies are all exempt.
In order to fit out its data centre, it orders £100,000 worth of widgets from Les Bleus S.A., to be delivered to Belfast from France.
A purchase of goods of that value will mean PiggyBank Ltd will need to register for VAT in the UK. It will need to account for £20,000 of VAT on the sale, paying this over to HMRC, but not recovering any of it (because its supplies are all exempt).
Note that this is a very simplified version of events. In real life, it is perfectly possible that PiggyBank Ltd would not register in time to obtain acquisition treatment, meaning it faced French VAT on the purchase, followed by a requirement to register in the UK. Big trouble.
There are other additional detailed rules in this area, but these are not discussed here. If you have any queries about VAT registration in respect of acquisitions, please don’t hesitate to contact me on 028 71 876 220, or by email at email@example.com.
The principal reason for a requirement to register for non-established persons is created where that person has made a supply of goods in another member state.
As a non-established person does not benefit from any threshold in the UK, any supply of goods at all will give rise to a requirement to register for VAT.
As outlined in Example 2 above, Les Bleus S.A. had made an acquisition of goods in the UK. This means the place of supply of the goods is the UK, where Les Bleus S.A. does not have an establishment. Accordingly, it would have a requirement to register for UK VAT.
Note that there are some fairly narrow exceptions to this rule, as outlined below.
First, where a non-established person makes a “temporary” movement of goods, and meets all of the following conditions, it may avoid a requirement to register for VAT:
- It does not have a place of business in the EU member state to which the goods are temporarily transferred;
- It has a specific contract to fulfil; and
- It intends to return the goods to the EU member state from which they were dispatched
This might arise where, for example, goods are subject to a leasing agreement in another EU member state, or where tools or equipment are moved to another EU member state to fulfil, e.g.: a repair contract.
Secondly, persons meeting the following conditions can also avoid registering in the UK (and generally speaking, other EU member states as well, though the rules can vary):
- the goods would be eligible for temporary importation relief if they were imported from outside the EU
- they’re to remain in the EU member state for no longer than 2 years
Some additional detail on temporary importation relief will be provided in next month’s blog post.
Note that NI will, at least based on what we have been told so far, continue to operate these exceptions and simplifications after 1 January 2021, but the rest of the UK will not.
The Joy of Intrastat
No survey of EU VAT rules would be complete without a discussion of the Intrastat system.
Intrastat is the name given to the system for collecting statistics on the trade in goods between EU member states. Intrastat replaced Customs declarations as a source of trade statistics within the EU. It exists throughout the EU and requirements are similar in all EU member states.
As the rest of the UK is leaving the EU goods system, Customs declarations will be coming back in for sales between GB and the EU; and they will (basically) be coming back in for sales from GB to NI, as discussed in section 6 below.
However, under the NI Protocol, Intrastat should continue to apply to EU trade for NI businesses.
Note that supplies of services are excluded from Intrastat except where they’re related charges such as freight and insurance and form part of the contract to supply goods.
For Intrastat purposes, goods received into the UK are called arrivals and goods consigned to an EU member state from the UK are called dispatches.
This is because (just to make things easier and more enjoyable) the Intrastat system developed separately from the VAT system and there are some differences in coverage between the two systems.
All businesses carrying out trade with EU member states must declare the totals of their sales and acquisitions on their VAT Returns. Those businesses over a legally-set threshold are also required to provide more detailed information on Intrastat “Supplementary Declarations”. Intra-EU trade statistics are compiled from the Supplementary Declarations and estimations made using the information on the VAT Returns.
All businesses registered for VAT in the UK must complete two boxes (Boxes 8 and 9) on their VAT Returns showing the total value of goods supplied to EU member states and the total value of goods acquired from EU member states
However, as noted above, businesses with a value of trade in goods with EU member states above the Intrastat threshold for either acquisitions or supplies of goods must complete Intrastat Supplementary Declarations each month. The thresholds are currently:
- Arrivals: £1.5 million in the past calendar year
- Dispatches: £250,000 in the past calendar year
If the threshold is exceeded, the business must complete Intrastat returns for the following calendar year, even if they subsequently fall below the threshold.
Note as well that if the thresholds are exceeded during a particular calendar year, then declarations must be submitted for the remainder of that calendar year.
What Do I Need To Do To Zero-Rate My Supplies?
Section 2 covers the basics for intra-EU movements of goods under the “acquisitions” rules.
For this section, therefore, the focus is on the impact of the rules from the perspective of the supplierproviding goods to a customer in another EU member state. There are two key focuses for suppliers in this position, namely:
- Whether any tax is due on the supply
- What administrative requirements there are
EU dispatches can, as noted above, usually be zero-rated. There are, however, strict conditions for this treatment. As a result the administrative requirements affect the tax treatment as well. One of these administrative issues is the EC Sales List, which is now legally required to permit zero-rating. Note that the EC Sales List is in addition to the Intrastat return mentioned above.
The zero-rating conditions and the EC Sales List are discussed in return.
In principle, any supply of goods from one VAT-registered person to another in a different EU member state can be zero-rated.
However, there are strict conditions to meet for the zero-rating to apply. If the conditions are not met, the supply is effectively treated as a UK domestic supply and subject to VAT at the prevailing domestic rate.
The UK regulations provide that a supply from the UK to a customer in an EU member state is liable to the zero rate where:
- The customer is VAT-registered in another member state and has notified the supplier of that VAT number;
- The goods are sent or transported out of the UK to a destination in an EU member state; and
- The supplier submits an EC Sales List accurately accounting for the supply
The “VIES” website should be used to confirm the customer’s VAT number, and taxpayers must be able to show they have taken “reasonable steps” to check the number is valid. The VIES website should continue to be available to NI businesses after 1 January 2021.
The EC Sales List may be completed and submitted after the supply has been made, and zero-rating is not delayed on that account. The EC Sales List is discussed in greater detail below.
In addition to the three bullet-points above, VAT Notice 725 includes the following statement:
The following sentence is a condition that has force of law.
You must get and keep valid evidence… that the goods have been removed from the UK within the time limits set out at paragraph 4.4
The time limits in paragraph 4.4 are as follows:
Where goods are removed from the UK and the call-off conditions are met, the time limit for getting valid evidence of removal is 3 months from the time the goods leave the UK.
In all other cases the time limits for removing the goods and getting valid evidence of removal will begin from the time of supply. For goods removed to an EU member state the time limits are:
- 3 months (including supplies of goods involved in groupage or consolidation prior to removal)
- 6 months for supplies of goods involved in processing or incorporation prior to removal
The detailed rules on goods involved in processing or incorporation prior to removal are not discussed here, but it is sufficient to note that the conditions are strict and require that the goods can be identified in the supplier’s records at all times.
HMRC’s guidance provides detailed discussion of the kinds of evidence required to prove that the goods have left the UK. New rules with effect from 1 January 2020 provide the supplier with a “presumption of removal” are well summarised by HMRC below:
The effect of the new rules is that, where the conditions are met, it is presumed that the goods have been transported from the member state of origin. This presumption can be challenged by HMRC. If the relevant conditions are met, it is for HMRC to prove that the goods have not been transported from the member state of origin.
The presumptions are met where the supplier arranges for the transport of the goods and is in possession of one of the following issued by 2 different parties that are independent of each other, of the vendor, and of the acquirer:
- at least 2 items of non-contradictory acceptable evidence from list A
- any single item from list A together with any single item of non-contradictory acceptable evidence from list B
List A: Documents relating to the dispatch or transport of the goods, such as:
- a signed CMR document or note
- a bill of lading
- an airfreight invoice
- an invoice from the carrier of the goods
List B: The following documents:
- an insurance policy with regard to the dispatch or transport of the goods or bank documents proving payment for the dispatch or transport of the goods
- official documents issued by a public authority, such as a notary, confirming the arrival of the goods in the destination member state
- a receipt issued by a warehouse keeper in the destination member state, confirming the storage of the goods in that member state
VAT Notice 725 sets out detailed discussion of the evidence required to evidence removal and so secure zero-rating under the old rules, which still have effect where businesses have difficulty providing the information required by the new presumption rule. These are not discussed in detail here. The kinds of documentation required are similar to the two lists set out above.
There is also detailed guidance as to the approach to be taken in certain less common situations, for example
- Where the recipient arranges for collection of the goods
- Where goods are transported over the Irish Land Border
- Where goods are transported in small packages or by post
- Where goods are sent in consolidated or in groupage
- Where the supplier uses an agent to manage the transport
In all cases, the essential goal is to be able to evidence, based on third party records, that the goods in question left the UK on a particular date, and that the goods transported match the description, value and quantity, etc, as set out in the supplier’s records.
I won’t comment further on the evidentiary requirements, but if you have any queries on this point – and perhaps especially in respect of movements across the Irish Land Border – please don’t hesitate to get in touch on 028 71 876 220 or firstname.lastname@example.org.
EC Sales List
As referred to above, the VAT rules require that businesses submit EC Sales Lists. What follows discusses the position, and also includes some general comments on supplies of services and the reverse charge, which will be dealt with in detail in a future blog post.
All businesses registered for VAT have to submit EC Sales Lists for their EU supplies of goods or services subject to the reverse charge in their customer’s EU member state.
EC Sales List must be completed by any person which:
- Makes supplies of goods to a business registered for VAT in an EU member state, including transfer of own goods,
- Is the intermediary in triangular transactions between VAT-registered traders in EU member states,
- Makes supplies of services subject to the reverse charge in its customer’s EU member state
An EC Sales List is not required where the trader is involved in triangulation (discussed in section 4 below) and the goods are exported to a final customer outside the EU. (Note that the triangulation simplification measures do not apply in these circumstances.)
EC Sales Lists can be submitted online or by paper. There is no requirement to submit nil EC Sales Lists.
The rules on how often to file a return can be quite complicated, and are not discussed in detail here. Smaller businesses, or businesses which only supply services, need only file the return quarterly. For businesses which supply goods with a value greater than £35,000 net of VAT in the current or previous four quarters, monthly returns are required.
There are certain other technical rules on determining frequency which are not discussed here. If you have any queries on this point, or just want to chat about EC Sales Lists and the relevant time limits, please don’t hesitate to get in touch on 028 71 876 220 or email@example.com.
The List must be submitted within 14 days of the end of the period for paper returns, and 21 days for returns submitted electronically.
A failure to file the return is subject to penalties, as are returns which are mistaken. Generally HMRC will offer taxpayers the opportunity to correct the return before imposing penalties.
An EC Sales List is required where a supplier makes supplies of goods to a trader registered for VAT in an EU member state, including the transfer of own goods and goods that would be zero-rated if supplied within the UK. Similarly, goods provided free of charge to customers in EU member states should be included, although there are certain strictly defined exceptions for samples or gifts.
Where there are supplies of goods to customers who are not VAT-registered in EU member states and the supplier is responsible for delivery of the goods (what is catchily known as “distance selling” to those in the know), these supplies do not appear on the EC Sales List. Note that distance selling and similar issues will be covered in a separate blog post.
Temporary movements are not included on the EC Sales List unless the conditions relating to the transfer change (as discussed above in section 2).
Only services which are taxable at a positive rate in the customer’s EU member state are included on the EC Sales List, and so suppliers must take steps to establish liability. If errors are made, the taxpayer should seek to correct the List. Zero-rate supplies are not subject to the reverse charge and therefore no charge arises.
Where continuous supplies of management services are being made, the quarterly invoice date may be used to complete the EC Sales List.
As noted briefly above, services will be addressed in greater detail in a future blog post.
Note that only supplies to VAT-registered persons in other EU member states should be included on the List. Supplies to non-VAT-registered persons are excluded.
What If It’s A Bit Of A Weird One?
It is important to note that there are some exceptions to the acquisitions rules, or certain movements of goods which have special or simplified treatment.
In the interests of some kind of brevity, I have focused on the most common ones which arise in practice, namely:
- Installed or assembled goods: this is discussed in greater detail below
- Movement of goods for process and repair, etc: this is discussed briefly below
- Triangulation: this is also discussed in greater detail below
Following the section on triangulation, I have looked at some of the other significant movements of goods for commercial purposes in section 5.
Note that there are some others, for instance supplies to “privileged persons”, or the rules on samples and gifts, which are very uncommon in practice and so are not discussed in detail.
Installed or Assembled Goods
The movement of goods (for example, component parts) between EU member states as part of a supply of installed or assembled goods is not treated as a supply of “own goods”. Consequently, there is no acquisition in the EU member state of installation or assembly. The treatment is different.
A supply of installed or assembled goods occurs when a taxable person supplies goods and has a contractual obligation to install or assemble the goods for the customer. HMRC give the example of a supplier of studio recording equipment where the supply involves installation at the customer’s studio.
The supply takes place where the installation or assembly of the goods is carried out, and as a result, in principle there is a requirement to register for VAT in any EU member state in which the person is supplying installed or assembled goods.
However, some EU member states operate a simplified procedure which permits the VAT-registered customer to account for the VAT due, thus avoiding a requirement to register.
The UK operates the simplification, which applies provided the following conditions are met:
- the customer is registered for VAT in the UK
- the supplier is registered for VAT in an EU member state
- the supplier is not required to be registered here for any other reason
- the supplier informs HMRC and the customer of the intention to use the simplification
Any similar supplies to new customers must be newly notified to HMRC and the customer.
HMRC have (more or less) confirmed that simplifications of this nature will continue after 1 January 2021 for NI traders, and for goods moved to NI from the EU. The precise mechanics of how this will be administered remains unclear.
Under the simplified procedure the UK customer is treated as acquiring the goods in the UK and must account for acquisition VAT on the full value of the supply. The invoicing and other requirements are the same as for an acquisition. As a result the supplier is no longer liable to account for VAT.
In effect, the supply is treated as being an acquisition provided the conditions are met.
Movements of Goods for Process, Repair, etc
These movements are not discussed in detail, but may be summarised as falling under the following four headings:
- Goods sent from the UK for work to be carried out elsewhere in the EU: services received should be accounted for under the reverse charge (discussed in a future blog post), and movements of goods recorded on the Intrastat return as needed
- Goods sent to the UK for work to be carried out: the supplier of the service need not account for acquisitions VAT, but must record and evidence the movement of the goods in its own records and also on the Intrastat return as needed
- Goods not returned to the EU member state of departure: if for some reason the goods do not return to their place of origin, the normal acquisition rules and registration requirements arise
- Work performed on goods in an EU member state before removal to the UK: the customer should account for acquisition VAT in the normal way and also for the reverse charge on any services received. The Intrastat filings should be made as needed
- Work performed on goods before removal from the UK: provided the normal conditions are met (see section (b) below), the standard dispatch treatment will apply
Triangulation is the term used to describe a chain of intra-EU supplies of goods involving 3 parties. But, instead of the goods physically passing from one to the other, they are delivered directly from the first to the last party in the chain.
HMRC provide the following example:
Here a UK company receives an order from a customer in Germany. To fulfil the order the UK supplier in turn orders goods from their own supplier in France. The goods are delivered from France to Germany.
In other words, the UK company which places the order from the French supplier does not take delivery of the goods, although it does take title to them; that is, the UK company becomes the owner of the goods before passing ownership to the German end customer.
Under the normal VAT rules, the French company can zero-rate its supply to the UK company, but the UK company would be regarded as making an acquisition in Germany, and would have to register for VAT there (as discussed in greater detail below).
However, there is a simplified procedure for triangulation scenarios such as these, and the intermediate supplier (in HMRC’s example, the UK company) can use this simplification when:
- It is already registered for VAT within the EU
- It is not registered, or otherwise required to be registered, in the EU member state to which the goods are delivered
- The customer is registered for VAT in the EU member state of delivery
- The supplier includes the supply on its EC Sales List (see section 3 above), marking it appropriately as a triangulation transaction
- The supplier excludes the value of the supply from its UK VAT return and from its Intrastat return
Using the facts above, the triangulation procedure would enable the UK company to avoid having to register for VAT in Germany. It could simply zero-rate its supply in much the same way as the French company, albeit there are certain administrative requirements (as set out above).
Non-established persons acting as an intermediate supplier making supplies to a UK customer must also inform HMRC and the customer that it intends to apply the simplification, and then effectively follow the rules for a normal acquisition.
Customers receiving supplies in this way account for them as acquisitions and record them on their Intrastat return.
Note that only intra-EU movements of goods are covered by these provisions. HMRC have confirmed that after 1 January 2021, goods moving to GB will not be covered, it seems.
And The Hits Just Keep On Coming… What Else Is There To Think About?
As if all of the foregoing wasn’t enough, there are more special rules which apply in certain circumstances. NI will, assuming we operate under the NI Protocol from January 2021, continue to be able to offer these rules, which may be advantageous to EU suppliers seeking access to the UK market. As ever, we are still awaiting clarity on the full picture…
The VAT system and HMRC’s guidance provide for certain other movements of goods, as noted below:
- Call-off stocks
- Consignment stocks
- Excise goods
- VAT treatment of goods removed from a warehouse to a place outside the UK
- Goods supplied on sale or return, or similar terms
- Goods sent for testing
- Chain transactions
I discuss call-off stocks, consignment stocks and chain transactions in more detail, not least because new EU-wide rules applying from 1 January 2020 were brought in to standardise the treatment of these relatively common transactions. The other points I ignore for now, but if you think they might be of relevance, or you have a query about them, please don’t hesitate to get in touch on 028 71 876 220 or firstname.lastname@example.org.
Call-off Stocks: A Handy Thing To Have In Your Back-Pocket
Call-off stocks are goods transferred by the supplier between EU member states, to be held for an individual customer in the EU member state of arrival pending “call-off” for use by the customer as they need them. In the meantime, title and ownership of the goods remain with the supplier.
This only applies in cases where the goods are destined for a single identified customer either:
- for consumption within their business (for example, as part of a manufacturing process)
- to make onward supplies to their own customers
Movements of goods to maintain the supplier’s own stocks in an EU member state, or where they are available for call-off by more than one customer, are to be dealt with as consignment stocks (see below).
From 1 January 2020 a new EU-wide VAT accounting simplification for call-off stock transactions was implemented.
The new treatment of call-off stock applies only when certain conditions are met. The key conditions are that at the time of removal of the goods from the state of origin to the state of destination by or under the directions of the supplier:
- a call-off stock agreement is in place with the customer
- the supplier is removing the goods to the state of destination with the intention of supplying those goods to the customer there after their arrival in the state of destination
- the supplier does not have a business establishment or other fixed established in the destination state
- the customer is VAT registered in the state of destination and the supplier knows the customer’s identity and VAT registration number
- the supplier records the removal of the goods in the register required by law
- the customer’s VAT registration number in the state of destination is reported on the supplier’s EC sales list
Detailed provisions defining many of the terms used in these conditions has been published by HMRC, but I haven’t discussed them here. Please don’t hesitate to get in touch on 028 71 876 220 email@example.com if you have any queries about call-off stock.
A simple example of when the call-off stock rules might apply is given below:
- Example 4: Let’s Call The Whole Thing Off
Les Bleus S.A. has decided to start selling widgets directly to TradeCo Ltd – in other words, to a specific UK customer.
For commercial reasons, TradeCo Ltd does not wish to take delivery of the stock upfront, and does not want to pay until it has received delivery.
Accordingly, Les Bleus S.A. rents warehouse space near Belfast, and ships £10,000 worth of widgets from France to the warehouse. It signs a call-off stock agreement with TradeCo Ltd, and retains title to the goods until they are “drawn down” by TradeCo Ltd.
Les Bleus S.A. does not have any establishment in the UK.
Provided it meets all of the relevant conditions, Les Bleus S.A. can apply the call-off stock treatment to this movement of goods. This will save it having to register for VAT in the UK.
Note that Brexit is due to end this favourable treatment for goods moved to GB, with goods held in Northern Ireland being the exception. If we really do get “unfettered access” to GB, then this might actually be helpful…
Consignment stocks are goods transferred between EU member states to meet future supplies to be made by the supplier, or on the supplier’s behalf, in the EU member state of arrival.
The important feature is that the movement of the goods occurs before a customer has been found for them. This can include goods not meeting the conditions necessary for treatment as call-off stocks.
Consignment stocks are treated as a transfer of own goods for VAT accounting and reporting purposes.
Chain Transactions: Or How To Make Life Really Difficult For Yourself
A chain transaction occurs where there are a number of businesses successively buying and selling the same goods but the goods themselves are transported directly from the original supplier and delivered to the final purchaser. A triangulation transaction (see above) is in many ways simply a “special case” of chain transaction.
The rules simply determine which transaction in a chain is to be treated as the cross-border intra-community supply. These rules do not affect chain transactions that do not involve a cross-border movement of the goods (e.g.: where the goods stayed within the UK).
All supplies leading up to and including the intra-community supply are to be treated as taking place in the member state of origin and all subsequent supplies are to be treated as being made in the member state of destination.
The default position is that the intra-community supply is the supply to the person (“intermediary operator”) in the chain who arranges for the goods to be moved from the member state of origin to the member state of destination.
The intermediary operator who arranges for another party to physically transport the goods remains the intermediary operator for the purposes of the chain transaction rules.
If that intermediary operator is VAT-registered in the same member state as the supplier, then, provided that the intermediary operator supplies its VAT number to its supplier, the onward supply by the intermediary operator can then be treated as the intra-community supply.
If the intermediary operator does not disclose the existence of the chain to the supplier then normal supply, dispatch and liability rules will apply.
These are new rules and it is possible that, even though they have been designed to clarify matters, further EU case law will follow.
A relatively brief example of a “chain transaction” is given below:
- Example 5: Chain, chain, chain…
Les Bleus S.A. is (still) a French company. It sells goods to TradeCo Ltd, a UK company, which in turn is purchasing these goods for resale to Schwarzenull GmbH, a German company. Schwarzenull GmbH has made its purchase to allow a resale to the end customer, Abbondanza S.p.A, an Italian company. Each company is only registered for VAT in its home country, so the default chain transaction rules will apply.
The companies arrange between themselves that Schwarzenull GmbH, the third company in the chain, will arrange for transport to Abbondanza S.p.A directly from Les Bleus S.A.’s premises in France to the delivery site in Italy.
The chain transaction rules state that the “intermediary operator” in this scenario is therefore Schwarzenull GmbH, and that its purchase of the goods from TradeCo Ltd would be treated as an intra-community acquisition.
This means that the steps in the chain before that point, namely, the sale between Les Bleus S.A. to TradeCo Ltd, and the steps in the chain after that point, namely the onward sale by Schwarzenull GmbH to Abbondanza S.p.A. will be treated as domestic supplies.
Thus Les Bleus S.A. will be required to charge French VAT on its supply to TradeCo Ltd, and to provide a French VAT invoice. Similarly, Schwarzenull GmbH will have to charge German VAT on its onward supply to Abbondanza S.p.A, and furnish it with a German VAT invoice.
Clearly, as can be seen from the example, this treatment creates numerous complications. In practice, it might be more straightforward to simply move the goods at each link in the chain, or to form a triangulation for the first step, and then move the goods one last time from Germany to Italy as an intra-community supply (i.e.: an acquisition). Happily these scenarios are relatively rare in practice.
The Heeby-GBs: What About Moving Goods Across The Irish Sea?
This is the Big Kahuna of the post-Brexit era.
As things stand, moving goods to NI from GB and vice versa amounts to a normal domestic supply for VAT purposes. Businesses moving their own goods about the UK do not need to consider cross-border VAT or Customs, etc, as NI is part of the UK VAT system.
This is going to change from 1 January 2021, and we are beginning to get a flavour of how it is going to change.
As I have said before, I am not an expert in Customs, but it is increasingly obvious we are all going to have to get a bit more familiar with Customs procedures and concepts in the coming months and years.
For that reason, while I have (obviously) focused on VAT in what follows, I have also highlighted some of the Customs points which we all need to consider. I am planning to put together some shorter documents as a kind of Brexit Action Plan, with the aim of concentrating minds. I will not be able to answer all, or perhaps even many, of the questions which arise. But I do know some people who can. I will also be looking at Customs in greater detail in next month’s blog post, which is focused on non-EU trade.
It is worth also stating that the precise deal agreed between the UK Government and the EU in October 2019 in effect puts NI in an anomalous position.
Politically, NI is part of the UK and subject to UK taxes, etc. However, for the purposes of trading in goods, it is – certainly de facto, and for legal purposes, very largely too – going to be part of the EU after 1 January 2021.
This means that there is, in effect, a Customs border in the Irish Sea after 1 January 2021. We await further details on the “unfettered access” promised to NI businesses in respect of the GB market, but the GB to NI guidance so far is in line with a Customs border. The UK authorities have been a bit shy of making this clear so far…
On that basis, it would probably be more logical to address these points in next month’s blog post about imports and exports. Because it is increasingly looking like here in NI, we will be importing from GB, and maybe exporting to GB as well.
Nothing daunted, however, on we go…
HMRC Update October 2020
With regard to GB to NI movements of goods, HMRC have finally started to outline what is going to happen after 1 January.
In the August blog post, I set out the implications of the NI Protocol in a reasonable amount of detail, but we were still left with a large number of “known unknowns”.
In a Policy Paper published by HMRC on 26 October, some of these unknowns are cleared up, and the more important ones can be summarised as follows:
- Sales of goods by GB businesses to NI customers
These are to be treated by HMRC as domestic UK sales. Note that the EU Commission doesn’t agree with this stance, so for all we know, this point will be revisited before 1 January 2021.
As things stand, however, HMRC have clearly stated their intention to regard commercial transactions between GB suppliers and NI customers as domestic UK sales, subject to the normal VAT rules.
HMRC do indicate some exceptions to this treatment:
- Goods declared into a special Customs procedure
- Goods currently subject to domestic reverse charge rules
- Goods subject to an Onward Supply procedure
Where these exceptions apply, the sale will effectively be treated as an import for VAT purposes, and the importer/customer will need to account for VAT on the supply, and recover it according to the normal rules under the deferred import VAT treatment.
UK businesses are going to have to account for VAT on transfers of their own goods from GB to NI. Unless there is some restriction on their input VAT recovery, in practice this should not matter greatly. For some businesses, however, it might matter quite a lot…
This is best explained by an example (using a different imaginary company in this case…):
- Example 6: The Liver Birds Head West…
Reassuring Insurance Ltd makes exempt supplies of insurance services, from offices in Liverpool and Belfast. It also has some small amounts of VAT-able business, amounting to about 5% of its total sales.
As part of a reorganisation, it is moving some staff to the Belfast office. It is also shipping over their laptops and other computer equipment.
The movement of these goods will give rise to a VAT-able charge under the Policy Paper’s guidance, which Reassuring Insurance Ltd won’t be able to recover in full – in fact, it will only be able to reclaim 5% of this VAT. However, Reassuring Insurance Ltd only reclaimed 5% on the initial purchase, so it is now facing a “double-whammy” in terms of its VAT on these goods.
The goods cost £10,000 plus VAT initially, so Reassuring Insurance Ltd paid £2,000 of VAT, but only reclaimed £100.
In transferring the goods to NI, and assuming the goods are of the same value, it will face another £2,000 VAT bill, of which only £100 may be recovered.
So it will end up having paid £3,800 of VAT on goods with a net value of only £10,000!
To avoid this situation, HMRC have indicated that the initial VAT on the purchase may be reattributed by Reassuring Insurance Ltd as if it related to an onward taxable supply. This may be taken into account as part of the company’s annual adjustment.
On this basis, the initial VAT recovery would go from £100 to £2,000, and the overall result would be a real VAT cost of £1,900, which is surely the “correct” outcome.
For most businesses most of the time, this will probably resolve the issue.
However, there are still big questions about how this will work in reality. What about goods which were purchased more than four, or more than six, years ago? (Those are the limits for error correction and for “payback” or “clawback” adjustments on exempt input VAT respectively.)
We don’t know yet. Which is nice.
- Transfers of goods within VAT groups
Even though VAT groups are treated as a “single taxable person” for most purposes, the new rules appear to require a similar treatment for movements of own goods by other businesses when the goods go from GB to NI.
However, there are other little “oddities” to be aware of.
In particular, where goods are located in NI at the date of transfer, then the VAT charge will be disregarded if both the group members involved in the movement of goods have an establishment or fixed establishment in NI.
If one or both of the group members only have establishments in GB, the movement will not be disregarded, and the representative member will have to account for VAT on the movement.
A genuine clarification on this point.
As suggested above, NI will still be able to avail of intra-EU simplifications such as triangulation, call-off stock, etc, as outlined above.
However, GB entities will not be permitted to be part of these simplifications, because they are based in a “third country” for EU VAT purposes.
In practice, this might – and we are still awaiting clarity on “unfettered access” from NI to GB – mean that it makes sense for GB businesses to set up an NI entity which engages in EU trade on their behalf, before shipping the goods to GB in an “unfettered” manner.
This is one area where NI might actually benefit from the NI Protocol, though as ever, the devil will be in the detail.
- HMRC Administering NI VAT
This isn’t really much of an update. We already knew this.
Sadly, we are still unclear on how HMRC will be administering NI VAT after 1 January 2021, e.g.: will there be a specific office to manage NI VAT matters? So we still need to watch this space.
Like HMRC, however, I have saved the best till last.
This looks to me like a real Brexit car crash.
The Policy Paper states the following:
In line with EU rules, margin schemes involving goods, such as the second-hand margin schemes, will not usually apply for sales in Northern Ireland where the stock is purchased in Great Britain. The VAT on these sales will be subject to the normal rules and must be accounted for on the full value of the supply.
My reading of this is that if, say, a used car dealer bought a second-hand car in GB and brought it back for sale in NI, he would not be able to use the margin scheme in respect of that sale.
Note that it will affect all businesses buying stock from the UK under the second-hand margin schemes – so art-dealers, horse-traders, and others, as well as used car dealers.
Here’s another example…
- Example 7: Brexit Car Crash?
TradeCo Ltd buys a used car in Manchester for £5,000. It was sold under the second-hand margin scheme, so no input VAT is recoverable by TradeCo Ltd.
TradeCo Ltd goes on to sell the vehicle for £6,000 to a private individual in Belfast.
If the sale takes place on, say, 29 December 2020, the VAT due from TradeCo Ltd is £167 (i.e.: £6,000 – £5,000 x 1/6th).
If it takes place on, say, 2 January 2021, the VAT due from TradeCo Ltd is £1,000 (i.e.: £6,000 x 1/6th).
Can TradeCo Ltd make a living under these rules? It’s hard to see how it can…
I don’t think I am wrong on this, but nobody else seems to be talking about it.
Given that this will have ramifications for a huge number of businesses in NI, I really think we need to have some answers on this, and soon…
With regard to Customs, anyone moving goods to NI from GB will – practically speaking – be making an import from 1 January 2021.
I do recommend you look at the Trader Support Service on this (although it is still pretty rudimentary), but I really strongly recommend you carry out a “supply chain mapping” exercise.
Very broadly, this means sitting down and working out all of the flows of goods into and out of the business. It also means trying to work out the correct classification of the goods, as well as trying to resolve the “origin” of the goods. This last one is potentially the trickiest of the lot.
In addition to all of the above, I very strongly recommend getting an idea of Incoterms. These are standard commercial arrangements drawn up by the International Chambers of Commerce to facilitate international trade.
They are incorporated in contracts and use three letter short-hands (e.g.: DDP) to summarise the agreed balance of risks between the parties.
As I will be addressing imports and exports in next month’s blog post, this is something I am going to talk about in a bit more detail then.
However, you won’t go far wrong by at least looking into it yourself. We will be hearing a lot more about them in the near future.
Summary: What Are The Key Points I Need to Remember?
Acquisitions can be zero-rated, as long as you meet the conditions.
There are a number of special procedures for various movements of goods – it is best to look at these in detail, as the rules are complex and must be strictly adhered to.
HMRC have begun to clarify some points about how things will look after 1 January 2021. Not everything that is being clarified is good news – especially, it seems, if you are using the second-hand margin schemes and buy stock in GB for sale in NI.
HMRC’s guidance in this area can be found in the relevant VAT Notices as follows:
- VAT Notice 725: The Single Market
Note that this Notice is bound to be subject to – possibly quite significant – changes between now and January 2021. As stated throughout, the law is very much in flux in this area at the moment!
The following links might also be useful:
HMRC Policy Paper published 26 October 2020:
UK Government Approach to Moving Goods under the NI Protocol (August 2020):
Hopefully this blog post has been helpful, and should you wish to discuss any of the issues arising – or indeed anything else VAT-related – please don’t hesitate to contact me for a free, no obligation initial enquiry.