HMRC wins case on zero rating of exports in the H Ripley case

Who this will interest: businesses that export goods from the UK, especially those that use the EXW Incoterm (the customer picks up the goods and manages the customs clearance).

Key point(s): HMRC’s strict approach concerning the evidence required to zero rate exports was upheld in this case.

Essentia’s take: HMRC and the Upper Tribunal share the view that substantial evidence is required in order to zero rate the export of goods from the UK. The onus is on the UK supplier to show that the goods they have sold are the same as the ones removed from the UK and to provide evidence of this.

Action points: Check you have appropriate evidence for all your export transactions. Where evidence of the removal of the goods from the UK is unclear or incomplete we recommend undertaking a more thorough review. If necessary, you should reach out to suppliers, clients and partners that were involved in the export process to obtain relevant documentation.

The Case In Detail

UK VAT rules state that exports can be zero rated if the supplier can provide sufficient evidence that the goods have been removed from the UK.

The issue with zero rating is that in practice it’s not always clear what counts as sufficient evidence in the eyes of the tax authorities.

A new Upper Tribunal decision in H RIPLEY & CO provides more information on how the rules around zero rating work in practice. In this case the UK Tax Authorities (HMRC) won the case which means they will likely take a similar view in similar cases in the future.

Background to the case

H Ripley & Co Ltd (Ripley) is a UK established and VAT registered business that specialises in metal recycling and waste handling. The business had exported metal waste and zero rated the supplies. However, all transactions were carried out under an EXW incoterm, which means the customer organised transport, cleared the goods for customs

Evidence was available, however HMRC believed it was not sufficient evidence to zero rate the exports. The case was reviewed in the First Tier Tribunal and then made its way to the Upper Tribunal. In both cases however HMRC won.

UK VAT rules

For context HMRC guidance states that as a matter of principle the supply of goods outside of the UK can be zero rated provided that certain conditions are met. The zero rate is available in cases where the export is undertaken by the supplier but also where the customer manages this obligation.

In both cases evidence will be required to show that the goods were shipped from the UK to a destination outside of the country within specified time limits. Official or commercial evidence of the export must also be obtained within the specified time limits as well as supplementary evidence. In most cases there is a time limit of 3 months to physically remove the goods from the UK and a 3 month time limit to obtain evidence to support the zero rating.

If the supplier is the one clearing the goods for customs and arranging the transport it will usually have access to the official and commercial evidence required for zero rating purposes. However, if the customer will pick up the goods and clear the goods, then the supplier will have to rely on the information provided by the customer. The latter case will usually create more issues as the supplier does not have direct access to the documents or the third parties that managed the transport and customs clearance.

What documents were available in the Ripley case?

As mentioned, the issue at the heart of the Ripley case was that HMRC did not believe the available information was sufficient to prove the goods had left the UK and therefore the zero rate is applicable. The First Tier Tribunal and later the Upper Tribunal agreed with HMRC’s assessment.

So what documents were actually available?

• Proof of payment via bank transfer from the foreign customer using a foreign bank account;
• Sales invoices raised to a Belgian customer with a valid Belgian VAT number;
• Weighbridge tickets indicating goods had left the premises of the supplier and indicating the customer was the business mentioned on the invoices;
• CMRs (transport documents) although HMRC argued these were not fully completed;
• Documentation used for the cross border shipments of waste material;
• P&O boarding cards showing the goods were loaded onto a ferry – it should be noted these were excluded as they were not obtained within the given time limits mentioned above;
• Emails and WhatsApp messages between Ripley and the Belgian customer concerning the goods sold;
• It was noted that the weight stated on all documentation was consistent, which would indicate it was related to the same consignments according to the supplier.

HMRC essentially argued that none of the above documents actually showed the goods had in fact left the UK. In some cases this is obvious as proof of payment, sales invoices and weighbridge tickets will clearly not show where the goods were sent to. The CMRs, HMRC argued were not fully completed and therefore unreliable, the ferry boarding cards did not properly identify the goods to clearly show they were the same as the goods that had left the supplier’s premises while the emails and WhatsApp messages were inconclusive.

The Upper Tribunal’s view was that “even it could be said the evidence was not inconsistent with removal, it was also the case that it was not inconsistent with the goods remaining in the UK”. The Upper Tribunal refused to accept that the evidence, taken as whole was indicative of the goods having been removed and instead argued that no piece of evidence clearly showing the goods had been removed was provided.

What does the decision mean for exporters?

The Upper Tribunal made an interesting remark: “the correct question is whether the Appellant held sufficient evidence of removal, not whether the goods were in fact removed.”

In other words, it is not sufficient for the goods to have left, the test for zero rating purposes is whether sufficient evidence is available within the time limits set by the legislation to prove the removal took place.

Exporters should make sure they have evidence that shows:

• the goods sold to the foreign customers have been removed from the UK. The official evidence is the cleared export entry declared to the appropriate HMRC system.
• Transport documentation showing the goods were shipped outside of the UK should also be made available. However, as noted in the case, the documentation must be fully completed.
• Supplementary evidence which can be traced back to the sale of the goods and the movement outside of the UK.

And of course, the evidence must be available within the three month deadline.

Where EXW is used for the sale, the customer will transport the goods and clear the shipment for customs. The required documentation for zero rating will be with the customer, not the supplier. Ensuring this documentation is passed on to the supplier within the three months deadline will be crucial to ensuring the supply can be zero rated.

If you have any questions concerning the Ripley case or zero rating exports, feel free to reach out to us