This article summarises the zero rating export rules for businesses that have only ever traded with the EU before Brexit and may not be as well versed with the export paperwork requirements.
The rules for zero rating an export have not changed since Brexit.
HMRC requires zero rated exports to be supported with an array of documents and there is potential for businesses to get caught out, with the risk of penalties and VAT liabilities arising from such oversights.
For example: Marv’s Marvellous Mugs Ltd (MMM Ltd) is based in the UK and manufactures bespoke mugs for corporate customers in the UK and EU only. A new EU based business customer places a large order of mugs and arranges for the goods to be transported using their own freight agent.
The customer has arranged their own freight because they want to control the shipping process, ensuring their freight agent has the right documentation for delivery, etc.
The above scenario is called an indirect export (HMRC Notice 703), the guidance suggests that MMM Ltd should charge VAT until the customer sends the documents needed to support zero rating, and then issue a credit note for the VAT once the customer sends the proof of export.
HMRC’s guidance refers to a basket of evidence that contains sufficient commercial evidence. Such evidence can include air and sea waybills, bills of laden, purchase order from freight agent/courier, other documents from the freight agent that show the customers’ name/address. The guidance also notes that with the exception of specific circumstances, vague assertions by a trader that they acted in good faith, is not sufficient to support zero rating on its own.
That evidence must be obtained within three months of the export, otherwise, the export becomes standard rated, and that evidence needs to be retained with the other business records.
If Marv’s Marvellous Mugs was responsible for the shipping, they would still need to ensure the freight agent supplies the appropriate paperwork and retain it within the business records. On a much smaller scale, a business that ships goods by a physical visit to the local Post office, they should obtain a proof of posting receipt from the post office counter, otherwise what proof does the trader have to show HMRC that the goods have been posted to the customer abroad?
The potential risks
If a business does not hold the evidence needed to support zero rating, HMRC will assess VAT at the standard rate. HMRC can assess for VAT for the duration that the evidence was not available and potentially charge interest for the period the business was not compliant.
Export evidence has been covered in the past, and this article is a reminder that in a post Brexit landscape, the importance of zero rated export evidence has not diminished. If anything, the importance has increased, as the export rules now apply to EU transactions.