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Business and industry are in a continued state of flux as Brexit rolls forward, uncertainty following each extension. Whilst it is out of the hands of business to determine what happens with regards the Brexit process, independently of the UK’s departure negotiations there are upcoming changes for businesses operating in the EU which all organisations should be preparing for.
The EU’s Four VAT ‘Quick Fixes’ will come into force in January 2020, and are set to have a substantial impact on businesses across the board. The ‘Quick Fixes’ are scheduled as part of the EU’s attempts to modernise the VAT system. It’s important to note that they are designed as a temporary measure to be implemented before the more substantial, permanent changes due to be established in July 2022 come into force. However, despite the best of intentions, questions are being raised as to whether they will make VAT compliance easier. Their objective is to streamline and harmonise the VAT system, but these kind of wide-ranging changes to international accounting measures seldom occur without some teething issues.
The ‘Quick Fixes’ propose to tackle four main areas: call-off stock arrangements, chain transactions, substantive conditions to exempt B2B intra-EU movement of goods, and evidence required to support that movement. I’ve developed a guide to analyse each of the four ‘Quick Fixes’, its pros and contras, and some key steps that business and industry should consider implementing.
1. Call-off stock
For those businesses that operate call-off stock operations for customers, this fix will be of particular interest. Its objective is to simplify the current position for Member States and suppliers by harmonising the rules in Member States. At present, when stock is moved from one EU Member State to a warehouse in another with the intention of a domestic sale to a customer, a call-off stock situation is created. For VAT purposes this normally means that the supplier has a liability to register for local VAT so as to account for acquisition tax and any VAT due on the onward supply.
Some Member States operate a simplification process which allows suppliers to avoid this registration need. However, the conditions to apply this simplification often differ between countries and of course, many Member States don’t apply it at all. This fix will put in place uniform simplification rules that must be applied in all the Member States when the conditions are met.
On the positive front, rule harmonisation means that businesses won’t need to investigate regulations in every Member State they operate in. This may also mean that some existing VAT registrations can be cancelled, and businesses will not need to register when expanding into new nations.
However, some of the definitions involved have yet to be clarified. Also, this simplification may not always be as beneficial as existing rules. Furthermore, there are several requirements that must be fulfilled in order to apply this fix. In the event that one or any of these requirements is no longer satisfied, a supply will have been deemed to have taken place and the need to register will reappear.
2. Chain transactions
Chain transactions occur when goods move from a first supplier in one Member State to a final customer in another and along the way, ownership passes between several different parties. These supply chains are complicated because it is necessary to identify which of all the transactions is the cross border one and hence the others which are domestic. This is important so as to determine the VAT treatments that apply and, in some cases, whether registration obligations are created.
This quick fix intends to simplify this decision making process by having a default position which makes the first supply in a simple three party supply chain as the moving one, where the intermediary party has arranged the transport. It also gives the intermediary party the ability to treat the first supply as a local sale with the subsequent sale being the intra-EU one. However, it is not possible to apply the quick fix where a party other than the intermediary supplier organises the transport. This has the potential to remove the need for the intermediary to be registered in other Member States.
The advantages of the fix are that it will give businesses greater certainty on how to interpret chain transactions and hence a better likelihood of correct VAT treatment being applied. The challenges are that there must be clarity on the position of businesses in the chain, as well as a comprehensive understanding of the applicable rules for that position – e.g. understanding whether there is a third party involved in case of the EXW sale of goods.
3. Mandatory use of VAT numbers
This fix will impact all businesses involved in the intra-EU supply of goods. It changes the wording of the EU VAT Directive to add extra conditions that must be met in order to exempt a cross border movement of B2B goods:
- The recipient will need to be a taxable person or a non-taxable person acting as such in a Member State other than that in which dispatch of the goods begins;
- The recipient of the supply must be identified for VAT purposes in a Member State other than that where the dispatch of the goods begins. It will have indicated that VAT number to the supplier; and
- The supplier must have submitted a recapitulative statement including the correct information about the supply
The advantage of this fix is that it provides certainty around how intra-EU supplies can be exempted. Ultimately, this is positive for businesses. However, it is going to create a significant administrative burden and may unleash as many problems as it is trying to fix. Checking customers’ VAT numbers using the VIES platform will now be an obligation, so there needs to be trust that VIES will work efficiently. There will also be additional obligations in terms of reporting, EC Sales Lists and recording of information – so processes need to be up to date and record keeping optimised.
4. Evidence of Intra-EU supplies
The last quick fix deals with the evidence of intra-EU supplies and aims to harmonise the rules that apply to obtaining evidence to support the exemption for these transactions. It adds formal requirements set down in the legislation to replace the varying different selections used by tax authorities.
Effectively, suppliers and recipients will have to acknowledge to each other that goods have moved and will have to keep their own records on transport and destination. The advantages are that it provides clear guidance on the evidence that is required, regardless of the Member State from where the supply is being carried out. However, it is another quick fix which is likely to quickly increase the administrative burden faced by businesses, in terms of time and cost. It’s essential that businesses review master customer data to make sure that all the relevant VAT details and addresses are in place, and to ensure record keeping requirements are met in collection of documentation.
Conclusion:
The EU does plan to issue guidance for businesses and this is currently available in draft format, but it is wise to be one step ahead and to consider any supply chains that may be affected, to identify gaps between the rules currently in place and those due to come into force, and crucially, consider how these gaps can be filled. There are a few short weeks before the Four Quick Fixes come into play and businesses would be wise to take the reins now and get prepared, before accounting practices change around them.
The author Rob Janering is Associate Director at Accordance.
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