The classics: VAT and transport linked to the supply

In which link does the transport take place? Using a machine that travels from Germany to France and later to Belgium, we work through the consequences for the zero rate and for transfers of own goods.

In this case A sells a machine to B. The machine is located in Germany. B then hires the machine out to C in France, and C arranges the transport there.

Should A invoice B with VAT?

A is unsure whether it may issue a zero-rated invoice for an intra-Community supply. It knows the goods will leave Germany and has received a Dutch VAT number from B. Is that enough?

The answer is no.

A must establish in which link the transport takes place. Where the transport is carried out by or on the instructions of A or B, the transport is in the A to B link, in other words the transport takes place in connection with A's supply to B. That supply is then an intra-Community supply to which the zero rate in principle applies, provided the other conditions are met: a valid VAT number for the customer in another member state and evidence of transport there.

Where the transport is not arranged by A or B, as here, the place of supply is the country in which the goods are located at the time of supply. C arranges the transport, so there is a domestic supply by A to B in Germany, subject to 19% German VAT.

It is therefore important that A obtains or inspects its customer's transport documents where it does not arrange transport itself and the parties want to apply the zero rate. Not only to prove transport to another member state, but also to establish that the transport is indeed arranged by B rather than by a party further down the chain. Where those documents are missing and it later emerges that the goods were transported by C, D or another party, the transport did not take place in connection with A's supply and the tax authorities will assess A on audit.

Should B invoice C with VAT?

B supplies a hire service to C which falls under the general rule for services. The service is taxed in the country where the customer, a business, is established. It is therefore taxed in France, and C must declare the reverse-charged VAT in a French return.

Is there a transfer of own goods?

The goods are no longer in Germany. Is there then a deemed intra-Community supply in Germany and a deemed acquisition in France, requiring B to register in both countries?

Again the answer is no.

On the literal wording of article 17(1) of the VAT Directive there is only a transfer of own goods where the transport is carried out by or on the instructions and for the account of the business itself. Here C arranges transport for its own account. In any event, article 17(2) provides that there is no transfer where goods are moved temporarily as part of a service supplied by B, in this case the hire to C.

And afterwards: B invoices D

After the hire agreement ends, B has the machine collected in France and taken to Belgium for delivery to buyer D.

Because the place of supply is where the transport begins, that place for B is France. B must therefore register in France in order to make the supply under a French VAT number. Where the Belgian customer provides a VAT number from a member state other than France, such as a Belgian number, B can apply the zero rate for an intra-Community supply from France. In France the supply must be included in the local return and in the recapitulative statement.

Note that because the machine does not return to Germany, a tax authority may take the view that a deemed transfer to France must be declared after all, with the arrival as an intra-Community acquisition. In our view, however, that does not follow from the directive.