EU VAT action plan ‘quick fixes’

The European Commission has estimated that in 2017 EU member states lost €137.5bn of VAT to the so-called VAT Gap (the difference between theoretical and actual VAT receipts). A significant element of this is specifically attributable to cross-border VAT fraud.

Three years ago, the EU Commission set out its Action Plan to reform and simplify the cross-border VAT system. The plan sought to improve the co-operation between tax administrations, provide flexibility for member states on rates policy, and reduce obstacles to cross-border trade. 

It is intended that a definitive VAT system for business to business trade in goods within the EU will take effect in July 2022.

EU VAT Quick Fixes

1 January 2020, member states will be required to adopt four ‘quick fixes’ to their VAT rules in advance of the implementation of the Action Plan. 

These are designed to provide a level of consistency and simplification to VAT rules where goods are traded across EU borders. However, some members have already implemented the Quick Fixes into their own legislation. 

Broadly, the proposed Quick Fix solutions are as follows:

1. Call off stock simplification

Where stock is held for subsequent supply to a named customer in that member state.

Current Position

Goods moved from one-member state to another for subsequent call off by a known customer, are considered to be an intra-community movement of own goods as title does not pass until the stock is called off. 

The owner of the goods has a VAT registration requirement in the destination member state. By way of simplification, some member states allow the owner to avoid registration in the destination member state (subject to local restrictions), but this simplification is not consistently applied.

Position from 1 January 2020

The intra-community supply will only take place when the goods are formally called off (or after 12 months, if earlier). Suppliers and customers must keep a ‘call off’ register of goods. The goods will not be regarded as transferred if they are returned to the member state of origin after the 12-month period.

2. Chain transactions simplification

Where there are two (or more) transactions but a single movement of goods.

Current Position

There is confusion and inconsistency as to which is the (potentially zero-rated) transaction where goods are supplied by way of a ‘chain transaction’ – e.g. legal title in goods transfers from A to B to C but a single movement of the goods, from A to C, takes place. This can lead to uncertainty in treatment for all three parties and most often additional VAT reporting and compliance issues for the intermediate owner, B.

Position from 1 January 2020

If B arranges the transport of the goods as intermediary the sale from A to B is the zero-rated intra-community transaction but if B is registered in the member state of departure and provides its VAT registration number in that member state, then the B to C sale is the zero-rated transaction.

3. Evidence to support zero-rating for intra-Community supplies 

Current Position

There is no common set of guidelines or policy governing the level of evidence required to demonstrate that goods have left the member state of origin to support zero-rating.

Position from 1 January 2020

The seller must have access to two non-contradictory pieces of evidence from a pre-determined list of documents issued by two parties (eg bill of lading or airfreight invoice). These two parties must be independent of the seller, the customer and each other.

4. Requirement for valid VAT number to be obtained and quoted 

Current Position

Currently European court case law has found that in principle a supply goods can be zero rated as an intra-community transaction without a VAT number, provided it can be determined that the customer is a taxable person. The case law in question has confirmed that the EU VAT number of the customer is not a necessity provided other substantive evidence demonstrates the conditions for zero-rating the transaction have been met.

Position from 1 January 2020

Two new preconditions will exist to qualify for zero-rating. First, the customer’s VAT registration number must be collected by the seller and shown on the sales invoice. In addition, the transaction must be included on the seller’s EC Sales List.

Applicability to the UK

UK businesses trading with the EU are already grappling with the uncertainties around Brexit; these changes will add to the VAT issues associated with this trading.

While the applicability of these changes will not be known until the terms of the UK’s exit have been agreed, if the UK exits on 31 October 2019 without a deal, the impact will be limited to any VAT registrations and stock movements within the EU27. However, if a deal is agreed where a ‘transitional’ period commences, or the UK decides to revoke article 50 and Remain, then the UK must embrace the changes as a continued member of the EU.

There are a number of important logistical, commercial and accounting implications arising from the commission’s Quick Fixes and the development of the EU Action Plan from 2022. These include understanding the operational and record-keeping requirements, the impact on the supply chain and ensuring that ERP systems are properly configured to deal with them.

If you would like to discuss your VAT needs and how we can support your business, please get in touch Andy Ilsley.