VAT and Borders
A critical factor in the creation of a single market without borders in the European Union was the introduction of a new system of VAT on 1st January 1993. Prior to that, VAT was payable at the point of entry. This is still the position in respect of imports from outside the European Union. VAT is s collected in conjunction with any customs duty and as part of the system of customs control and documentation.
Brexit is likely to mean that goods coming into the EU from the UK are subject to an immediate charge to Value Added Tax at the point of entry. This may raise control issues for states in relation to the movement of goods. It would be necessary to identify the entry of the goods. This may be done through the customs return in the same manner as for imports from outside the EU.
Businesses which import may be able to effectively to offset the charge and input credit so as to defer the cash flow implication until the point of sale. In other cases (businesses who can’t claim a credit or others) may have an immediate charge and payment obligation, in the absence of new facilitation or the less likely maintenance of a common VAT system
EU VAT System
Under the system of VAT in place in the EU since 1993 imports from (and exports to) other EU countries are treated differently to those from or to places outside the European Union stop. See the separate article on the “intra-EU” VAT system on the different procedures that apply. So-called acquisitions and supplies between EU member states occur without any VAT charge applying at the border. This facilitates the goods crossing the border without VAT controls.
VAT procedures and rules differ depending on whether the trade is with countries within or outside the European Union. Purchases from other EU countries are known as “acquisitions” rather than imports. Sales to customers in other EU countries are known as “dispatches” rather than exports.
EU states are required to charge standard VAT rate of at least 15% and a reduced VAT rate of at least 5% on a wide range of goods and services. VAT rates vary between EU member states and vary for different types of goods and services.
The UK has indicated that it intends to maintain VAT as its general system of indirect tax. It has recently legislated for post-Brexit import VAT.
It is not clear whether it will be possible to have an arrangement or alignment of UK -EU VAT rules that would be necessary to maintain a system of EU UK VAT equivalent to that in place for intra-EU trade.
Exports to other EU States
Dispatches of goods to VAT registered customers within the EU are zero-rated. The customer’s EU VAT number must be included on the sales invoice. Evidence must be kept that the dispatch has been made to another EU trader. If the sale is to an EU customer who is not VAT registered then VAT is charged at the normal domestic rate in the state of export.
The place of supply within the EU is where the transport begins i.e. in the exporter’s State. Provided the above conditions are met, the supply to another European Union member state will be zero-rated. This enables the exporter to recover VAT on his corresponding purchases.
It is necessary to obtain proof of transport. Delivery dockets or bills of lading will be acceptable and should be available to the supplier. Proof of removal from the state is essential. HMRC may require to see transport documents, copies of warehouse receipts, delivery documents etc. If there is any doubt involved, the supplier should charge VAT and will be entitled to recover. It is essential to verify the customer’s EU VAT number. HMRC have a facility to confirm whether a particular VAT number is correct. It is not required to verify every number. A common sense approach is required.
If total sales to non VAT registered customers in any particular country exceed the VAT distance sales registration threshold in the State of export, it is necessary to register and account for VAT in that State. The thresholds vary between EU member states.
International trade transactions may involve more than two businesses in different countries. For example, a country may order goods from an intermediate supplier who then sources the goods with the supplier in a third country. If a supplier based in a European Union country delivers goods directly to a customer in another EU country rather than via the intermediate supplier, there is a so-called “triangulation” arrangement. There are special VAT rules which apply.
Imports from other EU States
Prior to 1993 VAT was collected at the frontier as part of the Declaration to customs. Since that date, VAT is accountable in the Member State of destination through the national EU VAT systems. See our separate notes in relation to international VAT.
Where a VAT registered business imports goods from another EU member state the following rules apply. The supplier of the goods charges VAT in his State at zero rate. This means that the supplier can recover VAT on the purchases relating to the goods supplied. The supplier will have to file a declaration in respect of all such supplies in his own State and may have to file a statistical return.
The business which acquires the goods from the other EU member State must “self-account” for the VAT on the acquisition in his VAT returns in the State of import. This reverses the normal rule by which the supplier normally accounts for and pays the VAT.
Assuming the importer charges VAT on all of his sales and is accordingly entitled to recover VAT on all the corresponding purchases, there would be no actual cash flow charge. The purchaser self-accounts for VAT by simultaneously charging the VAT and taking a corresponding credit. If the business did not have full VAT recovery some VAT liability may arise.
The above rules do not apply to motor vehicles, vessels and aircraft which are subject to special rules.
VAT on imports from outside EU
VAT is due on goods imported into the UK from outside the EU and into free circulation. There are a number of temporary reliefs which postpone the duty if goods are put into a customs warehouse. VAT on imports is payable at the same rate as applies for supplies of the same goods in the UK.
The VAT calculation is based on the valuation of the goods. This is the total of the VAT value and incidental expenses such as transport up to the first point of destination in the UK and other duties such as excise duties. For goods worth more than £6,500.00 it may be necessary to complete a separate valuation document.
Imports must be declared and any VAT or other duties paid before they are released into free circulation in the UK. Goods are normally declared electronically or by using the paper Single Administrative Document. This gives the information needed to work out import VAT.
Authorised traders can use simplified declarations to get most imports released more quickly. Authorised traders can also defer VAT without providing full security.
Special rules apply to postal imports worth under £2,000.00. If these are accompanied by a customs declaration showing the VAT number or what the goods are, it is not necessary to pay VAT immediately. Instead, it is possible to account for import VAT on the business’s own VAT return.
There are some types of goods which can be imported without payment of VAT. These include samples of negligible value and various goods for disabled persons.
If goods are supplied from outside the EU for onward supply to another EU country it may be possible to claim onward supply relief. Instead of paying import VAT it is accounted for by the customer.
If goods are imported for processing and re-export there is a relief for both customs duty and import VAT. If one is processing imported goods and the end product will be subject to a lower import duty it may be possible to benefit from processing under customs controls. Customs duty including VAT is suspended while the goods are being processed. Duties become payable at the lower rate when the finished product is released into circulation.
It is possible to import goods into a free zone and process them without paying the duty or VAT. Customs duties and import VAT can be suspended on goods being transported through the UK using certain customs procedures.
Import VAT is not due if goods are imported under a custom suspension arrangement. Import VAT becomes payable when goods are subsequently released.
The Customs Declarations supplies statistical information for exports outside the European Union. With the removal of European Union frontiers in 1993 new statistical measures were put in place. The system is called “Intrastat”. It requires suppliers of goods to the other Union Member States above a certain threshold to report their supplies in a monthly declaration.
It is necessary to declare imports and exports to customs. Exporters declare their exports electronically using the National Export System. If one is transporting goods through the EU which are imported from a third country liability for customs duty and VAT might arise each time the goods cross the EU border unless an appropriate transit system such as community transit is used. Transit declarations can be submitted electronically.
A freight forwarder may handle imports or exports for the importer and exporter. They will then usually complete the customs declaration and pay or defer duties including VAT. The agent must ensure that they state on the customs duty that they act for the business concerned.
It is possible to complete custom freight formalities electronically. This is through the CHIEFS system. If the business is importing the CHIEFS computer system normally calculates the value of the goods and import duty automatically.
When supplying goods to another Member State VAT registered business the supplier must obtain the customer’s VAT registration number on the commercial invoice and zero rates the supply. The customer then accounts for the VAT in the State of import.
Where supplies are made to non-registered customers in another EU State (a VAT registration number cannot be quoted) and the invoice must charge VAT at the appropriate rate in the supplier’s Member State. The supplier must account for the VAT.
The general position on exporting outside the European Union is that there are minimal formalities. Under certain circumstances, exportation may involve repayment of customs duty previously paid or may involve restrictive goods.
When supplying goods outside the European Union, evidence must be obtained that the goods have left the EU. Such evidence could be a certificate of shipment or commercial transport document by a haulier etc. VAT registered companies must complete a VAT return and a VAT sales list.
VAT Procedures and Returns
Where goods are acquired by a business from within the European Union the VAT details must be entered on the VAT return in the country of acquisition. If imported by a VAT registered business, VAT can be reclaimed by a simultaneous credit and debit with no cash flow consequences.
It is possible for regular importers to delay paying VAT for up to thirty days by opening a deferment account with HMRC. A lump sum direct debit is paid monthly. This means payments do not have to be undertaken for each transaction so that clearance is quicker.
The simplified importing VAT accounting system (SIVA) can help reduce the level of financial security or guarantee required to operate a deferment account for import VAT on import transactions. There are conditions for use of SIVA and not all businesses are eligible. Under the excise payment security system, traders can apply to make deferred payments of excise duty without an excise duty deferment guarantee.
Goods dispatched to other European Union countries or exported outside the EU are normally zero-rated. The details must be entered on the VAT return. If one sells to countries outside the European Union it is necessary to submit details to HMRC and complete them on the VAT return.
It is necessary to keep proof of export documentation that identifies the exporter, the customer, the goods and their value, the export declaration, the mode of transport and the route. Special procedures apply to the holding and moving of excise goods. These are goods such as alcoholic drinks, tobacco, mineral oils which attract excise duty over and above standard VAT.
A VAT registered business which sells and moves goods to other VAT businesses within the EU must record and report certain data. Intrastat is a statistical system of the European Union designed to ascertain trading patterns and values and to provide essential statistical data.
Prior to the EU single market in 1993, information was available through import and export returns. However, with the free movement of goods within the EU, the Intrastat system became necessary in order to compile statistics on movements of goods. Intrastat relates only to goods and not to the value of services.
If the value of arrivals exceeds £1,000,000 annually, a monthly return is required. It is necessary to report the value of goods counted as arrivals or dispatches. Duties are not included. It is not necessary to report goods which are not moved for trade purposes which are in transit or which are sent for or returned after repair.
The return requires details of VAT registration, certain transaction codes, the values of goods, country codes, delivery terms (mandatory for certain larger traders) commodity codes and details of the quantity and mass of goods.
It is necessary to keep the records including the following:-
- a copy of each Intrastat return
- copies of papers and documents that have been used to complete the return
It is required to keep records for six years and produce them to Revenue when required.
Supplementary declarations can be returned by the internet or in paper format.
European Community Sales List
A business which is VAT registered and supplies goods to other EU countries must provide details of sales for use on a European Community sales list. This information is used throughout the European Union to ensure that VAT has been correctly accounted for.
The European Community sales list must include details of the VAT registration number and details, the country code, the customer’s VAT registration, total value of goods and certain other information.
The ECSL can be returned via the internet or in paper form. Intrastat supplementary declarations must be made monthly. They are to be made by the end of the following month. The obligation to commence returns starts once the level of trade with other EU member states reaches the requisite threshold.
The information required includes the following:-
- details of the business;
- commodity codes;
- transaction codes depending on nature of the transaction;
- delivery terms.