Originally published by Bloomberg Tax
Reproduced with permission. Published February 19, 2020. Copyright 2020 The Bureau of National Affairs, Inc. 800-372-1033. For further use, please visit: http://www.bna.com/copyright-permission-request
In a two-part article, VAT specialist Terry Dockley reviews the EU “quick fixes” which are intended to address four VAT issues. He considers when they will apply, and how successful they will be in practice.
With effect from January 1, 2020, the EU has introduced new rules designed to iron out four of the perceived value-added tax (VAT) obstacles to the smooth running of the single market. These are seen as measures to improve a system which the European Commission has never envisaged as the long-term VAT system for the EU, but as an essentially temporary measure—albeit one that has been in place now for nearly 30 years.
The necessary legislation has been in place since December 4, 2018 (see amending legislation) but it is only effective from the beginning of this year and the Commission has only recently published the final version of its Explanatory Notes. These Notes are extremely comprehensive and seek to cover a huge 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.
This Insight will deal with the first of the two quick fixes listed above. Part 2 will deal with the remaining two issues, and consider the planning points arising from all four.
Call-off Stock—What was the Issue?
The inception of the EU single market from January 1, 1993 led to the abolition of border checks at frontiers between EU member states. Instead of dealing with VAT at the border, VAT-registered businesses were able to deal with the tax through their periodic VAT returns. In place of “exports” and “imports” the following concepts were introduced, as explained below.
An EU business “exporting” to a VAT-registered business in another EU country made a VAT exempt intra-EU supply. The sale had to be recorded, including the customer’s VAT number, in a “recapitulative statement” under a new VAT Information Exchange System (VIES). In the U.K., for example, these statements were referred to as EC Sales Lists (ESLs).
The importing business made an “acquisition” and accounted for VAT on its value through its own VAT return. Normally the business could claim the VAT in the same VAT return, as if it were VAT incurred on a domestic purchase.
Where a business moved its own stock across an EU border without any change of ownership, it was deemed to make a supply. Unless it was VAT-registered in the country to which it was moving the goods, the business would have to account for VAT on the supply in its own country. Therefore, for example, a U.K. business moving its own stock to a warehouse in Germany would need to register in Germany and obtain a German VAT number. Otherwise, it would have to pay U.K. VAT on the value of the goods moved.
This was the precise problem faced by a business if it moved stock to a warehouse in another EU country for “call off” by a specific customer. (“Call-off stock” refers to goods which a supplier sends to a warehouse in another country, knowing the identity of the customer that will later purchase those goods. Subsequently that customer will “call off” those goods as and when all or any of them are required.)
In the absence of any special arrangements, this would have meant that call-off stock in the above example could have given rise to the following:
- the U.K. supplier would have to register for VAT in Germany;
- the U.K. supplier would then use its German VAT number to enable it to exempt its sale in the U.K.;
- the U.K. supplier would then have to account for German VAT on the acquisition in Germany;
- the U.K. supplier would have to make a supply subject to German VAT whenever its German customer called off stock.
How was Call-off Stock Dealt With 1993–2019?
Call-off stock was previously dealt with in a wide variety of ways. For example, the U.K.’s policy was to treat a movement of call-off stock into the U.K. as giving rise to an immediate taxable acquisition in the U.K. by the customer, even though ownership might not pass until later. They took an equivalent approach to movements of stock to other member states under call-off arrangements.
By contrast, Ireland did not recognize any supply or acquisition until the stock was drawn off. This sort of mismatch was largely dealt with by fudge, making it difficult for businesses to navigate their way and almost impossible for their advisers to provide coherent route maps.
What Does the Quick Fix Do?
This quick fix removes the necessity for a business to register and account for VAT in another member state solely to deal with its own call-off stock in that other country. It does this by deferring the time of supply to the point that the stock is called off. The supplier only then has to make a recapitulative statement and the customer accounts for VAT on the acquisition. This treatment is subject to the following conditions:
- the supplier having no establishment or fixed establishment in the member state to which the goods are moved;
- the supplier must record the movement in a register, the contents of which are stipulated in the Implementing Regulation;
- the goods must be moved with a view to their subsequent supply to an identified customer, which customer must be VAT-registered in the member state to which the goods are sent;
- the supplier must know the customer’s VAT number in that member state at the point that the goods are moved;
- when the goods are moved across the border, the supplier must record the customer’s VAT number in its own recapitulative statement but not the value of the stock. It must use the call-off stock indicator. A further entry will be made by the supplier each time stock is called off;
- the customer must also keep a register of the stock subject to the arrangements, and again the Implementing Regulation stipulates the contents of that register.
Where Would the Quick Fix not Apply?
This quick fix does not apply in any circumstance where the above conditions are not met. In particular, the supplier will need to register and account for acquisition VAT in the member state of destination where any of the following applies:
- the supplier no longer intends to supply the goods to the original call-off customer and has not followed the procedure that is available for the formal substitution of another call-off customer; or
- the supplier intends to supply the goods to the customer in a place other than the member state of destination; or
- the supplier moves the goods from the member state of destination without returning them to the member state of origin; or
- the goods are destroyed, lost or stolen; or
- 12 months have elapsed from the placing of the goods under the arrangement but without the customer calling them off.
However, a liability to register in the member state of destination is not triggered where either another customer is formally substituted for the original customer, or the goods are returned to the member state of origin.
VAT Numbers and Exempt Intra-EU Supplies of Goods—What was the Issue?
If asked, most tax officials in the EU, let alone tax advisers or businesses, would probably always have assumed that it was a requirement under EU law for a supplier to have its customer’s VAT number before exempting an intra-EU supply of goods. However, the Court of Justice of the European Union has ruled that they would have all been wrong. Although adopted as a condition for exemption in the national law of many member states, this was not a requirement to be found in the VAT Directive.
What Does the Quick Fix Do?
The VAT Directive has been amended so that an intra-EU supply of goods by a business in one member state (the member state of origin) may only be exempt where:
- it is made to a person registered for VAT in another member state; and
- the customer has provided the supplier with a VAT number in a member state other than in the member state of origin (but not necessarily the member state to which the goods have been sent). The Explanatory Notes suggest that the inclusion of the customer’s VAT number on the supplier’s invoice should be sufficient evidence that the customer has complied with this condition. It will no longer be enough for the customer to have applied for, and be awaiting allocation of, a VAT number as used to be the case, for example, in the Netherlands; and
- the supplier has submitted a recapitulative statement under the VIES containing all the information required, unless it can justify its “shortcomings” to the tax authorities.
The EU VAT Committee has noted that a recapitulative statement will not normally have been completed at the time a supply is made and, therefore, compliance with this condition can only be assessed after the date the recapitulative statement should have been submitted; the quick fix enables a tax authority to seek payment of the VAT after the event where there is non-compliance.
Will These Quick Fixes Work?
The quick fix on call-off stock should improve matters by synchronizing the approach to the VAT treatment of such arrangements across the EU and reduce some unnecessary administrative burdens.
The quick fix on the need for VAT numbers is probably primarily of assistance to the tax authorities.
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: firstname.lastname@example.org
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