INSIGHT: Zero-Rating Exports and European Community Sales

There are many considerations for U.K. suppliers when making sales of goods to customers outside of the U.K. In this article, we will highlight an increasingly common area of value-added tax (VAT) dispute with HM Revenue & Customs (HMRC): whether a supplier holds and retains the correct standard of evidence to zero-rate their sales to customers in the EU (dispatches) and/or outside the EU (exports).

Many businesses assume they hold the necessary evidence to zero-rate the sale of goods to customers outside the U.K. However, we are increasingly seeing HMRC raising VAT assessments for sales shipped from the U.K. where the supplier is not able to produce the required documentation on demand.

With HMRC’s guidance having the force of law as to what evidence is needed, as well as businesses frequently relying on third party agents to obtain and hold this documentation, export evidence is a common topic for HMRC to focus on during VAT audits.

Why Does it Matter?

If sufficient evidence is not held, or if any of the other conditions for zero-rating are not met, the supplier will be required to charge and account for VAT at the appropriate rate for the supply being made. On standard-rated supplies, with VAT calculated as one-sixth of the supply, this can result in significant sums of VAT becoming due to HMRC.

We continue to see issues around the level and standard of evidence required to support zero-rating. With a number of businesses failing to obtain and hold the right evidence, we have recently seen HMRC raise assessments for underpaid output tax. If HMRC does undertake a review of your records, it is almost certain that they will request evidence to substantiate zero-rated sales to customers outside the U.K. From our experience, HMRC will expect this evidence to be readily available and produced on demand. Considering the impact of Brexit and the issues this raises with the movement of goods, this is an increasingly high-profile area, and an area that is very easy to get wrong.

What Evidence do I Need to Keep?

EU Dispatches

From January 1, 2020, new VAT simplification rules which affect cross-border supplies of goods came into effect across the whole of the EU. One of the EU VAT “quick fixes“ is standardizing the evidence requirements to support zero-rating. The new simplification rules apply to both dispatches arranged by the customer (indirect dispatches) and dispatches arranged by the supplier (direct dispatches). The U.K. will need to comply with these during the transition period (expected to end on December 31, 2020).

Where the U.K. supplier holds the correct documentation, under the new rules it is now presumed that the goods have left the U.K. HMRC are able to challenge this presumption, but would have to demonstrate that the goods have not left the U.K.

The presumption that the goods have left the U.K. is only proved if the supplier holds two or more documents, issued by two separate independent parties, confirming the dispatch. The supplier must hold at least two items from List A, or one item from List A and one item from List B:

For sales where the customer has arranged for transport (indirect dispatches), the supplier must also hold a written statement from the customer confirming that they have transported the goods. This must be obtained within prescribed time limits.

In practice, obtaining this documentation from customers within the time limits can prove very difficult.

Exports

For proof of export, the supplier of the goods must produce either official or commercial evidence of export, together with supplementary evidence. Businesses must ensure that the combined evidence demonstrates:

• a transaction has taken place;
• the goods have actually left the EU;
• the transaction relates to the goods that have been exported.

If the customer arranges the transport of the goods, the standard of evidence required is higher and additional documentation must be held which states the mode of transport used, as well as the date and route of the movement of goods. As such, there is a greater risk that the supplier’s zero-rating will be challenged, as it can be difficult to obtain proof of export. Suppliers can mitigate this risk by obtaining a deposit from their customer equal to the U.K. VAT, which could be due if the customer does not supply the evidence for zero-rating.

Using Shipping Agents

Even if an agent is used to manage a business’s sales, it is important to note that the supplier is still legally responsible for ensuring that the dispatch meets all the conditions for zero-rating. This includes obtaining and holding the required evidence. As suppliers are reliant on documentation from third parties, this is an area of high risk.

Our experience is that delivery companies can sometimes only hold this information in their systems for a set time period—sometimes for as little as a month. One way organizations can mitigate this risk is to put processes in place that ensure these records are copied onto their own accounting systems.

Key Time Limits

• For both exports and EU dispatches, the time limit for removing the goods from the U.K. and obtaining valid evidence of removal is generally three months from the time of supply. However, certain supplies, such as those involving work on goods, may benefit from extended time limits. If the business does not have the evidence when submitting the relevant VAT return, VAT will need to be charged and accounted for on the transaction as if it had been a domestic sale.
• Evidence of removal must be kept for a minimum of six years. As such, businesses should be aware of how much reliance they are placing on access to third-party systems, and put processes in place to ensure they hold the correct documentation. We have worked with businesses who, after a key member of staff has left or following a restructuring, have been unable to access historic records.

Planning Points

This is an area in which HMRC is increasingly raising assessments and as HMRC’s guidance has the force of law, assessments for underpaid output tax are easy wins for the tax authority. In our experience, businesses have found it difficult to pass this cost on to their customers so this can be a costly area to get wrong.

It may be helpful to obtain advice in the following areas:

• carrying out reviews of processes, systems and documentation held (including involvement of agents and freight forwarders where used);
• providing advice and improvements where necessary;
• reviewing supply chains and identifying potential risk areas.

Robert Marchant is Partner and Head of Corporate VAT with national audit, tax, advisory and risk firm, Crowe.

The author may be contacted at: robert.marchant@crowe.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.