Post Brexit divergence – the UK and EU VAT rules on zero rating exports are diverging

Takeaway: countries with very similar rules can apply them in different ways. Knowing the principles behind the rules is often as important as knowing the rules themselves. This is all the more important when trading in the UK and the EU.

The issue in detail

Although the UK is no longer a member of the European Union, the UK VAT rules have not changed significantly. Not being bound by decisions made by European Commission or the European Court of Justice had been one of the main arguments for leaving the EU, therefore the lack of major changes to the UK legislation has been a bit of a surprise to many.

And yet the two VAT systems seem to be slowly but surely diverging. This is not something most businesses realise, until they are faced with having to apply different outcomes to the same types of transactions, depending on which VAT rules apply.

What are these differences?

A recent example of the divergence in VAT rules comes from two tribunal cases, one with the European Court of Justice, the other with the Upper Tribunal in the UK. The cases are quite similar:

• they both deal with zero rating an export;
• in both cases the customer picked up the goods and exported them;
• in both cases the tax authorities did not want to allow the zero rating on grounds that the tax payer did not have sufficient documentation to back up the application zero rate;
• the rules around zero rating exports are almost identical in both the UK and the EU.

The outcome was completely different:

• In the EU, the tax authorities lost and the tax payer won the right to zero rate the supply even though they did not have evidence of the export;
• In the UK, HMRC won and the tax payer was not allowed to zero rate the export even though they had some evidence of the export;

We have provided background and technical explanations for the two cases (see here for the W case in the EU and H Ripley Co case in the UK).

To summarise the approach taken by the courts, in the EU, the European Court of Justice (CJEU) said that that as long as the substantive requirements have been met, the principle of fiscal neutrality requires the zero rating to be granted even if certain formal requirements have been omitted by the taxable persons.

In the UK on the other hand, the Upper Tribunal stated: “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. And from the proceedings in the case the evidence has to be with the UK supplier.

This is the opposite of the logic applied by the CJEU in the W case. Having documentation to justify the zero rating is considered a formal condition, not a substantive one. Whether the goods had left the EU and therefore the supply can be zero rated is an objective test according to the CJEU. As long as this is clear and there is no indication of tax evasion, the CJEU believes the zero rate should be applied.

In the W case the Polish supplier was not in possession of the evidence of removal of the goods from the EU. This information was however available to the Polish Tax Authorities. The CJEU decided this is not an issue for the purpose of applying the zero rate. In the H Ripley Co case there was no mention of potentially checking if HMRC already has the evidence that the goods were removed. The onus is on the supplier to provide the evidence of the removal of the goods from the UK.

We also note another interesting difference between the two cases: In H Ripley Co both HMRC and the courts reviewed the evidence in detail in order to determine if the goods that had been sold by the UK supplier and picked up by the customer were the same as those that were allegedly exported. This point was not questioned or discussed by the CJEU in the W decision. It was accepted that the goods removed by the customer from the EU were the same ones that were sold by the Polish supplier.

What does this actually mean?

This means that not all export evidence is equal and there will be differences in how the legislation is interpreted when trading internationally. Sometimes you can get different outcomes even where the rules are almost the same as in the case of the two cases discussed above. The difference will be in how the underlying principles are applied to the rules.

The result can be that some countries will place more emphasis on formal conditions being met while others will focus on whether the goods have been removed and if there is any evidence of fraud.

Knowing this in advance of undertaking exports can help avoid difficult audits and ensure the zero rate can be applied.

If you want to discuss these rules please feel free to reach out to us.