EU TRADE - 30.08.2023

Key points for clients post-Brexit

EU departure

The UK left the EU on 31 December 2020 and there is a temptation to think that not much has changed as far as VAT is concerned. But that is not the case, particularly for those clients who trade in goods with EU countries.

A significant change is that previous references in HMRC’s notices and manuals to “outside the EU” now refer to “outside GB”. In other words, your clients will adopt the same VAT procedures if they trade with the US or France as far as UK VAT law is concerned. But that is not the end of the story.

Buying and selling goods in the EU

A business only gets the benefit of a registration sales threshold in their own country. So, e.g. if your clients buy stock in France and sell it there, they will need to register for VAT in France, irrespective of the value of the sale, i.e. a zero-registration sales threshold applies. It is only a French-based business that gets the benefit of a threshold in France. If your clients buy goods in France and export them to, say, Germany, they will still need to register for French VAT.

However, if your clients export goods from GB to the EU - and the EU customer acts as the importer when they arrive - your clients will not need to register for VAT in that country.

Three-party deals

Envisage the following situation: one of your GB-based clients has received an order for goods from a business customer in Germany. Your client will buy them from a Polish supplier and they will be shipped directly from Poland to Germany. What are the VAT issues?

Before the UK left the EU, this type of deal was covered by the rules of triangulation. In other words, when A sells goods to B and B sells goods to C but the goods are shipped directly from A to C - and A, B and C are in different EU countries - then no VAT is charged on either sale, with C accounting for acquisition tax on their own VAT return instead.

However, this deal is more complicated because your client - B in the supply chain - is outside the circle of the EU. Your client must now register for VAT in either Poland or Germany, depending on where they legally take ownership of the goods. This is because they are a non-EU supplier buying and selling goods in the EU, so the triangulation concession no longer applies.

Pro advice. The benefits of triangulation can still be enjoyed by a business based in NI, which is part of the EU as far as supplies of goods are concerned but not services.

Example. Marie is VAT registered in the UK and her trading activity in GB is to buy and sell ceramic tiles. She has received an order from a business customer in Germany for £10,000. The goods will be shipped directly to Germany by her Polish supplier, who will sell the goods to Marie for £6,000.

If Marie registers for VAT in Poland, she will be charged Polish VAT by the supplier and claim input tax on her Polish VAT return. She will then zero-rate her sales invoice to the German customer; the latter will account for acquisition tax based on the German rate of VAT for ceramic tiles, also claiming input tax on the same return.

If Marie registers for VAT in Germany, she will not be charged Polish VAT by the supplier because this is now an intra-EU deal between different countries and therefore zero-rated. She will charge German VAT on her sales invoice to the German customer and the latter will claim input tax on their German return.

Pro advice. From a cash-flow aspect, it makes sense to register for VAT in the country where the goods arrive, as the above example shows.

Possible alternative?

The option of your client registering for VAT in either Poland or Germany is not straightforward. Many EU countries insist that a non-EU business appoints an EU-based accountant or representative to manage their VAT affairs, which can be a costly expense. The time and administration costs incurred by your client might exceed the profit margin made on a deal.

Alternatively, is there scope for your clients to earn a commission on these deals rather than buy and sell on goods? A commission is classed as a supply of services and will avoid the need for your client to register for VAT in an EU country and the complications that entails.

Example. Following on from the previous example, Marie has agreed that her Polish supplier will directly invoice the German customer for the goods, charging £10,000. This invoice will be zero-rated as an intra EU supply of goods between VAT-registered entities. Marie will issue an invoice to the Polish supplier for £4,000 as a sales commission. The Polish supplier will deal with the VAT on their Polish return by doing a reverse charge computation, i.e. accounting for output tax and claiming input tax on the same return based on the Polish rate of VAT. There is no need for Marie to register for VAT in either Poland or Germany.

Pro advice. The downside of the commission arrangement is that the Polish supplier and German customer might agree to cut out your client in future deals, i.e. to save the commission fee. They could possibly prevent this happening by including a restriction of trading clause in the supplier/customer contracts.

New rules for some NI trade

If any of your GB clients trade as second-hand vehicle dealers, they should be aware of new VAT rules that took effect on 1 May 2023, which give them scope to claim input tax on the purchase of vehicles in some cases, even where they have not been charged VAT by the seller, e.g. if vehicles are purchased from a private individual or a business that did not charge VAT.

The aim of the rules is to restore the benefits of the second-hand margin scheme for sales to NI and the EU - only paying VAT on the profit margin rather than the full selling price - which will save significant amounts of VAT for your clients.

Example. Classic Cars is based in Birmingham and has purchased a vehicle from a private individual for £12,000. It will be shipped to NI and sold to a customer for £15,000. The sale will be made for £15,000 including VAT, i.e. output tax of £2,500 must be declared by Classic Cars on their UK return. However, if the purchase and shipment dates are both after 1 May 2023, Classic Cars can claim input tax of £2,000 on the original purchase of the vehicle, £12,000 x 1/6 = £2,000.

The result - as shown by this example - is that your clients will pay VAT on their profit margin but by a method based on output tax minus input tax. In other words, £2,500 output tax less £2,000 input tax is the same as 1/6 of the £3,000 profit margin.

The new procedures apply to all vehicles and not just cars. As the new rules represent a tax concession, your clients must keep specified accounting records, e.g. a separate stock book for vehicles transferred to NI/EU and a purchase invoice when they buy the vehicle.

Pro advice. If your clients transfer a used vehicle from GB to an EU country for sale there, they can claim input tax in the normal way if 20% VAT has been charged by the seller. Otherwise they can only claim input tax on the purchase of the vehicle in GB if they are also VAT registered in the EU country where the car is shipped, i.e. because they are selling vehicles there.