Guidance

Changes to VAT for intra-EU chain transactions and zero-rated goods

Published 20 December 2019

1. Chain transactions

A chain transaction occurs where there are a number of businesses successively buying and selling the same goods but the goods themselves are transported directly from the original supplier and delivered to the final purchaser.

There is no limit to the number of businesses that can be in the chain but it must consist of at least 3 businesses which include the:

• original seller
• original buyer
• final buyer who purchases the goods

Where the goods supplied by the original seller in the member state of origin are transported from that member state and delivered to the final customer in the member state of destination there must be an intra-community supply. The Court of Justice of the EU has ruled that only one transaction in a chain can be treated as the intra-community supply. In a simple chain consisting of 3 businesses, this could be either the:

• supply by the original seller to the original buyer
• onward supply by the original buyer to the final purchaser

The new chain transaction rules set out how to determine which supply is to be treated as the intra-community supply. The principle holds good for a chain of any length, irrespective of the number of intermediary buyers.

The new rules make express provision as to which supply is to be treated as the intracommunity supply and, in most cases, will achieve the same end result as the UK’s current policy does.

The new rules do not affect chain transactions that do not involve a cross-border movement of the goods. In those cases, normal VAT accounting rules will apply in the member state where the goods are located.

1.1 Overview

The new rules provide a simple approach to determining which supply in a chain is the crossborder intra-community supply. The default position is that the intra-community supply is the supply to the person in the chain (the intermediary operator which may be the original buyer or a subsequent buyer in the chain) who arranges for the goods to be moved from the member state of origin to the member state of destination.

All supplies leading up to and including the intra-community supply are to be treated as taking place in the member state of origin and all subsequent supplies are to be treated as being made in the member state of destination.

If that intermediary operator is VAT registered in the same member state as the supplier, then, subject to certain conditions, the onward supply by the intermediary operator can be treated as the intra-community supply.

The businesses involved may not be established or have a fixed establishment in either the member state of origin or the member state of destination but the normal VAT registration rules and reporting requirements will apply to the supplies made by the parties in the member state where the supply takes place.

The new rules are set out in part 4 of the Value Added Tax (Place of Supply of Goods) Order 2004 (SI 2004/3148) and take effect from 1 January 2020.

For more details on the VAT treatment of the supply that is deemed to be the intra-EU supply, read information about the single market (VAT Notice 725).

1.2 Intermediary operator

This legislation defines an intermediary operator as the business in the chain that transports or arranges for the transport of the goods across the EU border.

The intermediary operator cannot be the original supplier. Where the original supplier arranges the cross-border transport, then the normal rules for accounting for intra-community supplies of goods will apply.

Where the final customer arranges for the transport of the goods to itself, the rules will apply and the final customer can be seen as an intermediary operator for the purposes of applying them.

1.3 Intra-community supply

The intra-community supply is deemed to be the supply to the intermediary operator.

If that intermediary operator is VAT registered in the member state of origin, the intermediary operator can opt to treat the onward supply made by it as the intra-community supply, provided that the intermediary operator supplies its VAT number to its supplier and, in that case, the supply to the intermediary operator will be a normal business to business supply in the member state of origin.

1.4 Final customer

A final customer who otherwise meets the conditions can apply the rules as though they were the intermediary operator. In such a case, the intra-community supply will be the supply made to the final customer and the final customer must account for acquisition tax on the supply in the destination member state.

If the final customer notifies its supplier of a VAT registration number in the member state of origin, the intra-community removal will become a deemed supply of own goods. Read Notice 725, section 9 for more information.

1.5 Business establishments

It is irrelevant to the operation of these rules whether or not the original supplier, the original buyer (or any other intermediaries in the chain) or the final customer are established or have a fixed establishment in either the member state of origin or the member state of destination.

All parties are required to keep to the relevant VAT registration rules and accounting requirements that apply in relation to making the relevant supplies.

1.6 Triangulation

The chain transaction rules can operate in conjunction with the triangulation rules, as long as the triangulation criteria are met.

1.7 Zero rating

Subject to certain conditions being met, a cross-border supply can be zero-rated as a supply in the member state of dispatch. The new rules make some changes to the zero rating conditions.

2. Zero-rating for intra-community supplies

The intra-community supply of goods between businesses is almost always zero-rated for VAT in the member state of origin and taxable as an acquisition by the customer in the destination member state.

Member states are entitled to set conditions to prevent possible evasion, avoidance or abuse of the VAT system and to ensure the correct and straight forward application of this zero rating provision.

The UK, along with most other member states, applies a condition that requires the customer to be VAT registered in the destination member state and the supplier to record that number. This helps make sure that the VAT is not lost where, for example, the goods are supplied to a non-VAT registered person. The UK decided that this was vital in the provisions of the Principal VAT Directive.

In a number of cases, the Court of Justice of the EU concluded that these requirements were not formal conditions with the force of law, meaning that there was some uncertainty as to their status.

2.1 Overview

The new rules add additional formal conditions that must be legislated for, so that for an intra-community supply of goods to be zero-rated, the:

• customer is VAT registered in a member state other than the member state of origin
• customer has provided the supplier with that VAT number
• supply is reported on an EC Sales List

In addition, Article 45a of Council Implementing Regulation 282/2011 sets out a list of documentary evidence and conditions whereby it can be presumed that the goods have been transported across an EU border. As the Implementing Regulation is directly applicable, no further legislation is required to implement it into UK law – it will apply in the UK from 1 January 2020. Read VAT Notice 725 the single market.

2.2 Conditions

VAT number

The requirement for the supplier to obtain the customer’s VAT registration number is currently set out in Notice 725 paragraph 4.3 which has force of law. As this is now a legal requirement set out in the Value Added Tax Regulations 1995, the notice will be revised. The other requirements in that paragraph will remain, including the requirement that the VAT registration number be shown on the sales invoice including the 2-letter country prefix code.

Fall-back use of VAT number

While the legislation requires a customer’s VAT registration number to be known and disclosed, it does not require that number to be issued by the destination member state. Read the fall-back requirements in Notice 725 paragraphs 7.7 to 7.9.

EC Sales List

There is no change to the general requirement to submit EC Sales Lists. However, submission of an accurate EC Sales List will become a requirement for zero rating a cross border supply within the EU from 1 January 2020. If a supply is not correctly reported on an EC Sales List then any zero rating of the supply becomes invalid and will be cancelled. The effective date of cancellation will be the date of the original supply. Any additional VAT due on the supply may be liable to a penalty and interest.

If the EC Sales List is corrected at a later date, zero rating can be reinstated from that date as long as all the other conditions for zero rating are met. You may still be liable for interest.

If there was a reasonable excuse for the failure to submit the EC Sales List or the failure to provide the correct information, then zero rating will not be cancelled.

Normal penalties for non-submission, late submission and errors on EC Sales Lists are unchanged.

Notice 725, paragraph 17.12 explains penalties.

2.3 Removal evidence

Current requirements

Notice 725, paragraph 4.3 (which has force of law) includes a requirement that you get and keep valid commercial evidence that the goods have been removed from the UK within the time limits set out at paragraph 4.4.

Notice 725, section 5 sets out a list of documents, a combination of which must be used to provide clear evidence that a supply has taken place and that the goods have been removed from the UK. The responsibility is on the business to prove to HMRC that the conditions have been met. Businesses which have difficulty gathering the information required by the new rules can continue to rely on these rules.

New simplification rules

The effect of the new rules is that, where certain conditions are met, it is presumed that the goods have been transported from the member state of origin. This presumption can be challenged by HMRC. If the relevant conditions are met, it is for HMRC to prove that the goods have not been transported from the member state of origin.

Article 45a of Council Implementing Regulation 282/2011 sets out the conditions under which the goods can be presumed to have been removed. The Implementing Regulation is directly applicable, so no further legislation is required to implement it into UK law.

Presumption

The presumptions are met where the supplier confirms the dispatch or transport which was issued by 2 different parties that are independent of each other, of the vendor and of the acquirer and is in possession of one of the following:

• at least two items of non-contradictory acceptable evidence from list A
• any single item from list A together with any single item of non-contradictory acceptable evidence from list B

In addition, where the acquirer arranges the transport of the goods, the supplier must be in possession of a written statement from the acquirer, stating that the goods have been dispatched or transported by the acquirer, or by a third party on behalf of the acquirer, and identifying the destination member state of the goods.

That written statement should state:

• the date of issue
• the name and address of the acquirer
• the quantity and nature of the goods
• the date and place of the arrival of the goods
• in the case of the supply of means of transport, the identification number of the means of transport
• the identification of the individual accepting the goods on behalf of the acquirer

The statement must be provided by the 10th day of the month following the supply.

Acceptable evidence

List A: Documents relating to the dispatch or transport of the goods, such as:

• a signed CMR document or note
• a bill of lading
• an airfreight invoice
• an invoice from the carrier of the goods

List B: The following documents:

• an insurance policy with regard to the dispatch or transport of the goods or bank documents proving payment for the dispatch or transport of the goods
• official documents issued by a public authority, such as a notary, confirming the arrival of the goods in the destination member state
• a receipt issued by a warehouse keeper in the destination member state, confirming the storage of the goods in that member state