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Andrew Needham of VAT Specialists Ltd looks at VAT issues affecting businesses trading in the EU. 

Introduction

Trading in other Member States of the EU is an increasingly complicated area of VAT for businesses. It can sometimes result in the need to register for VAT in another EU Member State with increased administration and compliance costs.

This article looks at the scope of possible business activities with other Member States, from basic supplies of goods to the more complex areas of triangulation, highlighting any possible registration requirements that may arise.

In theory, all EU Member States are covered by what was the 6th Directive, now  the new Directive 2006/112/EC and, therefore, the national legislation should be almost identical in all the Member States. Unfortunately, in practice the different interpretation placed on the Directive 2006/112/EC by national governments, together with Derogations, can result in quite substantial differences in VAT legislation between the Member States.

Place of Supply For VAT Purposes

When deciding on the VAT implications of a transaction it is first necessary to establish the place of supply. This will determine which country's VAT regime will apply. There are different rules for determining the place of supply of goods and services. It is often more straightforward to determine the place of supply of goods.

Goods

The legislation on the place of supply of goods is contained in the VAT Act 1994 s 7 and SI 1992/3283 (Place of Supply of Goods) Order, which are in turn derived from Directive 2006/112/EC. It should be noted that s 7 is a hierarchical structure. The place of supply of any goods may be determined by working through the rules in order, until the one applicable to the particular supply is reached. The basic place of supply for goods can be summarised as being the Member State the goods are in at the time they are assigned to the customer, or where the journey begins.

In the most basic example a UK business supplies goods to a VAT-registered customer in another Member State. This supply can be treated as a zero-rated supply in the UK providing the supplier obtains the customer's EU VAT registration number and quotes it on its sales invoice, and obtains commercial documentary evidence that the goods have been removed from the UK within three months of the time of supply.

Distance Sales

When a UK business is supplying goods to non-VAT-registered customers in other Member States, and the goods are removed from the UK at the direction of the supplier, the UK business is making distance sales. The normal scenario for this is mail-order sales. If the value of the supplies to each Member State is relatively low then the customer is simply charged UK VAT on the transaction. If the value of these supplies exceeds a certain threshold in another Member State then it will trigger a requirement to register for VAT in that Member State and charge local VAT. 

It is quite feasible that a mail-order business could have a VAT registration in each Member State of the EU, 27 in all.  The administrative burden of this could be considerable. In addition, if a business fails to monitor its distance sales and exceeds one of the national thresholds without informing the tax authorities, back tax and penalties may be due.

The registration threshold can be set at either 35,000 Euros or 100,000 Euros at the discretion of the national government. Businesses may register voluntarily even if they are below the national limit. 

VAT on Transfers of Own Goods/Consignment Stocks

The transfer of goods within the same legal entity from one Member State to another is deemed to be a supply of goods for VAT purposes and is subject to VAT under the normal arrangements for intra-EU supplies. If a business does not register for VAT in the other Member State it will have to charge UK VAT to itself, which it will be unable to recover. Therefore, in most cases it will probably need to register for VAT in the other Member State in order to account for acquisition tax and to obtain zero-rating in the UK by quoting its overseas VAT number. 

If the UK business creates a stock of its own goods with the intention to sell them on from that Member State (“consignment stocks”) it will be making taxable supplies in that Member State and will be required to register for VAT subject to the registration thresholds in force at that time.

VAT and Call-Off Stocks

Call-off stocks differ from consignment stocks in that they are allocated to a named customer at the time of transfer. In many EU countries, call-off stocks are treated in the same way as consignment stocks and VAT registration in that Member State will be required.

However, subject to certain rules, a number of Member States require the final customer to account for acquisition tax, therefore, the UK supplier is not required to register for VAT in that Member State. The following Member States do not require registration for call-off stock: (although, due to a lack of published information this may also apply in other States):

• Austria – but only for intra-Community goods;
• Belgium;
• Finland;
• France – provided title passes within three months (stock must be held by the final customer not an agent);
• Ireland – title must pass within three months;
• Italy - title must pass within three months;
• Luxembourg;
• Netherlands
• Poland; and
• UK

VAT on Supply and Install Goods

The basic rule for supply and install contracts is that they are treated as supplied where they are installed. This means that the supplier is, prima facie, required to register for VAT in the Member State where the goods are supplied and installed.

However, to avoid un-necessary VAT registrations, a number of Member States permit the customer to account for VAT on the supplier's behalf (“reverse charge”) thus avoiding VAT registration by the overseas supplier.

The following Member States definitely permit the use of the reverse charge:

• Denmark – only pieces of equipment; assembly lines, etc., treated as a building and registration required;
• Finland – although registration is required if the installation takes more than 9 months;
• Germany;
• Italy;
• Netherlands;
• Spain; and
• UK

In addition, Portugal has no penalties for non-registration, and in the absence of registration, requires the customer to account for the reverse charge if it is a taxable person.

Triangulation

This is a term used to describe a chain of supplies of goods involving three parties where, instead of the goods physically passing from one party to the next, they are delivered directly from the first party to the last party in the chain. In other words ownership moves from A to B and B to C, but the goods move directly from A to C on the instruction of B. All three parties have to be registered for VAT in different Member States.

Under the normal rules, the intermediary supplier, B, may have a potential liability to register for VAT in the Member State of destination. However, to avoid imposing this additional burden on businesses a simplification procedure was introduced which means that businesses registered for VAT in one Member State are no longer required to register for VAT in another Member State simply because of triangular transactions.

Under the simplified procedure B can opt to have its customer, C, account for VAT on its behalf (the procedure is compulsory if B opts for it). C can reclaim this VAT as input VAT on its VAT return.

Examples of Procedures for VAT Triangulation

In terms of record keeping, where company A is established in the UK it should:

• record the sale on its VAT return;
• record the sale on its EC sales list on its normal way showing company B as the customer, and
• record the sale on its Intrastat Dispatches SSD (if over the registration threshold) showing the final destination of the goods.

Company A may zero-rate the sale subject to the normal rules.

Where Company B is established in the UK it need not record the transaction on its VAT return or SSD, however it will appear on the EC Sales List showing the customer's VAT registration number and “2” in the indicator box.

Where Company C is established in the UK it will need to account for acquisition tax in the UK in the normal way, recording the purchase on the VAT return and the Arrivals SSD.

Nil VAT Registration Threshold for Overseas Businesses

A number of EU Member States operate a nil VAT registration threshold for overseas businesses that do business in their country. These are:

• Estonia
• Greece;
• Hungary;
• Italy;
• Latvia;
• Lithuania;
• Malta;
• Netherlands;
• Portugal;
• Spain;
• Sweden;
• Slovakia; and
• Slovenia.