Zero-rating for indirect exports

The rules for zero-rating supplies of goods for indirect export outside the European Union have changed.

HMRC has released Revenue & Customs Brief 26/13 VAT: Changes to the rules for zero-rating supplies of goods for indirect export outside the European Union.

Provided that you meet the conditions for exports, together with supporting evidence, goods exported from the EU are zero-rated.

The details of these conditions and the evidential requirements can be found in VAT Notice 703: Export of goods from the United Kingdom.

An indirect export is where goods are collected or arranged to be collected by an overseas customer.

Under Article146(1)(b) of the European Directive 2006/112, zero-rating for indirect exports is allowed provided that the overseas customer does not have a permanent establishment in the supplier’s country.

Currently the UK only allows zero-rating for indirect exports provided it meets an additional condition:

  • that the overseas customer is not registered for VAT in the UK.

The additional condition can be found in Regulation 129 of the VAT Regulations 1995 and is seen to be in contravention of EU law.

From 1 October 2013 the regulation is amended to comply with EU law, only removing the condition about VAT registration, the permanent establishment will remain in line with EU law.

The regulation is to be amended by statutory instrument.

Included in Brief 23/14 are four illustrative examples that help demonstrate when the changes will make a difference to the supply:

Example 1

A UK VAT-registered business supplies goods to a customer established in the US.

That customer is also VAT registered in the UK but has no business establishment here. The customer arranges for the goods to be collected from the UK supplier for subsequent export outside the EU.

The supply is eligible for zero-rating as an indirect export. Regulation 129 of VAT Regulations 1995 will be amended to fully reflect the provisions of EU Law.

Example 2

A UK VAT-registered business supplies goods to a customer established in China.

That customer also has a business establishment in the UK and is VAT registered here. The goods are collected by the customer and exported outside the EU.

This is an indirect export involving a supply made to a customer who is established in the UK. As such, the criteria in the revised Regulation 129 of VAT Regulations 1995 are not met and the supply is not eligible for zero-rating.

Example 3

A UK VAT-registered business supplies goods to a customer established in South Africa.

That customer also has a business establishment in the UK and is VAT registered here. The goods are sent direct to a destination outside the EU by the UK supplier.

This is a direct export and the supply is eligible for zero-rating under the provisions of section 30(6) of VAT Act 1994.

Example 4

Customer (A), who is established in Canada, orders goods from UK VAT-registered supplier (B).

The Canadian customer is also VAT registered in the UK but has no business establishment here.

The UK supplier (B) sources the goods from another UK VAT-registered supplier (C). The overseas customer (A) collects the goods from UK supplier (C) and subsequently exports those goods outside the EU.

There are two separate supplies in this scenario: from UK supplier (C) to UK supplier (B) and from UK supplier (B) to Canadian customer (A). The supply from (C) to (B) is a standard-rated supply and UK VAT is due.

The final supply in this chain (from (B) to (A)) is eligible for zero-rating under the provisions of Regulation 129 of VAT Regulations 1995 (as amended).

Next steps

If you or your clients believe that past transactions have been affected by HMRC’s incorrect treatment, HMRC is encouraging business to make a claim under Section 80 of the VAT Act 1994

The usual condition of the four-year time limit, setting off, providing backing evidence and unjust enrichment apply, and  can be viewed in VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.

For more information, visit the 'Related links' section on this page.