Exporting, VAT and some HMRC regulations

Exporters need to be clear, when shipping goods outside the UK, whether they are involved in a direct or indirect export, with regards to the treatment of VAT.

Value Added Tax (VAT) is a major source of tax income in the United Kingdom (UK) and the rules and regulations governing its use can be complicated.  VAT is dealt with by HM Revenue and Customs and they operate under a series of procedures which have different codes (for example anything relating to exporting starts with the code VEXP).  These procedures refer to the different aspects of monitoring and control of the VAT system in the UK.

There are circumstances when a UK VAT registered business can supply goods without charging VAT. These scenarios can change and so it is good practice to check with the UK Revenue and Customs to ensure that these systems are still in place.  Please note that the following information comes from the UK Revenue and Customs website and that this article is just an introduction to this subject.  It is not a complete or full description of all the factors that need to be considered.  If more detailed information or advice is required, please do contact your local Revenue and Customs office or a professional VAT advisor for assistance.

The following procedures are all relevant when exporting goods from the UK to destinations outside the European Community (EC) which allow for the goods to be zero-rated.  Please note that anyone involved in exporting and wishing to ensure they comply with all UK VAT regulations should also obtain a copy of Notice 703 from HM Revenue and Customs.

In addition, this article does not deal with the VAT procedures for shipments within the EC, nor does it cover every aspect of international trade and VAT regimes.  For example VEXP50100 relates to the export of motor vehicles outside the EC and the VAT treatment for that type of export.  VEXP50520 relates to the export of goods using couriers and fast postal services.  The following information relates to the procedures that concern concept of direct and indirect exports outside the EC and the various VAT treatments that allow the exporter to zero-rate the VAT on those shipments.  It helps to know which procedure does what.

VEXP 20300 – Principles of Direct and Indirect Exports
Legally there is a difference between direct and indirect exports when considering VAT, even though the end result appears to be similar.  A direct export occurs when the complete transaction from supply to export is under the control of the UK supplier or the owner of the goods.  The location of the customer is not a relevant factor provided the goods are exported under the control of the supplier.  The liability of such supplies is legislated for in Article 146(1)(a) of The Principle VAT Directive 2006/112/EC.  The supply of goods is deemed to be zero-rated when the goods have been either exported outside the European Community (EC) or shipped for use as stores on a voyage or flight to an eventual destination outside the UK.  The goods can either be handed to a freight forwarder, sent in the post or exported in baggage using the ‘Merchandise in Baggage’ (MIB) procedures.

An indirect export occurs when the supply has been made to an overseas customer i.e. passed to this customer whilst they are in the UK.  In this respect the overseas customer is defined as someone who is not resident or registered for VAT in the UK, does not have a business establishment in the UK from which taxable supplies are made, or is an overseas authority.  The liability of such supplies is legislated for in Article 146(1)(b) of The Principle VAT Directive 2006/112/EC.  The supply of goods is deemed to be zero-rated when they have been dispatched or transported outside the EC by, or on behalf of, a customer not established within the EC. The exception is where the goods are transported by the customer themselves for the equipping, fuelling and provisioning of pleasure boats and private aircraft or any other means of transport for private use.  The overseas customer must not be resident in the UK, must not be a trader who has a business establishment in the UK from which taxable supplies are made and the goods must be exported to a destination outside the EC.

VEXP 80100 – Direct Export
An example of a Direct Export is where a UK VAT registered business supplies goods and arranges to export them to a destination outside the European Community (EC) on behalf of the customer.  There is no connection between the UK supplier and the customer.  Under this scenario the supply may be zero-rated under section 30(6) of VAT Act 1994 provided that the conditions in Notice 703 are met.

VEXP 80200 – Indirect Export
An example of an Indirect Export is where a UK VAT registered business invoices goods to an overseas customer.  The overseas customer arranges for the collection and delivery of the goods to a destination outside the EC.  The goods are usually collected by a freight forwarder working on behalf of the overseas customer to arrange the physical shipment of the goods.  There is no connection between the UK supplier and the customer.  Under this scenario the supply may be zero-rated under regulation 129 of the VAT Regulations 1995 provided that the conditions in Notice 703 are met.  In addition, if the overseas customer collects the goods and exports them (e.g. as Merchandise in Baggage) the supply may be zero-rated under regulation 129.

VEXP 80310 – Exporting to Associated Companies outside the EC
When a UK company has a non-EC permanently established branch and the parties are part of the same legal entity, or when a UK supplier delivers the goods to the non-EC permanently established branch and sends the invoice to the UK associated company, then this is deemed to be an example of a direct export.  Consequently, the supply may be zero-rated under section 30(6) VAT Act 1994, provided the conditions in Notice 703 are met, because the UK Supplier is responsible for the physical export of the goods.  This applies equally where the transaction is invoiced to the UK company or where the invoice is sent to the non-EC branch.

VEXP 110010 – Assurance Procedures
The principle purpose of VAT checks on a supply of goods for export is to ensure that zero-rating has been correctly applied.  The supplier must ensure that the conditions laid down by the Commissioners in regulations and Notice 703 have been fully satisfied otherwise they will not be entitled to zero-rate their supply.  It is not sufficient for the exporter to claim that the goods have left the UK.  Checks will confirm that the transaction is genuine and properly valued; the goods exist; the description, quantities and values shown on the commercial documents are correct and linked to the evidence of export; the Commissioners’ legal conditions have been fully met, the goods have been exported from the UK within the specified time limits and the exporter is making the required adjustment in their records to account for the VAT if the conditions have not been met.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other articles on International Trade on the Point to Point Export Services website at www.point-point.com

Comments are closed.