A sole proprietor hand makes bespoke furniture and has taken a large order from a Norwegian individual for some solid oak furniture.
He has taken a £5,000 deposit in order to start buying the raw materials. There will be a further part payment of £5,000 required part way through the job and the balance to be paid prior to shipping.
The work will take several weeks to complete as he is extremely busy with other orders, it is likely he will not be able to complete the order and ship the goods to Norway until November 2019. He has been charging VAT at the standard rate for deposits and part payments; is this the correct treatment?
Norway is not within the European Community (EC); therefore, we treat the supply of goods delivered into Norway as a direct export in this scenario.
All of the following conditions have to be met in order to zero-rate an export:
- You must hold proof that the goods have been shipped from the UK to a destination outside the EC. For example, sea/air waybills or bills of lading, alongside commercial evidence such as sales invoices and contracts.
- Ensure goods are exported from the EC within three months of the tax point.
- Obtain official or commercial evidence of export within three months of the tax point.
The tax point will be the earlier of, either the date you send the goods or the customer takes them away, or when full payment is received for the supply. In the above question, assuming that full payment will not be made until late 2019, a tax point has not been created.
VAT notice 703 section 11.5 states ‘deposits and progress payments are part payments towards the total cost of a supply received in advance of its completion and have the same VAT liability as the final supply. If the final supply is to be zero-rated as an export, these payments may also be zero-rated.’ He should have treated these payments as zero-rated.
Once the invoice has been paid in full, the export conditions above need to be met in order to support zero-rating the supply. If those conditions cannot be met then the whole supply must be standard rated and an adjustment is required on the VAT return following the expiry of the three-month time limit.
This tax Q&A was published in July 2019 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission)