Chain Transactions: How to treat them from a VAT Perspective

Chain Transactions: How to treat them from a VAT Perspective

‘How should a business treat a chain transaction?’ is a common question we get asked at SimplyVAT.com. And it’s not surprising that businesses are often confused about the VAT treatment of chain transactions, as, by definition, the purchaser and the receiver of the goods are not the same entity. Sometimes they are not even located in the same country or even on the same continent. As a result, the rules surrounding chain transactions can be complicated. However, as international VAT experts, we at SimplyVAT.com are happy to help!

What is a Chain Transaction?

A chain transaction is any transaction in which the ownership of goods changes between several suppliers, while the goods themselves are sent from the first supplier in the chain to the final buyer in the chain. The number of businesses making up the chain can vary, but three, four, five, or more “links” in the chain are not uncommon. The below diagram helps visualize this type of transaction.

The VAT Implications of a Chain Transaction

The first step in determining how to treat a chain transaction is to consider where each of the parties is located. If one or more of the parties is located in the same EU Member State, or one or more of the parties is located outside of the EU, this will affect how the transactions are invoiced. If the goods begin or end outside of the EU, then the question of import and/or export declarations must also be addressed. Further, generally only one supply in the chain transaction can be treated as “cross-border”, thus allowing the supplier to exempt that specific supply, while the others will be treated as domestic supplies. This may mean additional VAT registrations will be necessary to facilitate the transaction in a fully compliant manner. These types of transactions are highly fact specific and must be addressed on a case-by-case basis. Luckily, our expert VAT Consultants can help you determine the correct VAT treatment that will minimise your administrative obligations and maximize the time you can spend getting on with your business.

Triangulation – Chain Transactions Made Easy

For chain transactions in which only three parties are involved, and in which all three parties are VAT registered in different EU Member States, the EU VAT Directive has introduced a simplified procedure. Under the triangulation simplification, the outbound invoices from the first supplier to the second supplier and from the second supplier to the final buyer are both treated as exempt supplies of goods provided certain conditions are met, while the inbound side of the transactions are treated as taxable intra-community acquisitions of goods by the second supplier and the final buyer.

In this way, the triangulation simplification, as outlined in the EU VAT Directive, makes certain types of chain transactions much simpler. VAT doesn’t need to change hands and only the reporting of the transactions to the relevant tax authorities is required.

Importantly, though, there are both limitations and expansions of the triangulation simplification in various EU Member States. Some Member States do not allow the simplification if one of the suppliers is registered in the Member State of another party to the transaction. Some Member States will allow for the simplification with four or more parties involved. And of course, when one or more of the parties, or the goods themselves, are located outside of the EU, complications can arise. For this reason, it is best for businesses to speak with a VAT expert. Our expert VAT Consultants at SimplyVAT.com are standing by to help you with these types of transactions, so don’t delay and get the expert advice you need today.