The End of EU VAT Triangulation and the Impact on UK Businesses
Updated: Apr 6
The Free Trade Agreement signed at the end of 2020 made very little mention of the impact of VAT on businesses trading within the EU. Zero Tariffs and Zero Quotas were the most pressing concerns for companies looking to see minimal disruption to their trading activities. However, the complexities of VAT legislation and application for businesses are a stark reminder that difficulties remain when trading both out of and with the UK. One of these difficulties relates to the concept known as VAT Triangulation, essentially a transaction and supply of goods where there are three or more EU member states involved and the supply chain is not as simple as 1,2,3. Most importantly, however, is that the UK is no longer able to benefit from the VAT Triangulation simplification offered by the EU, which will therefore result in the need for UK businesses to have to register for VAT purposes when making sales into the EU.
If, however, all businesses to the transaction are established within the EU then cross border transactions within the EU may involve successive intra-EU supplies of goods involving three parties in three different Member States (MS) whereby there are two sales transactions, but one transport transaction. In other words, Company A (MS1) sells to Company B (MS2) who sells to Company C (MS3), but Company A supplies the goods directly to Company C. The goods which do not pass through MS2 are transported directly from MS1 to MS3. In this case, three different EU countries are involved in the sale transaction, but only two in the supply of the goods.
These types of transactions are referred to as triangular transactions and, when they occur, an EU VAT simplification method can be applied. Without this simplification, the intermediate supplier, Company B would otherwise have to register for VAT in either MS1 or MS3. This simplification, therefore, dispenses with the need for multiple VAT registrations, which is a boon for businesses already overburdened by the increased admin and costs due to Brexit.
In order to minimise the paperwork and cash out lay at each stage of the sale, Article141 of EU VAT Directive 2006/112 provides that in triangulation transactions VAT is only due in MS 3, the country where the goods are received by the final buyer (Company C). Therefore, Company A issues an invoice without charging VAT to Company B, who in turns issues an invoice to Company C without charging VAT. The only cash that changes hands at each stage is the actual purchase amount. Businesses are thus saved from having to account for both input and output VAT in their local returns and it is the final customer, Company C, who must account for VAT in their local return under the reverse charge mechanism on the supply made to it by Company B.
Condition of Application
For the simplification to apply, Article141 holds that the following conditions need to be met:
1. There are three different parties who are VAT registered in three different Member States
2. The first supply/acquisition is made for the purpose of being on-sold
3. There is a single movement of the goods from MS1 to MS 3, i.e., bypassing MS2
4. The final customer, Customer C must be liable for the payment of the VAT in MS 3
If any of these conditions are not met, the simplification will not apply, and Company B will have to register for VAT in either MS 1 or MS 2 and account for VAT accordingly.
Triangulation is a VAT simplification method that removes the burden of multiple VAT registrations. It is therefore important in the extent that it applies to EU VAT registered businesses, who can take advantage of it to simplify their intra-EU VAT transaction obligations.
Co-authored by: Marc Sevitz and Simeon Adebolajo, VAT IT
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