Zero-rated sales

If any of your sales are zero-rated, you must always hold supporting evidence in the event of a query. Any zero-rating is a diversion from the default position that VAT is due on all supplies of goods or services at the standard rate, so officers are justified in setting a high standard of compliance. Many construction services are zero-rated, such as work on building new dwellings, and builders should be able to provide details about the site, nature of work and evidence that a building is a dwelling.

Tip. For exports of goods, your business must provide high-quality evidence to confirm that the goods have left the UK and arrived at an overseas destination. You must ensure that transport documents clearly specify the make and type of goods and the quantities being shipped. General descriptions such as “electrical goods” are not acceptable.

Transport evidence

To satisfy HMRC’s requirements, your business must be able to provide a combination of transportation and commercial documentation to prove that the goods left the UK and arrived at an overseas destination: correspondence with customers, copies of sales invoices and delivery notes, details of insurance. These are all commercial documents; however, officers tend to focus on transport issues.

Trap. If an officer is not satisfied that goods have been exported, they have the power to issue a “ best judgement ” assessment to treat them as being supplied in the UK.

Tip. Any officer assessment should charge VAT based on 1/6 of the selling price rather than 20% because the sales in question will be deemed to include VAT. This assumes they are standard-rated.

Conditions. Under UK law, HMRC can specify the conditions that your business must meet if exports are zero-rated. These conditions are explained in VAT Notice 703 and, unlike most other notices, many paragraphs have the force of law rather than being HMRC’s interpretation of the law. An example is para 3.3, which confirms: “All evidence obtained and retained in support of each supply and movement must meet the evidential conditions (read paragraph 6.5).”

Trap. If your overseas customer collects goods from your premises and arranges for them to be shipped abroad, this is an “indirect export” and the standard of evidence required is even higher because there is greater risk of the goods being deflected to a UK destination.

What has changed?

The relevant paragraphs in the notice that have been updated are 6.2, 7.1 and 7.2:

• the paragraphs reflect the full transition to the Customs Declaration Service
• the guidance lists the Movement Reference Number or the Declaration Unique Consignment Reference as the primary identifiers to keep
• the paragraphs about evidence for road, sea and air shipments have been updated to ensure exporters understand their responsibilities, i.e. obtaining proof of export within three months.

Tip. If you subsequently obtain proof of export after three months, you can reduce your output tax on the next return to reflect the zero-rating to which you are now entitled.