Part 1: VAT Identification of the Customer
We recently wrote about the EU’s latest report on the “VAT Gap” – the overall difference between the expected VAT revenue and the amount collected by each Member State. It is hoped that the VAT Gap will be substantially reduced by the introduction of a new definitive VAT regime, which is meant to simplify VAT compliance for business within the Single Market and minimise VAT fraud. The updated rules continue to build on the key foundation of the “destination principle” – that both goods and services should be taxable to VAT in the jurisdiction in which they are used or consumed. The first stage of this process is a series of measures adopted into EU legislation in December 2018 that have been collated into what has been colloquially referred to as the “2020 Quick Fixes” due to be implemented from 1 January 2020. The European Commission’s VAT Expert Group recently published Explanatory Notes providing substantial detail as to how these measures will apply.
This is the first in a series of four blogs providing explanatory detail to the EU’s “2020 Quick Fixes”. Here, we will discuss the updated guidance around VAT Identification of the Customer from 1 January 2020.
VAT Identification of the Customer
At present, EU VAT registered businesses can move goods from one EU Member State to another VAT free provided they are able to demonstrate the goods have been physically removed from the country of departure and delivered to another Member State.
Quick Fix: Going forward, it will be compulsory for the VAT registration number of the buyer to be identified and referenced in the transaction for that transaction to be treated as VAT free; the VAT registration number must be of another Member State to the dispatch country (but not necessarily the destination country). For the seller, in practical terms, this will mean:
- Inclusion of the buyer’s VAT registration number on the seller’s invoice; this effectively means that all affected businesses will need to obtain buyer VAT numbers in advance of fixing their price and generating an invoice.
- Cross-referencing and reconciliation of invoices with periodic EC Sales Lists or combined Intra-Community Transactions Declarations, depending on the country.
- A list of all VAT numbers will need to be maintained by the business in its accounting system or ERP, with regular checks against the EU’s VAT Information Exchange System (‘VIES’) database.
- If the customer is unable to provide their VAT registration number by the time the supplier must issue their invoice, the zero-rating cannot apply. However, the buyer can request a corrected invoice once the VAT registration number is later provided.
For clarity, where Member States issue more than one VAT identification number to a business, with each serving different purposes (e.g. for certain domestic transactions; VAT groups), only that which has attached a two-character ISO prefix (e.g. Germany = DE), and which is searchable via VIES, will meet the requirement.
Some EU countries have already unilaterally introduced some or all the “2020 Quick Fixes” in their local VAT legislations. However, the EU formalises these measures across the board from 1 January 2020. Businesses are encouraged to analyse the new framework to see how they can in turn make improvements and efficiencies in their Intra-Community goods movement processes.