Applying the Domestic Reverse Charge
When a business starts to undertake activity in a new country, it can sometimes feel like a bit of a “leap into the dark”!
This can especially be the case with VAT across the EU because although every country is, at a high level, subject to the same legislation (EU VAT Directive 2006/112EC) individual countries have sufficient scope to alter their national rules and apply unique procedures and rules. And even where that scope doesn’t formally exist, differences in how a rule is implemented also occur between EU Member States as a consequence of varied interpretations
The Reverse Charge (R/C)
The R/C is a mechanism whereby the obligation to account for VAT on a sale is shifted from the supplier to the recipient. This is achieved by the recipient acting as if it
has both received and made the supply, because they have to account in their VAT return for the VAT due on the sale whilst also recovering it as a cost. The R/C has the effect of removing VAT from the cash flow of transactions and hence it is becoming an important tool in the eyes of some tax authorities to help combat VAT fraud. This means the application of it is growing in certain territories.
New trading patterns
One of our UK clients recently started to trade with customers in France and as a result, asked us for advice on the VAT implications of this new venture. The intended business activities saw our client importing goods into France, and then delivering them to the customer’s depots, also in France.
We advised that a VAT registration wouldn’t be needed in France because of a domestic reverse charge applying when the goods were sold to the customer. However, the downside of this was that the import VAT could only be recovered via a refund directive claim, which would take some time to process and obtain compared to the relative ease of including it on a VAT return.
Optimising Supply Chains from a VAT Perspective
To assist our client we worked with them to review other possible supply chain options which would maintain the existing costs and time for delivery but generate higher VAT
efficiencies. To this the end, we obtained a VAT registration in Spain and the imports were re-directed to arrive there as well.
This slightly impacted on the logistics of delivering the goods but was more than offset by the fact that import VAT could be recovered on a regular basis via a Spanish VAT return whilst there was still no need to charge output tax. This was possible because of the different way that Spain applies some of its VAT rules compared to France. As a result of taking this advice our client was able to enjoy a more efficient VAT position compared to having just accepted the status quo.