VAT CASES - 09.04.2020

Export evidence not sufficient for zero-rating

The case. A&S Import and Export Trading Co Ltd (AS) exported luxury goods to “middle-class purchasers in China,” such as cosmetics, skincare products and branded bags. The customers were keen to buy these items from the UK because there were a lot of counterfeit goods on the market in China.

AS zero-rated the sales as an export of goods outside the EU but HMRC challenged the lack of export evidence retained by the company and issued an assessment for £152,181 for periods July 2015 to January 2017, i.e. as if the goods had been sold in the UK.

The law. HMRC has the power to insist on a high standard of evidence to support zero-rating of exported goods to ensure the public revenue is adequately protected. One requirement is that the goods must be fully described on export documents, including the quantity of goods being shipped.

The decision. The taxpayer admitted that goods had been incorrectly described and undervalued on the export paperwork to get around problems with the Chinese authorities. The directors also wanted to reduce the threat of the goods being stolen in transit. However, this strategy meant that there was inadequate proof that the goods had actually been exported to China for VAT purposes, and the First-tier Tribunal dismissed the taxpayer’s appeal.

Key points.If you export goods outside the EU, you must retain a combination of commercial transport evidence, such as authenticated air-waybills and sea-waybills, and supplementary evidence such as details of the customer order and payment arrangements. If this evidence is not obtained within three months of shipment, then the sales must be treated as a UK supply on your VAT return, i.e. standard-rated in most cases. You can zero-rate again if suitable evidence is acquired later.