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VAT on recharge of fuel costs to EU customer

UK entity incurs fuel costs. Recharge these to EU company as part of larger asset sale.

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Both entities are registered for VAT in their respective countries. Company in Finland has purchased some of our plant and machinery with c12m transition period. During that period we are able to recharge certain fuel costs incurred. How is VAT treatment determined for the recharge of this fuel?

Any help greatly appreciated, thank you.

Replies (18)

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chips_at_mattersey
By Les Howard
04th May 2021 13:50

Assuming the items are all exported from the UK to Finland, and you hold commercial evidence of export, the UK seller will zero rate. The Finnish purchaser will use the reverse charge mechanism to account for local VAT.
You should ask about movement of fuel and whether that is subject to Excise Duty and/or special licencing.

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By Kate CH
04th May 2021 14:02

Thank you. To clarify, the fuel is not leaving the UK, as it is consumed by the machinery during production. The machinery is part of a sale agreement and will be transferred to Finland end of 2021, in the meantime we are recharging some running costs.
So in response, no the fuel is not exported.

Many thanks

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Routemaster image
By tom123
04th May 2021 14:06

You have agreed a price for the machine.

How you reached that price (ie some for design, some for trials, balance on delivery) is up to you.

It is one supply, of a machine, that you are making.

Subject to the evidence rule, you would zero rate.

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By Kate CH
04th May 2021 14:10

Thank you. We are happy with the vat treatment for the sale of the machine, it is the recharge of related costs that I am struggling with.
Fuel costs incurred by us in UK, with VAT charged and reclaimed.
Recharge invoice raised to EU for these costs - should VAT be charged, and/or what narrative should be included?
Many thanks

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Replying to Kate CH:
Routemaster image
By tom123
04th May 2021 14:23

I don't see the transaction like that.

What are you 'recharging' fuel for?
Are you running tests on customer parts, or what?

You have incurred the spend, on your own behalf, to run the machine you are then selling to a customer.

The fact that you are describing it as a 'recharge' is a bit of a misnomer to me.

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By Kate CH
04th May 2021 14:33

We are holding the asset in the UK until it can be accepted by the recipient company at the end of the year. They supply our raw material, and are honouring a number of related costs to compensate for disruption caused from the delay in delivery and to ensure we can continue to trade until that point the asset is exported.
So you are saying that these additional items are wrapped into the overall price of the asset disposal, and should not be treated as a separate transaction (albeit billed separately)?
In which case we zero rate all related invoices - thank you for the clarification.

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Replying to Kate CH:
chips_at_mattersey
By Les Howard
04th May 2021 14:42

Interesting point. I would make it clear in the contract that the fuel is required as part of the supply of the machinery, and it can share the zero-rating.

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Replying to Kate CH:
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By VATs-enough
04th May 2021 14:53

Perhaps going back too far on basics here, but has the equipment already been sold? Has the customer paid? Or do you simply have an agreement at this stage to sell to them within the 12m period?

Just thinking of the export time limits here

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Replying to VATs-enough:
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By Kate CH
04th May 2021 15:02

Thank you, the transaction agreement was dated Nov 2020, with payment in stages, majority now received. Transaction agreement details disposal of assets, some to be transferred to Finland Nov 20, remainder to be held until Dec 21 latest.
Does that change things at all?

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Replying to Kate CH:
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By VATs-enough
04th May 2021 15:29

For zero rate to apply, goods must ordinarily be exported within 3 months of time of supply.
Time of supply defined as earlier of dates when goods are sent to customer/collected by customer, or you receive full payment.

Provided full payment not yet received, no issues with delay as no time of supply yet, so zero rate still possible.

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Jason Croke
By Jason Croke
04th May 2021 14:46

My initial thought is that this is akin to a management recharge, if you were recharging utilities, photocopier paper and other overheads incurred in the UK, over to a parent company in the EU, it would just be bundled up as "management recharge" and as a service, is outside the scope of VAT.

The other approach is that you are selling fuel to a non-UK business and as the fuel is not leaving the UK then you would charge UK VAT and the Finland company reclaims this VAT back via HMRC under what was a 13th Directive refund claim.

But I don't think that is correct because the fuel is being used by you for your benefit, it is not like someone from Finland has come to the UK for an event, incurred hotel and lease car costs and also fuel for the car and then is trying to reclaim via 13th Directive, because in your scenario, the customer isn't deriving any benefit at all from the fuel, you are, so this takes me back to it being a service and outside the scope of VAT.

One final thought is that are you even making a supply at all to the customer/ The customer is not buying the fuel from you for its own use, in a way, it feels a bit like compensation but if it's not compensation then we fall back to basics, for VAT to apply we usually need a supply for consideration, so here the consideration is the recharge, but what exactly are you supplying to the customer? It's not fuel is it?

ps. You ask a good question!

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Replying to Jason Croke:
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By Kate CH
04th May 2021 14:58

Thank you, this sums up what has been running through my mind pretty well! Initial thoughts were that this would fall under 'outside the scope' as a service to EU, rather than the export of goods. As you say however, are we even providing a supply at all?
I suppose we are - in substance - billing for compensation, as without this sale the business is not viable, we are remaining in production simply to bridge the gap between transaction date and export date. In which case is there any specific wording we should show on the invoice?

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Replying to Kate CH:
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By paul.benny
04th May 2021 16:18

It sounds like Customer is, in effect, paying liquidated damages for their failure to accept delivery at the previously agreed time. So yes, outside scope.

Alternatively, are you working as a toll converter providing equipment and labour to manufacture customer-provided materials into finished product on their behalf? (This arrangement being a temporary expedient until they can take delivery)

If that's the case, I think you would account for VAT on materials acquired and finished product despatched at full value.

(Agree with Jason - interesting question)

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Replying to paul.benny:
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By Kate CH
04th May 2021 16:45

Fortunately we fall into the first category! Many thanks for your reply, feeling more confident with an outside the scope decision.

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Replying to Kate CH:
Jason Croke
By Jason Croke
04th May 2021 16:25

Compensation isn't a supply, if I damage your car and offer to pay, I'm not supplying labour or material I'm just covering your loss.

I think the consensus is that it is either outside the scope because its services or its outside the scope because its compensation.

In terms of wording, perhaps "as per agreement, compensatory payment re. fuel" and that nails your colours to the flag post as a compensation invoice, which I think it feels more likely to be, than a supply of recharged services, but either way, is outside the scope of VAT, so cannot see HMRC having a major issue with it.

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Replying to Jason Croke:
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By VATs-enough
04th May 2021 16:45

Until HMRC has a further re-(re-think) on RCB 12/20.....

...and suddenly compensation isn't compensation at all. I think they (HMRC) would see this kind of thing as falling squarely into the "stuff doesn't happen in a vacuum" arena.

We could all find ourselves "..on thin ice my pedigree chums..."

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Replying to VATs-enough:
Jason Croke
By Jason Croke
04th May 2021 16:57

I understood that whatever guidance HMRC issue will not be retrospective, but will wait and see once they publish it.

Loving the "[***]" reference. I think all posts here should have a film reference within the replies, just to make it interesting.

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Replying to Jason Croke:
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By Kate CH
04th May 2021 16:46

Thank you, that's really helpful and much appreciated.

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