INSIGHT: VAT—Issues and Pitfalls Around the Movement of Goods Internationally

There are a number of issues and pitfalls which businesses encounter when involved in an international supply chain of goods. The most common of these surround triangulation, distance selling, call off stock and consignment stock.

To consider these different types of supplies, it is worth looking at the example of a large children’s toy retailer and wholesaler, “Company A,” based in the U.K.

Directly from Source to Customer

For VAT purposes, it is important to consider the movement of the goods themselves, rather than where the parties in the supply chain are based.

Company A has a German wholesale customer who has ordered stock which Company A is sourcing from a supplier in France. Rather than bringing the goods into the U.K. and then shipping them back to Germany, it is preferable for the goods to be dispatched directly from the French supplier to their German customer.

As a starting point, this supply chain would mean Company A takes ownership of the goods in either Germany or France. Company A would then be making an onward supply in these countries, which would result in its needing to register for VAT in one of these territories. An overseas VAT registration can be beneficial; however, here it is likely to result in Company A simply having an additional administrative burden, with little upside.

Fortunately, a VAT simplification exists for Company A, which is treated as the “intermediate supplier.” In order for the simplification to apply, Company A must meet the following conditions:

• it is already registered for VAT within the European Union (“EU”);

• it is not registered, or required to be registered, in the country where the goods will be delivered;

• the end customer is registered for VAT in the country where the goods are delivered.

Triangulation

In this case, Company A, a U.K. VAT-registered company, with no requirement to be registered for VAT in Germany, can meet all the conditions and avoid the need to register for VAT in France or Germany. All Company A must do is provide its U.K. VAT number to the French supplier (this allows them to zero rate their supply), issue an invoice to the German customer with the usual details for an intra-EU supply and include the sale on its EU Sales Lists (using Indicator 2 and the German’s customer’s VAT number to show it is a triangulation transaction). The goods never come into the U.K., so there is no need for the sale to be reported on the U.K. VAT return or Intrastat.

Variations on a Theme

Triangulation only applies where the three parties involved in the supply chain are EU VAT registered in different countries. As a result, a non-EU trader could still apply the triangulation simplification provided it has an EU VAT registration: so if Company A’s customer was actually a U.S. company with a German VAT registration (perhaps because it has a branch in Germany), we would still be able to use the simplification procedure.

However, if the goods were to move from Company A’s French supplier to a customer in Australia, the triangulation rules do not come into play and the supply should be treated as an export.

The reverse however is not as straightforward. If Company A has goods coming from an Australian supplier to a customer in Germany, this is likely to result in either Company A or Company A’s Australian supplier registering for VAT in Germany. In this case who decides to register may come down to commercial negotiation.

While this may all sound relatively clear-cut, the recent case of Firma Hans Bühler KG (C-580/16, http://src.bna.com/AtR) highlighted that although triangulation is a simplification set out in the EU VAT Directive, it can be interpreted differently by each member state. In this instance, Austria had denied the simplification where the intermediary was registered in the country where the goods originated. The taxpayer won, and as a result the ruling allows those businesses with multiple VAT registrations across the EU to structure their supply chains to minimize the VAT impact. Similarly, if businesses have historically been denied triangulation and an assessment has been made, now would be an opportune time to take a further look.

Stock Held for Customers

The terms “call off” and “consignment” stock are sometimes used interchangeably, although they are different concepts. Call off stock is goods held for a particular customer, usually at their own premises, with title transferring when they remove the stock; whereas consignment stock could be sold to a number of different customers. From a VAT perspective this difference is key; consignment stock can lead to an overseas VAT registration obligation.

Where goods are held for a customer and they are using the goods either in their own business or will be reselling them on to their customers, this can be treated as call off stock.

In our example, Company A holds call off stock in Italy for an Italian customer at one of the customer’s warehouses. When the goods were moved from the U.K. to Italy, Company A was able to zero rate the supply and treat it as a normal intra-EU dispatch with the VAT registered Italian customer accounting for acquisition VAT.

Company A is also moving consignment stock to a warehouse in Portugal. It has identified some potential customers: however, at the moment it is not clear who will be sold which goods. The movement of the consignment stock has to be treated by Company A as a movement of own goods. As a result, Company A will need to register for VAT in the EU member state of delivery (in this case Portugal) so that it can zero rate the dispatch on the U.K. VAT return. The movement would then be reported as an acquisition in Portugal by Company A. When the goods are subsequently sold to Company A’s customers, it will account for VAT as necessary, for example charging Portuguese VAT on domestic sales to Portuguese customers.

The movement of own goods can result in overseas VAT registration obligations. Not only does this arise from supplies of consignment stock, but also from supplies made on a sale or return basis (i.e. the supply only occurs when the customer advises they are going to adopt the goods), and also where goods are taken overseas and sold at a pop up shop or a trade exhibition. This is because, for non-established persons, as soon as a taxable supply is made in that country a VAT liability generally arises.

A business can be wholly compliant for VAT and then may find itself having to adjust its usual supply chain slightly to meet the needs of a customer. These one-off transactions can easily trigger overseas VAT registration obligations, which in the course of normal business may not always be picked up. From experience though, these are matters which are typically identified during a due diligence process, and as there are often harsh penalties arising in other EU countries for late registrations, this can put businesses in a sticky position.

Distance Sales

The above supply chains all involved Company A’s wholesale customers. However, following a lot of queries from individuals, Company A recently decided to start selling to persons acting in a private capacity, from its U.K. warehouse. Sales are predominantly being made to a number of individuals in Belgium and The Netherlands.

Company A is currently charging U.K. VAT on these supplies; however, it must monitor the value of supplies it makes to each individual country. Thresholds vary from country to country, but broadly if sales to one country exceed 35,000 euros in a calendar year, Company A will need to register for VAT locally in that member state from when it exceeded the distance selling threshold.

At the end of May 2018, Company A realized it had exceeded the distance selling thresholds in Belgium (35,000 euros) and the Netherlands (100,000 euros), so it needs to register for VAT in these countries. As a result it will account for local VAT on supplies made to Dutch and Belgian individuals and will have to submit VAT filings in these jurisdictions.

In terms of the general landscape, a simplification does not yet exist for distance sales of goods. However, there is a simplification for services, known as the ‘Mini One Stop Shop’ (“MOSS”). MOSS allows a VAT-registered business providing certain services to individuals in different member states to account for VAT and submit filings in only one country. This avoids the need for the business to register and account for VAT in each country where it would otherwise be required to do so. While MOSS currently only applies to certain services, the intention is the scheme will be extended to goods in 2021.

Where Does Brexit Leave Us?

It is still not clear exactly what a post-Brexit world will look like for VAT, all we can really expect is that some things will undoubtedly change. This could include the U.K. losing some of the simplifications which U.K. traders can currently rely on. As such, it is important for businesses to get to grips with their supply chains and think about those crunch points where Brexit may have the most significant impact.

Note this article has been limited to the VAT implications of international supply chains and we have not specifically looked at EU Sales Lists and Intrastat declarations. These are additional VAT compliance filings which arise from such international trade.

Planning Points

The starting point is to understand existing legal and physical supply chains and how VAT is being accounted for. By reviewing existing supply chains it should be possible to establish whether there are any unexpected VAT costs arising or situations where there are unnecessary VAT registrations. Where businesses are considering new supply chains (for example, selling into a market for the first time), we recommend that specialist advice is sought in advance so that the business is aware of what its VAT obligations will be and there is sufficient time to assess whether a simplification such as triangulation can be applied. Upfront planning should help to negate any expensive VAT mistakes. For organizations unsure of the VAT implications for their international operations, it is essential they seek specialist advice.

Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe UK.
He may be contacted at: Robert.Marchant@crowe.co.uk