Navigating VAT-related challenges for high-demand exports during COVID-19

23 Apr 2020 --- The ongoing COVID-19 pandemic has already impacted consumer behavior in the short-term and there are forecasts it will leave a lasting impression in the consumer mindset. While businesses are struggling due to lockdowns, quarantine measures and to some extent, global supply chain fracturing, there are a number of food companies witnessing a significant uptick in demand. FoodIngredientsFirst takes a closer look at these market shifts, while speaking to experts for guidance on VAT risks for exporters observing an abrupt rise in sales.

According to Innova Market Insights, consumers in Germany, the US and the UK indeed reported shifting their attention to “shelf life” when buying food and drinks during the COVID-19 outbreak. In the US and the UK, soup was one of the largest “more purchased” categories, whereas consumers in Germany went for more baking products, bread and chocolate.

In stark contrast, “health aspects” became an important reason to purchase a food or beverage amid COVID-19 for Brazilian, Indian and Chinese consumers. Accordingly, consumers in these countries reported a notable increase in purchasing “fresh vegetables,”  items which many European consumers reported buying less of since the outbreak. 

“Not all businesses in the F&B sector are enjoying increased demand – those that supply primarily to restaurants may be struggling, but with people across the continent at home, there has been an increase in demand for a variety of fresh ingredients, as well as frozen and tinned foods,” affirms Andy Spencer, Director of Professional Services at Accordance VAT.

How long these conditions will continue remains to be seen. “One immediate change that we’re seeing is the shift toward non-perishable foods. These center-store foods help consumers meet household food needs at a time when supermarket shopping has become a dicey proposition, given product shortages and COVID-19 worries,” Brian Williams, VP of Environmental Health, Safety and Sustainability at supplier CP Kelco, tells FoodIngredientsFirst.

 It is now essential that a close eye is kept on VAT obligations, so that businesses do not fall short from meeting compliance rules.Navigating VAT obligations
With F&B businesses preoccupied with the crisis and the impact it is currently having – as well as managing increased demand – it is now essential that a close eye is kept on VAT obligations, so that businesses do not fall short from meeting compliance rules.

For EU B2C sales, each Member State has a threshold for sales, which once exceeded, means businesses must become VAT registered, charge local VAT and file the relevant declarations. This may be the case for traded goods, like shelf-stable products, which are experiencing ballooning demand. “While on the one hand businesses must keep a close eye on thresholds and ensure that they are compliant with local VAT obligations, exceeding thresholds is in essence a good thing – it means that business is booming,” explains Spencer.

“The key factors for businesses in managing cross border VAT is in which country is it due and at what rate. Once this has been established, the final question is who has to account for the VAT to the tax authorities. The position can be dependent upon whether the sale is on a B2B or B2C basis,” he notes.

For B2B sales, if goods are being delivered from one EU Member State to another, it is usually the customer that will account for the VAT due, so no additional registration is required for the supplier. 

However, Spencer also highlights that there are still important considerations for the supplier including ensuring that they meet the invoicing and reporting requirements in the country of dispatch and also have the evidence to show the goods have moved cross border. Failure to do this can lead to exposure to penalties and interest and in the worst case, having to account for VAT on a sale which cannot be recovered from the customer.

“If products are sold to a customer in another country and the goods are sourced locally, the position will often be more complex and VAT registration may be required depending on the country involved and the status of the customer,” he stresses.

In any event, VAT will be incurred on the local purchase – unless there is a zero rate of VAT for the goods being purchased, he notes. It will be essential that this VAT can be recovered in order to maximize the profitability of the deal.  

The Four Quick fixes came into force in January this year in the EU and have had a significant impact on those businesses in the F&B industry who do cross border trade, notes Spencer. The “Four Quick Fixes”
The Four Quick fixes came into force in January this year in the EU and have had a significant impact on those businesses in the F&B industry who do cross border trade, notes Spencer. There are four new rules which have been introduced:

1. Simplified and uniform treatment for call-off stock – This will have an impact for any food businesses where their suppliers operate a call-off stock facility. This could be in respect of raw materials or any other items used in the manufacturing process such as packaging. It will also have a big impact on suppliers in these situations.  This quick fix is compulsory and can significantly change existing VAT accounting so needs to be considered fully.
   
   
2. Enhanced legal certainty when chain transaction arrangements are in place – Where there are three or more parties in a transaction and goods are delivered from the first to last party, the VAT accounting implications can be complex. This quick fix provides clarity in respect of one variation of chain transactions which has historically caused problems.
   
   
3. Changes to the evidence required to prove the transport of goods in intra-community supplies – Evidence of the transport of goods is crucial in order to support not charging VAT.  These changes provide certainty that exemption can apply but in practice are likely to be challenging to meet for many businesses so need to be considered carefully.
   
   
4. Increased use of VIES and VAT numbers to benefit from a cross-border VAT exemption – The customer must now provide a VAT number from a country other than that of dispatch and this must be verified by the supplier. This is now a legal requirement so suppliers must have appropriate procedures to ensure it is met.

Where there is a requirement to be VAT registered, this can be used to secure recovery but in cases where no registration is required, alternative routes will need to be considered. “The principle is that VAT should not be a cost to businesses buying and selling goods but there are rules and procedures that have to be managed effectively to ensure that a refund is secured,” concludes Spencer.

By Benjamin Ferrer