We are encountering an increasing number of instances where clients are failing to retain sufficient evidence to confirm that exported goods have actually been shipped out of the UK. Exporters are required to retain documentary proof that goods have physically been exported from the UK and this evidence must be obtained within 3 months of the date of export and retained for a 6 year period. In circumstances where a business does not hold satisfactory export evidence then HMRC will not only assess for the output tax due and interest but are also likely to impose a penalty equivalent to 30% of the VAT due!
A number of the exposures have come to light following reviews we have undertaken on behalf of clients, particularly in relation to establishing whether the SAO criteria are satisfied, but others have come about because of specific enquiries made by HMRC and it is clear that this is becoming a priority area for HMRC to review.
Our experience is that failure to retain sufficient export evidence tends to arise due to one of the key following reasons:
– It’s not my job! – it is apparent that in many instances no one individual in the finance department actively manages or takes responsibility for the export process and it is often assumed that someone in the shipping department takes responsibility or it is being dealt with elsewhere in the organisation.
– Ex Works Sales/Indirect Exports – sales where the seller physically hands over the goods to the customer or their haulage company when the goods are still within the UK frequently give rise to problems where it becomes particularly difficult to obtain appropriate evidence of export from the customer or their haulier once the transaction has taken place. HMRC specifically identify these as high risk transactions and will expect exporters to meet a high standard of evidence.
– Reliance on your haulier – very often the evidence to confirm that goods have been exported is not held by the exporter but by their haulier and we frequently find that there is no service level agreement in place which creates any obligation on the haulier to retain the evidence on behalf of the supplier.
– Customers EU VAT number – it is a legal requirement to show the EU customers VAT number for goods delivered to a customer in another EU state in order to support zero rating,failure to have this will mean that the supply cannot be zero rated.
– Poor or incomplete Audit Trail – the lack of a clear audit trail were the transport document, consignment notes, invoice do not clearly identify the precise goods which have been shipped (eg reference/stock numbers, specifications, quantity, weights, pallet numbers etc) will result in a HMRC challenge.
It’s also worth bearing in mind that in terms of the quality of export evidence retained this will have to qualify as either “official” or “commercial” documentation and in whichever case this must be supported by “supplementary” evidence to show that a transaction has taken place and that this relates to the goods physically exported. In our experience we often find that clients are unsure as to what constitutes either “official”, ”commercial “ or “supplementary” evidence and are surprised to learn that what they actually retain falls very much short of what is required to support zero rating.
At The VAT Consultancy we have extensive experience in advising clients on ensuring that the evidence they retain is sufficient to support the zero rating of exports and where this is is not the case make appropriate recommendations to improve procedures going forward and remedy any potential liabilities or exposures which may exist.
If you have any queries in relation to this matter please do not hesitate to contact Julie Park or John Forth on 01962 735350.