More recently, clients have been approaching me to express their frustration at EU suppliers wanting to charge them local VAT, where the supplier is being asked to ship within the EU. My honest answer is the same as the suppliers, in the absence of an EU VAT registration number they have little choice. They have no basis to treat the sale as an intra-community supply and it's not an export. Our focus now shifts to facilitating solutions where the goods are purchased and sold within the EU. Clearly, there are a number of different ways of doing this and the key is to implement the right structures in the right countries to operate your supply chains efficiently. To do this requires a clear understanding of your local obligations in the territories where you operate. Logistics should drive this, but there are VAT considerations that should be considered as part of the process. We’ll share experience in terms of how businesses are meeting these challenges and some of the different fulfilment options that are commonly being used.
Fulfilment options
Clearly, one of the key supply chain issues is speed to market. How quickly can you fulfil an order? The hard border between the UK and EU has caused delays. In response to this, many businesses have explored options for maintaining EU stocks. This can involve third-party logistics (3PL) arrangements, third-party warehousing and at its most involved, setting up EU subsidiaries to operate EU warehouses.
"Aside from speed to market, there are other real benefits to maintaining an EU stock where you import goods from the rest of world".
Let us use China as an example here. In situations where you can directly import goods into the EU from China, rather than import into the UK to then forward to the EU, you remove any potential issues around ‘double dip’ customs duties. Customs duty would only be payable in the EU and no customs duty costs would be incurred in the UK. You can also import containers or pallets, rather than individual packages which can significantly reduce handling costs and customs clearance fees.
Third-party logistics (3PL) arrangements
3PL arrangements provide an outsourced logistics and distribution solution, which can include transportation, clearance, warehousing, picking and packing, and forwarding services. The 3PL providers will also often act as a limited fiscal representative (Netherlands) or fiscal representative (Belgium) to facilitate VAT and customs duty compliance in the respective member state. In my view, where you don’t have a significant presence in Europe, this provides a neat end-to-end solution and a good deal of flexibility in terms of managing your EU VAT position. A couple of caveats; I am not saying it is a cheap solution (that would be for you to decide) and I am aware (from experience) that limited fiscal representatives may refuse to facilitate/report things like EU triangulation transactions. Where you have a direct EU VAT registration in a member state, the EU triangulation simplification can be used to facilitate buying/selling arrangements where you purchase in a second member state and sell/deliver directly to a third member state. Our clients have primarily used 3PL solutions down the west coast of the EU - Netherlands, Belgium and France. Germany has also been an option, although I have mixed views on Germany (a personal opinion which I will expand on below).
"The approach of the tax authorities is a key consideration. As I said before, logistics is the overriding consideration, but ease of customs clearance, cash flow and tax compliance are also front of mind".
In my view, the Netherlands is normally the most pragmatic tax authority to deal with. It also has a long and well-established reputation for logistics centred around Rotterdam and Amsterdam. Belgium works, we have worked with 3PL providers centred around Port of Antwerp. France can also be the right solution if you are supplying from the UK through the Channel Tunnel or Port of Dover (and others). Germany doesn’t feel like the most immediate point of entry into the EU and recent experiences of the time taken to process DE VAT registrations and the requirements for Customs (indirect) representation in Germany can make clearing goods in Germany costly and time-consuming. We have also had significant differences of opinion with Indirect Representatives in terms of the method of valuation to be used for clearing goods. My cynical thoughts are that this could have more to do with managing their own potential liability/exposure than the correct application of the Customs valuation methods.
Direct registration in an EU member state
Direct registration provides an EU mechanism to reclaim or account for import VAT, the ability to account for local VAT within the EU and the ability to provide an EU VAT registration number when needed for intra-community supplies of goods. Where businesses are not looking for a full 3PL solution, direct registration in your ‘point of entry’ member state (to the EU) makes the most sense. If you cannot achieve a single ‘point of entry’, I would encourage you to try and limit the number of member states where you import goods on a ‘Delivered Duty Paid’ (DDP) basis. Perhaps you adopt a cluster approach and use two or three EU hubs to fulfil customer orders around the rest of Europe. This approach could help manage the logistics challenge and keep the EU VAT compliance position as ‘light’ as possible. Where you are only trying to facilitate EU-to-EU supply chains, it is important to decide which member state makes the most sense.
"In very simple terms, it is likely you would register for VAT in the member state where your key EU supplier is based or, failing that, where your key EU customer is based."
The EU triangulation provisions could help you to facilitate any other EU supply chains. Depending on the member state, direct registration may require fiscal and potentially customs representation. In most cases, appointing a VAT agent may suffice. You could also explore whether an overseas VAT compliance technology offering could provide the right service. My advice would just be clear in terms of what level of service you can expect. VAT agency tends to be more responsive and is able to manage the relationship with the local tax authority more effectively. A technology solution can be more cost-effective when the wheels are on and you provide the right information in the right format. On the flip side, the issue resolution and communication side of things can leave a lot to be desired.
Final thoughts
There is so much to consider above. From a financial planning perspective, logistics should always drive the conversation but it is important for the VAT position to be managed effectively to reduce cost and ensure compliance. Getting it wrong can result in significant delays and additional costs. It is not a one-size-fits-all scenario and if you take the time to map and understand your supply chains, making sure you have the right ‘building blocks’ in the right places, you can go a long way to create as smooth a process as possible with minimal or no surprises.
If you have any questions about the topics discussed above or need support with your supply chains, the team would be happy to help.
Andrew Needham - VAT Partner
Haines Watts
