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HM Revenue and Customs Brief 20/11


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Issued on  16 May 2011

Accounting for acquisition VAT on intra-EU supplies - changes to the 'fallback' provisions


This brief announces a change in VAT treatment where a business uses a UK VAT registration number (other than for triangulation purposes - see below) to secure zero-rating of goods sent from one EU Member State to another, without arriving in the UK.

Under what is often referred to as the 'fallback' provision, use of a UK VAT registration number in these circumstances makes the customer liable to account for acquisition VAT in the UK. Significantly this does not cancel any liability to account for acquisition VAT in the Member State to which the goods are sent ('the Member State of arrival'). However, the UK VAT can be adjusted if VAT is accounted for correctly in the Member State of arrival.

The fallback rule is explained in paragraph 7.7 of Notice 725 (The Single Market). The change follows the judgement of the Court of Justice of the European Union (CJEU) in the joined cases of X (C-536/08) and Facet BV (C-539/08).

The CJEU decision

The issue before the CJEU arose from two similar cases. In each, supplies of computer goods were sourced from Member States other than the Netherlands and sent direct to customers located elsewhere in the EU. Dutch VAT registration numbers were used to secure zero-rating of the intra-EU supplies. The CJEU was asked to consider whether there was a right to deduct the acquisition VAT each of the taxpayers was required to account for under the Dutch equivalent of the fallback provision, as input tax.

In its decision the CJEU held that there could be no right to deduct acquisition VAT where it falls due under the fallback arrangements as the goods did not actually enter the Member State. In arriving at its decision the Court noted that if there were a right to deduct in these circumstances, it could jeopardise the operation of the normal rules as it would remove the incentive for the acquisition to be taxed in the Member State of arrival.

Effect of the decision

The decision provides a welcome clarification of what was previously an uncertain position. The liability to account for acquisition VAT where a UK VAT registration number is used in the course of an intra-EU supply of goods not involving removal to the UK remains unchanged. However, it is now clear that there is no right to recover the acquisition VAT as input tax. The only basis on which the UK VAT may be adjusted is where it can be demonstrated that acquisition VAT has been accounted for in the Member State of arrival.

Triangulation simplified procedure

Use of a UK VAT registration number as part of the triangulation simplification arrangements (see section 13 of Notice 725) is unaffected.

Impact on acquisitions of yachts in the UK

In 1997 Customs & Excise agreed to arrangements under which a UK VAT registered business could account for acquisition VAT in the UK on a yacht purchased from a supplier in another Member State without the yacht arriving in the UK. This was announced in Business Brief 12/97 (see below) which also permitted input tax deduction subject to the normal rules.

Following the CJEU decision the UK acquirer may now no longer recover the UK acquisition VAT as input tax. For this reason the agreement will cease to have effect and so is to be withdrawn from 1 June 2011. After that date UK acquisition VAT accounted for on a yacht that does not arrive in the UK will no longer be recoverable as input tax. However, as a transitional measure, any UK VAT registered business who, before 1 June 2011, entered into a contract for the purchase of a yacht and who intended to adopt the procedure as agreed in Business Brief 12/97, may continue to rely on those arrangements (including recovery of the acquisition VAT as input tax, subject to the normal rules) when the yacht is eventually delivered. But this is subject their holding satisfactory evidence of the contract and the date that it was agreed.

Extract from Business brief 12/97

Taxable acquisition of yachts in the United Kingdom

Customs & Excise have agreed to introduce a temporary arrangement concerning the liability to account for VAT on the taxable acquisition of yachts in the United Kingdom, in certain limited circumstances. This follows representations made on behalf of owners of large yachts and is effective immediately.

Where a VAT-registered business in the United Kingdom buys a yacht from a supplier in another Member State, and the yacht is being removed from that Member State to the place where it will be hired on charter, acquisition VAT may be accounted for in the United Kingdom without the need for the yacht to actually come here. The normal rules will apply for recovery of any input tax that is incurred and for accounting for output tax on any supplies subsequently made.

This arrangement does not affect the VAT treatment of yachts being imported into the EU from third countries, and will be kept under review.

About the Author

Crown Copyright 2011.

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Article Published/Sorted/Amended on Scopulus 2011-05-19 12:40:50 in Tax Articles

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