With the beginning of 2020, HMRC has come with some new updates. One of the most intricate sets of transactions under HMRC VAT legislation may possibly be eased after HMRC has issued its guidance on “Intra EU chain transactions and conditions under which Intra-EU chain transactions will be considered as Zero-rated goods.
We will discuss a few EU VAT quick fixes for 2020 in this write up.
Chain Transactions & Conditions to Qualify
Usually, a chain transaction happens when there is a number of businesses in a series that are successively buying and selling the same goods but, the goods are transferred directly from the original supplier to the final purchaser.
To encapsulate the theory, below are the conditions to qualify any series of transactions as Chain transactions.
- There must be more than 2 parties involved in the series
- The goods in question must be delivered directly from Original supplier to the final purchaser
- There must be an intra-community supply
- Goods must be supplied by the original supplier in the member state of origin, and Concerned goods must be dispatched to the final customer in the member state of destination
Rules that One Needs to Follow
As per the ruling pronounced by the Court of Justice of EU, that only one transaction in a chain is treated as an Intra-Community supply. That might be either:
- Supply from the original supplier to the intermediary
- Onward supply by the intermediary to the final purchaser
The new rules for chain transactions clarify,
- How to determine which supply is to be treated as the intra-community supply
- Which supply is to be treated as the intracommunity supply
Generally, new rules will not affect those chain transactions, that are not involved in cross-border supply. In the said cases, normal VAT accounting rules will apply in the member state where goods are located.
Let’s look into the details this new guidance has brought for businesses in the EU.
The Default Approach to Determine, which Supply in the Chain is the Intra-Community Supply
- The default approach, published guidelines have suggested 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.
- 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 original supplier must have the VAT registration number for the intermediary operator. If this is the case, then the supply to the intermediary operator will be a normal business to business supply in the member state of origin.
- The place of supply, for all the supplies up to and including intracommunity supply will be a member state of origin and for all subsequent supplies are to be treated as being made in the member state of destination.
Who could be the Intermediary Operator?
- The overall concept of chain transactions works in a series of transactions where, original supplier directly supplies goods to the final customer on the instruction of one or more parties in between, which makes the complete series.
- This whole chain will be connected through an “intermediary operator”. An Intermediary operator can be defined as the business in the chain who transports or arranges for the transport of the goods across the EU border.
- It is important to note that, the intermediary operator cannot be the original supplier. In case if the original supplier will arrange the cross-border transport, then the normal rules for accounting for intra-community supplies of goods will apply and the concept of chain transactions will not applicable over there.
Conditions Laid Out for the Intra-Community Supply of Goods to be Zero-Rated
- The UK along with other member states of the EU had already applied a condition to treat the intra-community supply as Zero-rated, that the customer to be VAT registered in a member state of destination.
- In many 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
- The new rules carried out, has some formal conditions that must be legislated for, so, for the intra-community supply of goods to be zero-rated,
- The customer must be VAT registered in a member state other than the member state of origin
- The supplier must obtain the customer’s VAT registration number and the same must be shown on the sales invoice including the 2-letter country prefix code
- The supply must be reported on the EC Sales list
- A supplier must be in possession of appropriate documents (as listed in the new rules) which verifies the removal of or transport of goods from the member state of origin.
Many VAT-registered businesses with a taxable turnover above the VAT threshold are now required to use the Making Tax Digital (MTD) service to keep records digitally and use software to submit their VAT Returns. Cygnet’s R7VAT is committed to helping the enterprises stay compliant and meet the HMRC MTD requirements.
If you are looking for any kind of assistance in VAT automation in the UK, then you can get in touch with our experts. Our VAT automation solution experts can assist you with any of your VAT-related queries and can help you ease your VAT filing process. You can also go through our Blog UK MTD 2020: Some Major Reforms for Businesses, where we discuss the changes and its effect on the businesses.
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