Businesses involved in the movement of goods often have complex supply chains involving multiple parties. As a result, navigating successful VAT compliance and meeting customs requirements can be a tricky business. For organisations operating cross border or considering scaling up operations, there is a lot to consider.
The following article will provide actionable guidance on how to understand proposed transactions flows from a VAT point of view. It will outline the steps to take to carry out transaction mapping, with key information on how to identify the basis for application of the reverse charge, specific considerations for transactions like intra-EU dispatches and exports. Read on to understand how to effectively prepare for transaction mapping and the key things to consider.
Start at the beginning
Supplies of goods involving more than one country can lead to complicated VAT issues. It is important to understand the correct VAT treatment before an order is accepted or placed, as failing to consider, and follow, the correct VAT treatment could result in VAT that cannot be recovered or a penalty for late payment of VAT due – as well as the cost of compliance. Equally, charging VAT incorrectly to a customer could impact the relationship or even result in a partially unpaid invoice.
It is also important to understand the correct VAT treatment of a transaction when setting tax codes in ERP systems e.g. SAP or MS Dynamics. But it is not just about the correct VAT (or not) on the invoice; it is also about proof required to support exemptions, invoice formalities, additional reporting, correct Incoterms etc.
Transaction mapping is an essential step which can assist in understanding these processes. The best way to display all relevant information in a meaningful way is to produce a matrix that shows the transaction and all relevant considerations. This can then be used as a reference document by commercial teams placing or receiving orders, by finance staff processing invoices and by IT staff when setting up new tax codes.
What information will you need to include?
Since the matrix will be used by non-tax staff, the starting point is to identify all flows and document them so that they are easily understood. They can then be converted into VAT speak to assist with coding – e.g:
“send goods to France to be packaged and then sold” becomes
“transfer of own goods followed by a local sale” – which involves two VAT transactions.
The transfer of own goods is straightforward – the supplier reports a dispatch from The UK to France. The subsequent local sale is more problematic and the first consideration is whether the supplier must charge VAT, or does an extended reverse charge apply? If there is a reverse charge – what is the basis?
The most common rule is that the reverse charge applies where the customer is established and the supplier isn’t. But the reverse charge can apply where the customer has a non-established VAT No or has appointed a fiscal representative. Different rules can apply if the customer is a non-taxable legal person (hospital, university etc).
And the reverse charge may not apply if the supplier has a local VAT No. It is therefore essential to have VAT profile information for each customer to be able to apply the reverse charge correctly.
Other transactions have different considerations:
For exports it is necessary to distinguish between direct exports where the supplier ships the goods and indirect exports where the customer collects the goods. For indirect exports it is necessary to establish the VAT profile of the customer in the Member State where the goods are exported from.
Intra-EU dispatches are relatively straightforward where only two parties are involved. Where three or more parties are involved there is a chain transaction and it is necessary to consider who transports the goods; can the triangulation simplification apply; does the relevant Member State allow triangulation – some Member States do not allow triangulation if the middleman is registered in either the Member State of dispatch or arrival or both and some Member States do not allow triangulation with more than three parties.
What should the outputs be?
The basic output will be a matrix showing the VAT treatment of each transaction reviewed. Once the VAT analysis is complete, the matrix can be expanded to include reporting requirements (EC Sales List, Intrastat etc.) and also whether proof is required to apply an exemption – and who must have this proof. Additionally, where a transaction is exempt from VAT the matrix can also detail the ‘mentions’ that must appear on the invoice.
What can the transaction mapping matrix be used for?
Once complete the matrix has several uses:
- It can be used by commercial teams to understand the VAT implications of proposed transactions which helps when setting process.
- It can be used by the commercial management to restrict the activities of commercial teams – e.g. the matrix can state what incoterms cannot be used as they may create additional VAT obligations. The Incoterms which regularly cause issues are Ex Works and DDP.
- It can be used by finance staff to assist in processing AP and AR invoices.
- It can be used by finance/IT staff to investigate existing tax codes or to set up new tax codes.
- It can be used to identify all transactions that require an additional VAT registration to be in place in another country. Such instances can be reviewed to see if there are alternative ways of structuring the transaction to remove the need for the additional registration.
How often should the transaction mapping matrix be updated?
Businesses are in constant evolution, and how VAT is applied from both a legislative and practical perspective is dynamic. It is therefore important to review and update the matrix for new flows, changes in existing flows or changes to legislation and application.
And what about Brexit?
Businesses that have transactions that involve the UK or UK businesses with operations in the EU can easily identify which flows will be affected by a hard Brexit and what changes will be required.
As with all things related to accountancy, maintaining a handle on detail and effectively planning and reporting is fundamental to transaction mapping. Understanding transaction flows before orders are place if essential, but it is never too late to start effectively mapping and developing a matrix to ensure VAT compliance in all the nations you already operate or are considering expanding into.
David Stokes is Senior Consultant at Accordance.