Apr
Three Triangulation Mistakes To Avoid In The EU:
Many UK companies are deeply embedded in EU supply chains and actively trade on the continent. Some of them buy and resell goods in the EU and often apply the triangulation simplification.
VAT rules on cross border supplies of goods are quite complex and have been through a number of changes in the past years. Some were brought by Brexit while others were the result of the EU attempting to overhaul its VAT system to facilitate trade.
Unfortunately, this complexity has led to some UK companies not meeting their VAT obligations and potentially exposing themselves to significant fines, penalties and liabilities.
One of the biggest and most common issues we come across is UK businesses incorrectly applying the triangulation simplification. And again we have noticed a pattern of errors that causes the triangulation simplification to no longer apply which are usually relatively easy to avoid.
We have discussed below these causes and have outlined how to correct them and avoid similar problems in the future.
- No EU VAT number for triangulation
Before Brexit, many UK companies were buying goods from EU suppliers and selling them to EU customers in other countries, with the goods being shipped from the country of the supplier directly to the country of the customer.
At the time, having a UK VAT registration number meant that UK companies were eligible to use the so called “triangulation simplification”. When used correctly this simplification meant they could buy and resell goods without triggering VAT registration and payment obligations in EU other countries. A number of conditions have to be met in order to use the triangulation simplification, among which is having an EU VAT registration number.
While the UK was a member of the EU, all reporting obligations related to these transactions were made to HMRC who then passed on the information to other tax authorities.
Post Brexit however having a UK VAT number is no longer sufficient for a UK business to use the simplification. Without this simplification UK companies that buy and resell goods in the EU will need to register in at least one EU Member State. If they have agreed different commercial conditions with different customers and sell to multiple countries, they may end up having registration obligations in many EU countries.
The simplification is not exclusive to EU companies, but a UK business would need to be VAT registered in at least one EU country that is not either the country of the supplier or the country of the customer to use it.
- Not checking the other conditions for triangulation
Having an EU VAT number that is not from the country of the supplier or the customer is just one of several conditions to apply the triangulation simplification. Many businesses are not aware that other conditions also have to be met:
- All three parties have to be VAT registered in three different EU Member States, the supplier and the customer in the country of dispatch and arrival respectively, while the party in the middle in a third one.
- There needs to be just one transport of the goods from the country of the supplier to the country of the customer
- The transport must be arranged by the supplier or the intermediary, but not the customer
- Invoices following certain requirements need to be met, including a reference to the simplification being applicable by the intermediary and a designation of the customer as liable for self-accounting for VAT on the supply under the reverse-charge mechanism.
- Certain reporting requirements need to be met (e.g. the intermediary has to report the transaction under a special code in its EC Sales Lists).
It is crucial to check whether all conditions are met before applying this simplification, otherwise the UK business may trigger significant registration, compliance and payment obligations.
- Assuming the triangulation applies in all cases
Another significant issue we see with failed triangulations is assuming that any transactions that implies buying and reselling goods in the EU qualifies for the triangulation simplification. This is unfortunately incorrect.
Buying and reselling goods means that from a VAT perspective the rules concerning so called “chain supplies” need to be reviewed. Among chain supplies, a particular subcategory may qualify for the triangulation simplification if other conditions are also met (as listed in the previous section)
The purpose of the rules is to help determine which sale in the chain can be zero rated as the other ones will be subject to VAT and possibly require VAT registration.
Failure to recognise that the transactions are not eligible for the triangulation simplification can have serious consequences (e.g.VAT should have been accounted for, a VAT registration might have been needed). Fines and penalties will be due in most countries for non-compliance and late payment therefore the impact can be quite significant.
Can these mistakes be fixed and apply the triangulation?
One common misconception about the triangulation simplification is that it can also apply retrospectively. For example if you register for VAT in the EU after the transaction has taken place you can still apply the triangulation for past transactions. Unfortunately, that is not possible as the triangulation is an exception to the standard rules and the conditions to apply it have to be met at the date when the transaction takes place. If the conditions are not met then the standard rules will apply.
The simplification also has to be opted for which means, if an EU VAT number was available at the time but the transactions were not treated as a triangulation it is not possible to go back and amend as the option should have been exercised at the time.
The European Court of Justice has also confirmed the above points in the Luxury Trust Automobil GmbH case (C‑247/21) where it clearly stated it is not possible to retrospectively qualify for the triangulation simplification if the conditions were not met at the time when the transaction took place.
How can these mistakes be corrected?
If the triangulation simplification has been incorrectly applied then a “clean-up exercise” will be needed to bring reporting up to date. This typically includes:
- A review of the transactions that have been carried out in the EU should be undertaken. Its purpose is to determine the VAT obligations the business has triggered in the EU.
- Based on the above there may be a number of VAT registrations and reporting requirements, as well as VAT payment obligations that will be identified and will need to be actioned off.
- Some of the transactions may have been one offs, in which case a registration can be applied for, all relevant compliance be undertaken and immediately after reporting and paying the liabilities a deregistration request can be submitted.
- In other cases there may be ongoing reporting requirements, which means ongoing filing and VAT payments may be needed unless the business changes its set up.
- Fines, penalties and interest may be added by tax authorities for late registration, late filing of the returns and other statements as well as payment of the outstanding VAT liabilities (if any). In some cases it is possible to lower the level of these fines and penalties, however this will usually be at the discretion of the tax authorities.
- Once all of the above have been clarified and reporting and payment obligations have been brought up to date, it might be worth exploring whether there are more efficient ways to structure the EU set up of the business.
How can these mistakes be avoided in the future?
As mentioned above, a clean-up exercise is required first and foremost. The business should however also consider how to avoid similar mistakes in the future. We usually recommend the following:
- Advice should be taken before undertaking EU transactions. The advice should identify if the triangulation simplification can be applied.
- If the transaction is eligible for the triangulation simplification the business should check whether the conditions to apply it are also met in practice. For example are the invoices issued correctly, are the commercial conditions in the agreement in line with what is mentioned on the documentation etc?
- If the conditions for triangulation are not met, the exact rules that should be applied must be considered so that the business is aware in advance of any registration, reporting and payment obligations. Usually, these should be actioned off in advance of the transactions taking place.
- Where the transactions have not taken place, it might be worth considering whether it might be possible to change the commercial terms and condition so as to ensure the triangulation does apply or, if not possible, the number of registration and reporting obligations is minimised.
- If VAT registrations are needed as a result of these transactions the business should factor in how long they will be needed for. For example a VAT registration triggered by a one off transaction can be closed as soon as the reporting and payment requirements have been met.
Feel free to reach out to us if you would like to further discuss any of the above.
For more information please get in touch with our team of experts on:
contact@essentiaglobalservices.com