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Andrew Needham, Director of VAT Specialists Ltd, highlights some potential problem areas when dealing with VAT and Intrastat systems.

Introduction

A client contacted us with a problem he had encountered during a Customs VAT visit. Customs had checked his Intrastat returns against his VAT returns and EC Sales Lists, and they did not match. Customs said that he must have made mistakes, and that he had to identify what they were. Our client had checked his Intrastat returns and was sure that he had completed them correctly; so what could the matter be?

The Intrastat system is complex and administratively burdensome on businesses despite some recent simplifications. One of the main sources of confusion for business is the difference between the VAT and Intrastat systems, in the way certain transactions are treated.

Confusion

The Intrastat systems applies to the movement of goods only and not to the supply of services, although the VAT and Intrastat system do not always agree on what is a supply of goods or services, so the same supply can be treated differently by the two systems. Could this be the reason for the mismatch?

Our client did a lot of "process and repair" work for businesses in other EU member states. The VAT system treated these as supplies of services, but, confusingly, the Intrastat system treated some of these transactions as supplies of goods and some as supplies of services. So what, you may say?

Process and Repair

The treatment of process and repair is one of the most common causes of confusion for businesses. This is because, as mentioned earlier, the VAT and Intrastat systems are not always consistent in what they treat as supplies of goods or services. For Intrastat purposes the repair of goods is generally classed as a service, so although goods may be sent from one EU Member State to another for a repair to be carried out, no Intrastat Supplementary Declaration (SD) is required. However, the processing of goods sent for, or returned after, processing is classified as a supply of goods. Using the example of a UK processor, the full value of the goods received should be recorded on the Intrastat Arrivals SD, for example £10,000. When the goods are returned after the process has been carried out, the the full value of the goods, and the value of the processing or repair must be aggregated and recorded on the Dispatches SD. For example, £2,500 in processing costs would be added to the £10,000 value of the goods, so the value of the goods returned aftershowing the process would a total of £12,500. Remember that certain processes are excluded from Intrastat because of the nature of the process, e.g., the testing, regulating or certification of goods (aircraft, machines etc.) required by law.

However, for VAT purposes, these  supplies involving a process are considered to be services and as such only the value of the process/repair (£2,500) appears in boxes 1 to 7 of the VAT return, even though the total Intrastat values should appear in boxes 8 and 9. This could lead to the situation where there appears to be an EU purchase recorded in box 9, but no corresponding acquisition tax appearing in box 2. Process and repair does not even appear on the EC Sales List.

Tip

Because of these different treatments, in these circumstances the figures declared on the VAT returns and the Intrastat SDs are unlikely ever to balance. if you are engaged in processing activity, and Customs question the fact that the figures do not balance, explain the situation to them. Customs are all too aware that this situation arises and as long as it can be shown that the discrepancy is the result of processing activity, all should be well. Whatever you do, do not think it may just be easier to simply put the same figures on the Intrastat and VAT returns. It may seem the easy option, but effectively you are making a false declaration, the penalties for which are a touch more stringent than those for simply making a mistake!

“Triangulation"

You also get differences in treatment between VAT and Intrastat for “triangular transactions".

There are a variety of transactions which come under the umbrella of “Triangulation". Put simply, it is often the term used to describe a transaction where the three parties involved (buyer, seller and producer) are in different EU Member States.

Let’s say that a business in country C (C) contracts to purchase goods from a company in country B (B); B then sources the goods from a company in country A (A) which dispatches the goods directly to C. The invoicing route has A billing B for the goods, and B billing C for the goods plus B’s margin. The invoices go from A to B, and B to C but the goods themselves move directly from A to C. An Intrastat SD records the physical movement of the goods, so in this situation Company A records a dispatch to C, and C records an arrival from A. B, however, is not required to do anything for Intrastat purposes or record a figure in box 8 on his VAT return (because there has been no goods movement for B).

B will, however have to record the transaction on his EC Sales Lists. Because the ‘competent authority' inMember States (in the UK that’s HMRC) can use the VAT Information Exchange System (VIES) data collected from EC Sales Lists to compare it with Intrastat dispatch information from a particular company, in B’s case, it could appear that they have failed to declare a dispatch. Again, as long as the transaction can be reasonably explained, there should be no problem.

The situation can become even more complicated when a non-EU country is involved.

Makes perfect sense doesn’t it!