Possible Consequences of not Reviewing Contracts Post-Brexit

David Stokes
March 18, 2021

Given the complexity of international VAT and the potential risk, pitfalls and associated costs, finance directors face a predicament. Unlike direct taxes, which tend to be retrospectively determined, VAT is effectively calculated in real-time. It’s linked to various aspects of the supply chain. If the related transaction has incorrect VAT calculations or erroneous codes, these errors can result in unintended financial consequences. These include fines, loss of the right to deduct input VAT etc.

For most finance departments their first and only involvement with VAT is when they are processing sales or purchase invoices. In the absence of a customer purchase order, there is often little, or no appreciation of what sales invoices are coming through until they need raising. However this may be too late. The transaction completing crystalises the VAT liability and the taxpayer cannot make any retrospective changes.

Incoterms and VAT

One component of VAT determination for goods is an understanding of if they are moving across a border and if yes, who is responsible for moving them – supplier or customer.

Within international trade the Incoterms issued by the International Chamber of Commerce are used to determine which party has responsibility for which aspect of the movement.

Within the EU the Incoterm used doesn’t determine the correct VAT treatment of a movement of goods. Although it can help to understand the intention of the parties. Most contracts for the supply of goods within the EU do, nevertheless, mention incoterms. In many cases contracts quote “Delivery Duty Paid” (DDP) even though it is often inappropriate. If a French company sells goods DDP to a German customer then the incoterm implies that the French supplier is responsible for all taxes due on the delivery. But if this is a B2B transaction, meeting the exemption conditions, then it’s the German customer who accounts for the acquisition tax.

While the UK was a member of the EU, incoterms weren’t really relevant for VAT. It also had little impact on the ability to move goods within the EU. It also had little impact on the need for EU VAT registrations since in many cases the customer would account for acquisition tax.

Unintended Consequences

But now, post-Brexit, UK companies may have “DDP” contracts with EU customers where there are potentially unintended consequences:

  • DDP requires the UK seller to export the goods from the UK and then import them into the EU. This gives rise to import VAT and possibly duty which may not be catered for in the budget.
  • DDP also requires the UK seller to account for local VAT unless the extended reverse charge applies – and for this, a local VAT registration may be required resulting in yet more cost and possibly a delay in delivery.

Renegotiate Incoterms

Now the only possible course of action is to renegotiate incoterms. This will take time and will only work if the goods haven’t already been delivered.

If the goods have been delivered but the required VAT registration is not in place there is the possibility of penalties and interest for late registration and late payment of VAT.

Automation can help here. A tax engine can process order information and determine the correct tax code. This is when placing the order and not when raising the invoice.

If this gives an unintended result, there may be time to renegotiate the incoterms or arrange the relevant VAT registration.

Take Action

Need help reviewing your VAT position and contracts post-Brexit? Find out how Sovos can help your business simplify VAT determination for every transaction, in any jurisdiction.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

David Stokes

As an FCCA of many years, David brings a commercially focused accounting perspective to the treatment of European VAT issues. He specialises in the understanding of cross-border VAT transactions and has helped many clients map their flows to optimise their VAT position. He has successfully completed the VAT Forum’s ‘Expert in European VAT’ course and is a partner of the forum. As well as advising clients David also sits on several technology product development teams at Sovos.
Share This Post

EMEA
June 16, 2022
VAT on Non-Fungible Tokens (NFTs)

The recent popularity of non-fungible tokens (NFTs) has captivated investors, governments and tax authorities. An NFT is a digital asset that represents real-world objects such as a piece of digital art, an audio clip, an online game or anything else. NFTs are purchased and sold online and are typically encoded with the same software as […]

EMEA IPT
June 15, 2022
In Focus: Why is Italy’s IPT Regime so Challenging?

Tax compliance in Italy – where do we start? From monthly tax settlements to an annual declaration, prepayment, additional reporting and treatment of negative premiums – all these factors make Italy unique and one of the most challenging jurisdictions from an insurance premium tax (IPT) compliance perspective. Let’s break it all down: Insurance taxes IPT […]

EMEA VAT & Fiscal Reporting
June 15, 2022
Reciprocity Agreements and Why They Matter When Recovering VAT

Sovos recently hosted an online webinar on VAT recovery where we covered reciprocity agreements between the UK and EU Member States when making 13th Directive VAT refund claims. One of the questions that kept coming up is what are reciprocity agreements and why do they matter? Reciprocity When making 13th Directive refund claims, each EU […]

E-Invoicing Compliance EMEA
June 14, 2022
Draft Resolution Introduces Changes to Peru’s E-transport Document

E-invoicing was introduced in Peru in 2010, following the continuous transaction controls (CTC) trend in Latin American countries for a more efficient collection of consumption taxes. Since then, the government has rolled out measures to encompass a significant number of taxpayers under the country’s mandatory e-invoicing regime and advance new technical and institutional structures within […]

E-Invoicing Compliance EMEA
June 9, 2022
Belgium Steps Closer to Mandatory E-Invoicing

In line with the obligations set by the European Directive 2014/55 on electronic invoicing in public procurement, Belgium introduced a mandate for public entities to receive and process electronic invoices in 2019. For Brussels, Flanders, and Wallonia the initiative went beyond the bare minimum of the EU Directive requirements and introduced obligations to also issue […]