Businesses involved in Chain Transactions
The supply and distribution of commodities, such as chemicals, fertilisers and food ingredients, can be achieved via a number of different supply chains.
In some cases these may be complicated and involve many parties including producers/manufacturers, distributors, traders, and resellers.
A large supply chain often occurs when distributors are involved who only deal in quantities that small resellers and intermediaries cannot cope with. When this happens it results in many supplies of a small value taking place in order to be more accessible for the final consumers in the market. More transactions though means more supplies to consider from a VAT perspective.
Complication can arise in these supply chains when an intermediary does not want his customer to know the identity of his supplier, normally so as to protect his commercial position. A consequence of keeping the two parties apart though is that the intermediary has to be “involved” in the supply chain – this means taking legal ownership and possibly managing the transport of the goods.
These actions can lead to some significant compliance obligations from a VAT perspective, some of which we have outlined below.
Importation of goods
When an intermediary sources goods from outside the EU with a view to selling them onwards to a customer inside the EU, it will normally be the intermediary who presents the goods to the Customs Authority in his own name (i.e. be the importer of record).
The intermediary will normally be required to pay import VAT (and duty) at the point of import. Where the Member State of import is the Member State where the intermediary is established then the recovery of this import VAT and subsequent sale will normally be straightforward.
However, if the goods are imported into a Member State where the intermediary is not established then it can get more complicated. For example, if the extended reverse charge applies then a VAT registration will not be required. Whilst this is a good thing in some respects (i.e. no need to complete VAT returns going forward), the import VAT must still be paid and because there is no VAT registration, it can only be recovered via a Refund Directive claim.
Recovering the VAT via a claim can mean waiting several months to receive the payment, which depending on the rate and amount of VAT could equate to a significant negative cash flow position compared to if it had been recovered via a VAT return. The cost of pre-financing such sums often has a severe impact on a business’s cash flow and hence businesses should look at the opportunities available to reduce the impact or need to pre-finance this VAT.
If a VAT registration is not required it is still necessary to consider the management of import formalities, particularly the need for an Economic Operator Registration and Identification (EORI) number. It is not always the case that one single EORI number will work in all jurisdictions and, where goods are imported into a Member State where the intermediary is not established, it is not uncommon for those goods to be delayed at Customs whilst the correct EORI number is obtained or applied for.
Delivery within one EU Member State
In circumstances where goods do not leave a Member State, local VAT will often be due. If the supplier is established in the country of delivery then it will most probably charge VAT on its supply to the intermediary.
How the intermediary recovers this VAT will be determined by the facts surrounding his onward supply to the final consumer. This needs to be considered so that as well as understanding how the VAT on costs will be recovered, the VAT registration position is also confirmed.
Many EU Member States have implemented domestic reverse charge procedures to mitigate the need for non-established suppliers to have to register for VAT in their countries. The rules surrounding these reverse charges are not always the same in each EU Member State however and in fact, it does not even exist in some.
It is important for the intermediary to understand if, and how, an extended reverse charge will apply to a particular transaction. This is essential for it to know the (any) actions it needs to take in respect of its VAT obligations. As a result, our advice is for businesses to always review the specific rules of a country where it might make a supply in order to have certainty on the issue.
Delivery between two Member States – Triangulation
In some circumstances goods are sold by a supplier to an intermediary and onwards to a customer who all belong in different EU Member States. However, the delivery will involve the supplier shipping directly to a final customer. This scenario is set out in the picture below:
This scenario can cause complications from a VAT perspective because of the combination of multiple countries, businesses and delivery method. However, it’s a supply chain that often takes place and therefore it is crucial that the VAT obligations are understood by all parties.
Usually in these circumstances a simplification known as “triangulation” can be applied. Where this is possible it can reduce the need for additional VAT registrations and also some compliance requirements. However, the application of it is subject to strict criteria and therefore its use must be considered ahead of a supply taking place in case its retrospective use is blocked.
Delivery between two Member States – Chain Transactions
In circumstances where the triangulation simplification described above cannot be applied, there instead takes place what is referred to as a chain transaction.
In a simple chain with only one intermediary there will be one instance of the goods being transported between countries but two supplies taking place. It is important to determine which supply involves the intra-community movement of goods and which is the domestic supply. This is because the consequences of getting it wrong can lead to the wrong VAT treatment being applied. When this happens it can lead to penalties, additional VAT to pay and incurrence of VAT that cannot be deducted.
We have significant experience of reviewing these types of chains (including those where multiple parties and movements across borders are involved) and applying the judgements set down by the European Court of Justice and the views of different tax authorities (which don’t always correlate) to determine the VAT treatments that should apply. Doing this ahead of time ensures that the correct VAT treatment is applied and minimises the chance of errors occurring.