Take Care: Supply of Goods to Other EU Member States

Trading in other Member States of the EU is an increasingly complicated area of VAT for businesses.  It can sometimes result in the need to register for VAT in another EU Member State with increased administration and compliance costs.

This article looks at the scope of possible business activities with other Member States, from basic supplies of goods to the more complex areas of triangulation, highlighting any possible registration requirements that may arise.

In theory, all EU Member States are covered by VAT Directive 2006/112/EC and, therefore, the national legislation should be almost identical in all the Member States. Unfortunately, in practice the different interpretation placed on the Directive by national governments, together with Derogations, can result in quite substantial difference in VAT legislation between the Member States.

When deciding on the VAT implications of a transaction, it is first necessary to establish the place of supply.  This will determine which country’s VAT regime will apply.  

The legislation on the place of supply of goods is contained in the VAT Act 1994, s 7 and SI 1992/3283 (The (Place of Supply of Goods) Order). The basic place of supply for goods can be summarised as being the Member State the goods are in at the time they are assigned to the customer.

In the most basic example, a UK business supplies goods to a VAT registered customer in another Member State.  This supply can be treated as zero-rated in the UK providing the supplier obtains the customer’s EU VAT registration number and quotes it on its sales invoice, and obtains commercial documentary evidence that the goods have been removed from the UK within three months of the time of supply.

When a UK business is supplying goods to non-VAT registered customers in other Member States, the UK business is making distance sales.  The normal scenario for this is mail order sales.  If the value of the supplies to each Member State is relatively low then the customer is simply charged UK VAT on the transaction.  If the value of these supplies exceeds a certain threshold in another Member State then it will trigger a requirement to register for VAT in that Member State and charge local VAT.  The registration threshold can be set at either 35,000 Euros or 100,000 Euros at the discretion of the national government.  

It is quite feasible that a mail order business could have a VAT registration in each Member State of the EU - 27 in all.  The administrative burden of this could be considerable.  In addition, if a business fails to monitor its distance sales and exceeds one of the national thresholds without informing the tax authorities, back tax and penalties may be due.

The transfer of goods within the same legal entity from one Member State to another is deemed to be a supply of goods for VAT purposes and is subject to VAT under the normal arrangements for intra-EU supplies.  If a business does not register for VAT in the other Member State it will have to charge UK VAT to itself, which it will be unable to recover. Therefore, in most cases it will probably need to register for VAT in the other Member State in order to account for acquisition tax and to obtain zero-rating in the UK by quoting its overseas VAT number.  

If the UK business creates a stock of its own goods with the intention to sell them on from that Member State (‘consignment stocks’) it will be making taxable supplies in that Member State and will be required to register for VAT, subject to the registration thresholds in force at that time.

Call off stocks differs from consignment stock in that it is allocated to a named customer at the time of transfer.  In many EU countries, call off stock is treated in the same way as consignment stock and VAT registration in that Member State will be required.

However, subject to certain rules, a number of Member States require the final customer to account for acquisition tax; therefore, the UK supplier is not required to register for VAT in that Member States.  The following Member States do not require registration for call-off stock, although, due to a lack of published information, others may also:

The basic rule for supply and install contracts is that they are treated as supplied where they are installed.  This means that the supplier is required to register for VAT in the Member State where the goods are supplied and installed.

However, to avoid unnecessary VAT registrations, a number of Member States permit the customer to account for VAT on the supplier’s behalf (‘reverse charge’) avoiding VAT registration by the overseas supplier.  These are:

This is a term used to describe a chain of supplies of goods involving three parties where, instead of the goods physically passing from one party to the next, they are delivered directly from the first party to the last party in the chain. In other words, ownership moves from A to B and B to C, but the goods move directly from A to C on the instruction of B.  All three parties have to be registered for VAT in different Member States.

Under the normal rules, the intermediary supplier, B, may have a potential liability to register for VAT in the Member State of destination.  However, to avoid imposing this additional burden on businesses, a simplification procedure was introduced which means that businesses registered for VAT in one Member State are no longer required to register for VAT in another Member State simply because of triangular transactions.

Under the simplified procedure, B can opt to have its customer, C, account for VAT on its behalf (the procedure is compulsory if B opts for it).  C can reclaim this VAT as input VAT on its VAT return.

In terms of record keeping, where company A is established in the UK it should:

Company A may zero-rate the sale subject to the normal rules.

Where Company B is established in the UK it need not record the transaction on its VAT return or SSD, however it will appear on the EC Sales List showing the customer’s VAT registration number and ‘2’ in the indicator box.

Where Company C is established in the UK it will need to account for acquisition tax in the UK in the normal way, recording the purchase on the VAT return and the Arrivals SSD.

It is important to monitor your liability to register for VAT in other EU Member States, in order to avoid penalties and interest for late registration.