The approach of Brexit has, rightly, obsessed commentators on tax and regulation; tariffs, rules of origin and crucially VAT as all pose substantial issues for UK businesses when the country finally exits the EU.
VAT in particular proved a political hot potato in the negotiations over the Irish border. Lost in the noise are the major changes coming to EU VAT rules from 1 January next year, which would be thrust upon us, Brexit or no Brexit.
Indeed, from the first day of 2020, no matter what happens with Brexit, UK businesses buying and selling intra-EU goods need to know about the new EU VAT rules so they can implement the appropriate measures in order to protect their VAT position and to mitigate exposure to assessments and penalties.
The current VAT system exempts the intra-community supply of goods, where the goods are despatched from one member state to another and from one taxable person to another, provided certain conditions are met.
These conditions are that the goods are dispatched to the VAT registered customer in another EU member state, and that there is proof that the goods have physically moved within three months of the date of the transaction. The customer then self-accounts for VAT locally by making an adjustment on their VAT return (known as acquisition tax).
When the harmonised VAT system was first introduced, it was designed to lead to economic integration. But challenges within the regime have led to a review by the European Commission which published its VAT Action Plan in 2016 and recommended a destination regime.
According to this, a business in France, for example, selling goods to a business customer in Germany instead of treating this as an intra-community supply of goods, as above, the supply will be subject to German VAT.
Using technology, the French supplier will account for the VAT through multi-jurisdictional VAT return. This solution has already been trialled for sales of digital services to private individuals and is known as MOSS (Mini One Stop Shop), while the new system will be known as “OSS”, (“One Stop Shop”).
The change to a destination system is a major reform, considered to be a long-haul project over the next decade. At the heart of it, it aims to prevent widespread VAT fraud – known as ‘Missing Trader Fraud’ – which is estimated to cost the EU up to 50 billion Euros p.a in lost VAT revenues.
It happens when a fraudster charges VAT on an invoice and is paid by his customer but fails to pay over the VAT to the authorities. In the meantime, the customer has recovered the VAT on his VAT return.
While the authorities have taken steps to prevent this type of fraud by bringing in anti-avoidance measures in sectors selling items such as mobile phones, computer chips and carbon credits, it has not stemmed the flood of abuse.
As the details of the major reform are being tackled, the EU is introducing new rules from 1 January 2020, bringing four major changes, called the ‘Quick fixes.’
The first relates to ‘Call off Stock’, where goods are sent to a customer in another EU country and only supplied to them when they are ‘called off’. Therefore, because the supplier still owns the goods, they are required to register for VAT in that country and charge local VAT.
In the UK, there is already a concessionary treatment available, whereby the supplier does not have to register for VAT. Instead, when the call-off happens, it is treated as an intra-EU supply by the customer, under normal rules, outlined above. This treatment will now apply throughout the EU.
To be eligible the supplier must call off stock for an identified customer; the customer must be registered for VAT; the supplier must keep a register of the call off stock; and the goods must be supplied within 12 months of them entering the regime.
This is good news for those businesses who previously had to register for VAT in the EU and charge the local VAT rate as they can now review and simplify their position.
The second fix is for ‘Chain Transactions’. These types of transactions are complex for VAT purposes and can lead to transactions being treated as VAT free when they should not be. This is because only one transport of the goods happens and it is this physical movement which makes it an intra EU supply.
The new fix introduces uniform rules to clarify which transaction the transport is assigned to.
According to these, the intermediary supplier needs to give the original supplier its VAT number in order for the first transaction to be treated as an intra-EU supply.
This quick fix does not alter the triangulation simplification, which still applies. Triangulation is a useful simplification involving three parties in different EU states and allows the intermediary to not have to register for VAT in the destination country, instead it requires users to notify their authorities to be able to operate it.
It only applies in chains of three. If there are more parties involved then additional VAT registrations will be required.
Intermediary businesses should review their transport arrangements to ensure that they comply with the rules to avoid unnecessary VAT charges and possibly VAT registrations in other member states.
Equally, they should be aware that the EU is cracking down on businesses not being registered for VAT in other jurisdictions when they should be.
To ensure that an intra-EU supply is zero-rated for VAT purposes, we all know that we need to prove that the goods have been physically moved to another member state.
From 1 January 2020 businesses will need to provide two items of documentary evidence: two category A documents (i.e. Signed CMR, Bill of lading, Air Freight invoice and carrier invoice) or one A and one B document (i.e. insurance policy, bank documents, official public documents and warehouse keeper receipt). If the customer arranges transport they need to additionally provide the supplier with a special statement.
This measure could be tough to implement and will need businesses to upgrade their admin processes to retain more proof of dispatch.
The final measure is the mandatory reporting of VAT ID numbers. In the UK, we are already required to quote our EU customers VAT number, so most UK businesses will be used to dealing with this, however, it is not always mandatory in the rest of Europe.
Businesses will also need to check the validity of their customers VAT number using the VIES website and to report it on the EC Sales list. Failure to prove it is valid and retain the evidence can lead to zero rating being withdrawn and an assessment for VAT.
As such, this could easily become an expensive problem as the measure requires businesses to validate the number each time there is a transaction. In our view, this is too onerous on businesses and it is hoped that the European Commission will take a pragmatic approach to this.
Overall, these major changes are designed to bridge the gap to the EU’s new destination VAT scheme. No matter what sort of Brexit arrangement the UK reaches with the EU, businesses will have to adapt to the new EU VAT scheme. Given its complexity, it is never too early to begin preparing.
At the time of writing, we expect the withdrawal agreement to be ratified by the new majority Conservative government, with the UK entering a transitional period until 31 December 2020. During this time, UK businesses will need to adapt to the new EU rules, despite the fact that it is unclear how rigorously HMRC will be enforcing these.
However, many UK businesses will be planning their EU operations after the transitional period and many will be either established in the EU or registered for VAT there. In which case great attention will be needed as these developments gather pace and protective action is required immediately.
Alison Horner, Indirect Tax Partner at MHA MacIntyre Hudson.