Who should read
There are multiple changes –
- Extending the digital supplies rule to most supplies – meaning digital supplies are more likely to result in an EU VAT registration requirement
- Introduction of a single VAT registration where there is a movement of own goods within the EU
- Changes to call off stock rules – improving the scheme
- Mandatory application of a domestic reverse charge
There will be an extension of the one stop shop VAT return system for the EU. This is helpful, but will require careful management by businesses.
In this article we consider the impact of a domestic reverse charge, applying to business to business (B2B) sales to customers in the EU. We will provide commentary in respect of the other changes in other articles.
Bottom line - if you sell goods to EU business customers then you need to be aware of these changes.
What is happening
From 1 January 2025 The EU will introduce a mandatory domestic reverse charge mechanism for B2B supplies across the EU. This is currently optional, and applied only in the Netherlands, France and Italy.
What is the proposal
Where goods are sold by a non established tax payer (no place of belonging in the customers country) to a business customer in the EU the customer will account for the VAT due on the transaction NOT the supplier. This removes the need for a VAT registration for the supplier in respect of these transactions. It also removes the right for a VAT registration.
Why is this being introduced
There has been a move to ensure consistency in the VAT system for a long period of time. There is a continual effort to simplify VAT accounting system. This is to make it easier for businesses to comply and ensure effective collection of VAT due. This change is intended to further these objectives.
However, the reality is every simplification seems to make VAT more complicated. In this instance it will bring a change to the current system and result in a shift in accounting responsibilities from the supplier to the customer. This could result in the cancellation of existing EU VAT registrations.
This is an important change for UK businesses looking to recover VAT in EU territories, particularly when they act as import of record and incur import VAT when the goods enter the EU. The safest and quickest way to recover VAT is through a VAT registration. If a registration is not allowed then there is a recovery mechanism that can be used, but historically it has been ‘patchy’ – claims can be rejected on a technicality.
For example -
One business had a German VAT claim in excess of £500k. The invoice to support the claim was a photocopy and therefore rejected. There was no doubt or dispute that the VAT had been incurred but this was ignored. The approach adopted by the authorities was subsequently held to be incorrect by the ECJ, but too late for this particular claimant as the claim had fallen out of time.
The European Commission have taken infraction proceedings against some member states to force them to make payment of valid claims and not ignore them.
Actions
Businesses will need to understand exactly what these changes will mean for them. There needs to be some planning to ensure that processes are compliant. There should be interaction with customers to ensure that all parties understand the new procedures. Any risk of VAT ‘leakage’ should be considered.
UHY’s view
It would have been helpful if these proposals had been implemented at the time of Brexit – as the changes at that time resulted in a lot of change and cost for many businesses. However, the decision to leave the EU was the UK’s decision and these changes are intended to improve the EU VAT system now and could not be rushed.
Many businesses have had to consider and reshape their EU VAT trading model and that may now need to be unwound. New compliance and tax management models may need to be developed and implemented.
We have had to work around the existing ‘simplifications’ in some countries to help UK businesses manage their VAT cost and cash flow. It will be interesting to see if we need to do this more extensively to make these new rules work for UK businesses.
More EU VAT changes are looming in 2028. These relate to e-invoicing and digital submissions.
Change is inevitable, particularly in tax, more particularly in VAT. VAT is a young tax, only 50 years in the UK, maturing like a fine wine, becoming more complex and nuanced. And more expensive.
The next step
If you have any questions regarding this article, please contact Sean Glancy.
