Your guide to 2020 EU VAT reform

Aug 25, 2019

By Vincent McCullagh 

From 1 January 2020, the VAT rules for EU cross-border supplies of goods will change in all EU countries. This 2020 EU VAT reform is also referred to as “the four quick fixes” and is a first step towards the definitive EU VAT regime.

In short, the four quick fixes are an attempt to:

  • harmonise call-off stock rules across the EU;
  • harmonise EU cross-border chain transactions rules;
  • harmonise the rules for documenting EU cross-border movements of goods; and
  • introduce a mandatory VAT ID number check for Intra-Community supplies.

The four quick fixes

Implementation of EU-wide call-off stock relief

Call-off stock generally refers to stock that is moved cross border within the EU to be held at a customer or third-party warehouse. The key identifier is that the customer is known before the goods are shipped, but the title in the goods only passes to the customer as the goods are called off.  

A new Article 17A has been added to the VAT Directive that requires all member states to apply call-off stock relief. This is a welcome simplification and should reduce the requirement for many businesses in Ireland to have to register for VAT in other EU countries. However, there are several strict conditions to be met to avail of the relief. If all are not met, the supplier will be required to register and account for VAT in the country of arrival.

There is a qualification to the relief that if the goods are destroyed, lost or stolen, the relief will not apply and, as a consequence, the supplier will be required to account for VAT in the country of arrival. It is common in call-off stock situations that there will be an element of wastage, spoilage, loss and indeed theft. However, the EU Commission has said that there should be a margin of tolerance for small amounts of missing stock.

EU cross-border chain transactions

In short, EU cross-border chain transactions concern supply chains involving three parties (or more) which entail the shipment of goods from one EU country to another.

The new VAT rules introduce harmonised criteria for determining which of the transactions in a chain is the intra-Community supply (ICS). This can change the VAT registration and reporting obligations for your clients and their customers.

Harmonised documentation requirements

The EU VAT Implementing Regulation has been updated to specify what evidence will be required to support the application of the zero-rate to an ICS.

Where the specified evidence is held by the supplier, it is presumed that the goods have moved across the border. If the tax authorities disagree, the burden will now be on the tax authorities to prove that the goods remained in the state.

Mandatory VAT ID number verification for EU cross-border supplies

Currently, the zero-rate can apply to an ICS, even if the customer does not provide a valid VAT number issued by another Member State. From January 2020, the zero-rate will only apply where the customer provides a valid VAT number, and the VAT Information Exchange System/ EC Sales List (VIES/ESL) returns are correctly filed. If these conditions are not met, the supply will be subject to VAT in the state of dispatch.

To avoid assessments and penalties, VAT validation and accurate VIES/ESL reporting will become essential.

Risk will be mitigated through the collection and maintenance of accurate customer data, a process that will often be enabled by technology.

How could this impact your clients?

These quick fixes are designed to simplify the VAT rules for b2b EU cross-border supplies of goods. The areas addressed are those that have given rise to the most confusion over the last number of years. Taxpayers have often found themselves caught in the middle of disputes between tax authorities, each trying to tax the same cross-border transaction.

However, these changes may result in less flexibility and require changes not only to current VAT treatments but also to existing supply chains, IT systems and accounting processes.

The precise impact on individual businesses will, of course, vary, but all companies involved in the cross-border trade of goods will be impacted by EU VAT reform, and that impact will be felt beyond the tax function.

As a result of the changes, every Member State will have to provide for call-off stock relief.  At the moment, some Member States have no form of call-off stock relief; even those that do have a variety of conditions to qualify for the relief. By aligning the conditions for the application of the relief, the new rules allow consistent processes to be put in place that will meet requirements across the EU. Done correctly, this should reduce multi-jurisdictional cross-border issues.

What should you do?

Now is the time for your clients to prepare for the changes. They should:

  1. determine which quick fixes will impact the current supply chains (‘must do’s’);
  2. determine which benefits can be derived from the quick fixes (‘nice-to-haves’);
  3. determine the actions and priorities for the stakeholders including sales, procurement, IT, tax, legal, etc.;
  4. initiate the process of change.

Vincent McCullagh is the Indirect Tax Partner in Deloitte.