Value-added tax derives from European Union legislation which sets certain broad parameters. The EU rules are designed in such a way that they essentially interlock so that sales and purchases across borders in the EU work in a manner that is compatible and broadly harmonised.
VAT law in all EU countries treats sales and purchases between EU states in a different way to sales and purchases to outside or from outside the EU. In strict terms, sales and purchases between EU states are described as supplies and acquisitions, whereas sales and purchases to outside and from outside the EU are described as exports and imports.
The United Kingdom has passed legislation designed to fully replicate European Union VAT rules on the first day of Brexit whether a hard Brexit or a softer Brexit in the longer term. Therefore, from a United Kingdom perspective, it would have a very similar system of VAT to that which now has, which itself is very similar to that which Ireland has. This would be the case on day one of Brexit and probably into the future indefinitely.
Two-State and Three-State Supplies
From a VAT perspective, the default position is that the supply takes place with the goods are situated or where transportation starts. This could mean having to register for VAT at that place. For direct intra-EU B2B supplies the place of supply is where the trader acquiring the goods is established. There are conditions for this treatment which if not satisfied, the default rules kick in.
In the case of tripartite sales, registration in other countries may be required such as the country of acquisition (to satisfy the conditions for an intra-EU supply). However, there are special EU triangulation simplifications which ease this position at present. Brexit changes this position and may mean having to register for VAT at the point of origin in the absence of new UK EU agreements on the issue.
Existing EU Triangulation
There are special rules regarding triangulation which may apply to transactions at present. They apply when three EU jurisdictions are involved. The intermediate EU company can zero rate the supply to the UK buyer provided that seller has a valid EU (e.g. Republic of Ireland) VAT number and the goods are transferred to another member state, e.g. the UK prior to Brexit (NI after Brexit).
The reason why relief is required is that the condition for arrival in the state allowing for the customer to self-account have not been satisfied. That is because the supplier is not registered for VAT in the EU 26 member state of the departure . Therefore, technically the seller would have to register for VAT in the UK in the absence of the simplification procedure;(Pre-Brexit).
Under the simplified procedure, the intermediate supplier in the above example is exempted from registering for acquisition VAT in the member state of arrival, the UK in the above example. It must satisfy certain conditions. It must be already registered in the EU not registered in the state of arrival and the customer must be registered for VAT in the state of arrival.
There are additional accounting steps required. A certain code must be used on the ultimate EU Sales list/ Intrastat for triangular transactions. In the case of the UK, the non-established taxable person must notify a particular unit of HMRC of certain details and give certain notices to customers. The customer must self-account for acquisition VAT
After Brexit, the special intra – EU rules would not apply and the starting point for a movement of goods directly from an EU country out of the EU into GB would be that there would be a supply in that country. This would imply having to be VAT registered in that EU26 country and purchasing from the supplier paying local VAT and reclaiming it as a credit with a subsequent export.
Registration in another EU country may take time, and there may be practical cash flow and other issues involved in reclaiming the VAT. It will be necessary to look at the VAT system in the relevant country which would be broadly similar to the UK and Irish system.
Other VAT planning may be possible to mitigate the possibility. Even at present, there are sometimes alternative ways of ensuring that compliance by structuring the transaction in particular ways, in particular by structuring it as an export by the original supplier.
What is triangulation?
Triangulation involves two supplies of goods between three Value-Added Tax (VAT) registered traders in three different European Union (EU) Member States. For example, where a trader established in one Member State (MS1) sells goods to a trader established in a second Member State (MS2). The goods, however, are delivered to a trader in a third Member State (MS3).
To reduce the administrative and compliance burdens on traders and the tax authorities associated with such triangular transactions there is a simplification measure. This simplification measure can only operate when the three traders involved are all registered for VAT in the European Union.
In general, the simplification measure works as follows:
- There is a zero-rated intra-Community supply (ICS) from company A to company B.
- The supply is listed in the VAT information exchange system (VIES) return by company A to company B.
- As company B has quoted its VAT number, it has made an intra-Community acquisition (ICA). Company B accounts for this ICA in its VAT return.
- Company B makes a VAT-free supply to company C. Company C accounts for this transaction in its VAT return as a received supply. In this way company C is deemed to have accounted for company B’s VAT liability in Member State 3.
Where company C is entitled to reclaim VAT, it takes a simultaneous credit for this transaction in the relevant VAT return.
Transactions involving more than three companies
The simplification measure can only operate in a classic triangulation situation as set out above. If there are more than three companies involved (for example, successive sales between companies in Member State 2), the strict legal position will apply. In such cases, registration may be required in at least one other Member State depending on the precise circumstances.