VAT: Brexit warning for quality of export documents
Disguising the value and quantity of luxury goods on export documents cost an import and export business £152,181 VAT, as there was insufficient proof for zero-rating.
A&S Import and Export Trading Ltd (TC7520) has a customer base consisting of Chinese individuals who are keen to buy cosmetics, skincare products, luxury handbags and iPhones from UK suppliers.
They can buy these goods in China, but they fear the locally available items are counterfeits, so they would rather buy from the UK with the confidence that the goods are genuine articles.
The company registered for VAT on 1 May 2014 and its problems started when HMRC checked the January 2017 VAT return which showed a repayment for £48,474.
The refund situation was caused by zero-rated exports of goods to China, with input tax claimed when they were purchased by A&S from UK suppliers. But HMRC was not satisfied with the export evidence produced by the company, which must clearly show that the goods have left the UK and arrived in China.
The company director Mr Chen admitted that the paperwork “incorrectly described and undervalued the goods on the export shipping documents”. He said this was because the Chinese authorities required purchases of goods from overseas suppliers to be below a certain value. Also, the CN23 export form had misleading descriptions in order “to reduce the possibility of theft in transit.”
HMRC raised a VAT assessment for £152,181 covering the periods July 2015 to January 2017.
The problem for the company is that VAT Notice 703, para 6.5 has the force of law (VATA 1994 s30(6)). This requires that goods and quantities must be clearly identifiable on commercial documentation linked to exports as a condition of zero-rating: “Vague descriptions of goods, quantities or values are not acceptable.” The company could not “link any of the export documents with specific goods” and its appeal was dismissed by the court.
There is no doubt that A&S were exporting high-quality goods to customers based in China, and the FTT judge described the director as “an honest witness”. However, their paperwork had been adapted to ensure their successful passage of the high value goods into China, and this adaptation created a big VAT problem, plus a costly assessment for the taxpayer.
As the Brexit transition period ends on 31 December 2020, we can assume that goods exported to individuals in EU countries (B2C) will become zero-rated, and liable to import duties on arrival in the EU country. This means the export evidence issue will become important for all EU sales as well as other worldwide sales. Now is a good time to reflect on this potential challenge.
The A&S case serves as a timely reminder that HMRC has considerable powers when it comes to the zero-rating of exports. Here are three tips to consider:
Review the evidence
Zero-rating needs to be underpinned by a combination of official and commercial evidence (eg authenticated sea-waybills or air-waybills, bills of lading, certificates of shipment) plus supplementary evidence such as details of the customer order and subsequent payment. It is essential that this important paperwork is properly retained by exporters to support zero-rating. The evidence will consist of a bundle of documents in most cases (VAT Notice 703, section 6).
Consider timing of the evidence
An exporter has three months from the time of export to acquire the necessary evidence to support zero-rating. If this time deadline is not met, the sale should be treated as a UK supply of goods, ie subject to 20% VAT in most cases. It can be treated as zero-rated if the evidence is subsequently received in the future (VAT Notice 703, paras 3.5 and 11.3)
Can specific goods be identified?
The crux of the A&S case was that the company clearly exported goods to China which qualified for zero-rating, but it could not link any of the export documents it held to specific goods. The reasons for the paperwork deficiencies were linked to other commercial factors but these issues were not accepted by HMRC. The evidence needs to be a very high standard!