This is Part 2 of an Insight dealing with the four “quick fixes” to the VAT system introduced by the EU with effect from January 1, 2020. The quick fixes address four of the perceived VAT obstacles to the smooth running of the single market.
The European Commission recently published the final version of its Explanatory Notes. These Notes are extremely comprehensive and seek to cover an extensive range of possible situations in which the quick fixes might apply.
Delays to Brexit mean the quick fixes will be relevant to U.K. traders and their advisers until at least the end of the transitional period on December 31, 2020 (see Article 51 of the Withdrawal Agreement). Accordingly, HM Revenue & Customs (HMRC) published guidance on December 20 and 31, 2019.
Which Issues do the Quick Fixes Address?
There are four issues:
- call-off stock arrangements;
- the significance of VAT numbers in the exemption of intra-EU supplies;
- proving that goods have crossed an EU border;
- chain transactions.
Part 1 of this Insight dealt with the first two of the quick fixes listed above. Part 2 deals with the remaining two issues and suggests some planning points arising from all four.
Proof of Transport—What was the Issue?
Within two years of the introduction of the single market, the European Commission drew attention to the difficulties that arose for both traders and tax authorities from the absence of “clear and stable rules” on the evidence to be provided that goods had been removed from the member state of origin so that their supply could be exempt.
This left businesses without an acceptable level of legal certainty. Equally, tax administrations needed to be able to monitor and ensure the correct application of the exemption, especially against a background of cross-border carousel fraud schemes (see original proposal).
Quick Fix on Proof of Transport
The quick fix on proof of the removal of goods to another member state involves the application of two rebuttable presumptions. Where the conditions for these presumptions are met, the goods are presumed to have been transported from the supplier’s member state to another.
It is open to the tax authorities to rebut the presumptions, for example, if they can demonstrate that the goods are still in the supplier’s warehouse or have been destroyed en route to the border. On the other hand, if the documents upon which the presumption relies can be shown to be forged, then that would not be a case of rebuttal. Rather, in such a case the conditions for the presumption would not have been met.
Where the supplier arranges the transport of the goods, it must be in possession of either:
- at least two non-contradictory items of evidence from two sources independent of each other and of the supplier and of the acquirer in what HMRC neatly describes as List A, below; or
- a single item from List A and a single item from List B, below, again from non-contradictory and independent sources:
- signed CMR document or note
- bill of lading
- airfreight invoice
- invoice from carrier of the goods
- an insurance policy covering the transport of the goods
- bank document proving payment for the transport of the goods
- official documents issued by a public authority, such as a notary, confirming arrival of the goods in the member state of destination
- warehouse keeper’s receipt confirming storage of goods in the member state of destination
Where the acquirer arranges transport, the vendor will rely on the acquirer to verify the presumption. By the 10th day of the month following the supply, the vendor must hold:
- A written statement from the acquirer to the effect that the goods have been transported by it or on its behalf and including:
- the date of issue;
- the name and address of the acquirer;
- the date and place of the arrival of the goods as well as the member state of destination;
- the quantity and nature of the goods;
- where it is a means of transport, its identification number;
- identification of the individual accepting the goods on behalf of the acquirer.
The Explanatory Notes indicate that it would be reasonable to expect the tax authorities to accept such a statement in electronic or paper form.
- The same items from Lists A and B as when the vendor itself arranges transport.
The presumption cannot apply in those instances where the supplier or acquirer uses its own means of transport as the documents on which the presumption relies would not exist. Arguably this means that some of the most problematic intra-EU supplies of goods in terms of proof of removal will continue to be the most problematic, namely where a purchaser crosses a land border to collect goods directly from the supplier’s premises in the member state of origin.
Chain Transactions—What was the Issue?
“Chain transactions” refers to the situation in which three or more businesses are involved in a cross-border transaction where the movement of goods and the invoice trail do not coincide. For example:
- B (in France) invoices C (in Germany);
- C invoices D (in the Czech Republic);
- D invoices E in Austria;
- but the goods are sent directly from France to Austria.
The Court of Justice of the European Union has ruled that only one of these transactions can be treated as an exempt intra-EU supply. The remaining transactions must be treated as subject to VAT either in the first country in the chain (the member state of departure, France in this example) or in the final country (the member state of arrival, Austria in this example).
Prior to the quick fixes, the VAT Directive only dealt with chains involving no more than three parties (“triangulation”) and there was no certainty or uniformity about the treatment of more complex transactions.
What Does the Quick Fix do about Chain Transactions?
HMRC has described the quick fix as providing “a simple approach to determining which supply in a chain is the [exempt] cross-border intra-community supply.”
For the quick fix to apply:
- there must be at least three parties in the chain;
- the goods must move directly from the first supplier in the chain to the last customer in the chain;
- the goods must move from one member state (country of departure) to another (country of arrival).
The quick fix applies the exemption to the supply to what is called the “intermediate operator.” The intermediate operator is the person that arranges the transport of the goods. That person can override this rule by providing a VAT number in the country of departure to its supplier. The supply to the intermediate operator then becomes a domestic supply in the country of departure. The intermediate operator’s supply then becomes the exempt intra-EU supply.
While the definition of intermediate supplier specifically excludes the first supplier in the chain, its supply can be the exempt supply if it organizes the transport of the goods. Equally, while the final customer cannot be a supplier, the supply to that party can nonetheless be the exempt supply if it organizes the transport.
Applying this approach to the B–C–D–E example above:
- if B organizes the transport, then:
- B’s supply to C is the exempt intra-EU supply in France;
- C will make a taxable acquisition in Austria and make a taxable supply in Austria to D;
- D will make a taxable supply in Austria to E.
• if E organizes the transport, then:
- B’s supply to C and C’s supply to D are both taxable in France;
- D’s supply to E is exempt in France;
- E will make a taxable acquisition in Austria.
• if C organizes the transport, then:
- B’s supply to C is exempt in France;
- all other steps are taxable in Austria.
• if C organizes the transport but provides a French VAT number to B, then:
- B’s supply to C is taxable in France;
- C’s supply to D is exempt in France;
- D makes a taxable acquisition in Austria and a taxable supply to E in Austria.
The U.K.’s guidance summarizes the rules neatly: all supplies up to and including the exempt intra-EU supply take place in the member state of departure and the rest in the member state of arrival.
The Quick Fix, Triangulation and Multiple Transports
The existing simplification for chains with just three parties continues to be available where the conditions are met. The quick fix does not override this existing legislation, which can provide a more benign result for the intermediate supplier in the chain.
It is important to grasp that, while there can be an invoice chain of any length, the quick fix can only apply to a single transport of goods. So, in the above example, if an Irish company (A) initially transported the goods to B (in France) and invoiced B, and E transported the goods to F in Hungary and invoiced F, the quick fix could not apply to the entire A–F chain because there would be three transports. However, in that example, the quick fix could still apply to B–C–D–E. In addition, A–B and E–F could each be an exempt intra-EU supply.
Will These Quick Fixes Work?
The quick fix on proof of transport is arguably more cosmetic than real.
The introduction of a rule of thumb for chain transactions should prove useful.
What do businesses trading across intra-EU borders need to do?
Any EU business involved in cross-border supplies within the EU needs to ensure or, in some cases, continue to ensure, that:
1. Its systems enable it to capture the VAT numbers of its customers in other EU countries, record those numbers on the invoices issued to those customers and use the data to complete accurate and timeous recapitulative statements.
2. Its systems capture and retain the information needed to support the presumptions that goods have been removed from the member state of origin. Where the business is the purchaser and it arranges the transport of the goods it purchases from businesses in other member states, it needs to ensure that the supplier receives the required written statement by the 10th day following the month of supply.
3. If involved in chain transactions, its systems can identify which supply can be treated as VAT exempt and, having done that either:
a. in those cases where its supply is the one treated as exempt:
i. it has the relevant VAT registration numbers and documentation to demonstrate the goods have been removed, as at 1 and 2 above; and
ii. it completes the recapitulative statement required; or
b. in any other case, ensure that it has identified any registration or other VAT accounting obligation in the other member state.
4. Its systems identify any chain transactions involving only three parties where the conditions for the more benign simplification for triangulation can be applied.
5. If involved in call-off stock arrangements, whether as supplier or purchaser, it maintains the required register and correctly identifies any tax points under the new rules.
Terry Dockley is a VAT consultant at Terry Dockley & Co, VAT specialists. He is a Chartered Tax Adviser, and has specialized in VAT for 30 years.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.