Logistics Assistance & VAT Issues
This East Coast supplier of wireless and wireline VoIP and multimedia infrastructure products had customers around the globe and a costly problem. The sales team at the public company had reached an agreement with a German telecomm carrier to sell product into Europe as the Importer of Record and the company had recently learned that it was not properly VAT (Value Added Tax) registered to do so. Six months prior to contacting us, the finance team had received notice from HM Revenue & Customs in the United Kingdom that the company’s claim for reimbursement of VAT paid upon their import of goods into the UK from the US had been rejected. Not only did the client have an unclear understanding of Importer of Record status and its ramifications, it had little experience or knowledge of VAT requirements. Compounding the problem was that the finance team at headquarters relied on an external advisor who had given the client poor VAT-related guidance. Uncertain as to how to proceed, the finance team contacted HSP for another opinion.Business Challenge
Our client faced one of the stickier logistical challenges a US company operating internationally can encounter, and there were significant monies involved. At a 17.5% assessment rate against the declared value of the equipment shipped, the amount of the claim held up by HMRC amounted to well over US $500,000.
The problem began when the company agreed to some less than optimal terms in order to close a coveted sales agreement with a high profile customer. Deciding that the contract was worth the “inconvenience” of the request, our client had agreed to be the Importer of Record when shipping product from the US into the UK for sale to the carrier in Germany, a status that meant it was our client’s responsibility to clear the product through customs in the UK.
To make matters worse, the client then received bad guidance on the VAT process after signing the contract, and was now paying the price. As the production, shipping and finance aspects of the importation process had not been coordinated and registered correctly, and proper documentation practices had not been followed, HMRC was completely justified in challenging the reimbursement request.
High Street Partners' Solution
Our first step in resolving the problem with HMRC was to unravel the chain of events and gain an understanding of the advice the client had received.
We learned that the previous advisor had directed our client to have the company’s UK subsidiary play the importer role, since that entity was already registered for VAT in the UK. While convenient, this approach was not correct – the UK subsidiary was simply a small marketing office, and was not the entity at all involved in the sales transaction between the US supplier and end-user customer in Germany.
After discussing our findings and options with the client, we approached HMRC to explain HSP’s role and propose a resolution. A lengthy meeting resulted in a clear action plan and a positive relationship with the tax authorities. If we could assist the client in “unwinding” the original, incorrect transaction and then re-transact all paperwork in compliance with UK import regulations, our client could then resubmit the claim to recover the $500,000 of import VAT already paid.
We then held a meeting with the client’s senior management team, as the necessary resolution required not only proper VAT education and registration, but a significant commitment to revised administrative processes going forward. First and foremost, the US company making the sale needed to get itself properly VAT registered, in whichever EU country they determined most convenient to import through. The presence of local employees in the UK made this the logical choice. While the registry itself is a straightforward process, it does entail ongoing requirements and adds a significant level of administrative complexity. Once registered, the client would need to take care of the following:
- submit quarterly VAT returns
- charge its UK customers VAT at 17.5% on its delivery of equipment in the UK on the full value of the contract
- charge UK VAT at 17.5% for UK customer maintenance and support contracts
- issue invoices to all EU customers in full compliance with the strict requirements of EU and VAT regulations, for all sales
- keep VAT books and records
- charge VAT at 0% for equipment deliveries to customers within the EU but outside of the UK, provided it obtains the customers VAT ID #
- since the above will require that the equipment land in the UK before shipping onward elsewhere in the EU, this movement must be reported on an “Intrastat” document, which is submitted each calendar month.
- report the equipment sale on an EC Sales List, per country, by VAT number, each month
After instructing the client about the process and challenges ahead, we also helped them assess possible alternatives. If the client could attempt a contract re-negotiation and convince their German customer to take on the Importer of Record role, VAT would cease to be an issue. However, if the current and projected sales to this customer outweighed the costs of taking on the additional level of administration, then the added compliance work was worth doing. The necessary internal analysis this required improved communication between Sales and Finance and created a better working relationship.
Effective Outcome
The process took several months, but with High Street Partners' assistance, the client determined that the benefits of the sales contract with the German carrier did outweigh the added cost and complexity of continuing as Importer of Record. The client was thereupon properly VAT registered in the UK and willingly undertook the steps necessary to ensure full compliance with the regulations. Local partners in HSP’s global network provided assistance, and we worked with the headquarters team to re-shuffle existing processes and responsibilities to manage the new requirements effectively.
While at times a painful process, the client received several significant benefits. Not only was the company eventually reimbursed for all of the VAT import paid, it also developed a clearer understanding of the cost/benefit of their sales contract, saved future headaches by severing ties with their old advisor, and gained a new and positive working relationship with the UK tax authorities.
A few months later, the client was able to avoid a similar situation when negotiating a large, new contract with a carrier customer in Asia. Armed with the knowledge of what’s truly entailed in the “inconvenience” of acting as Importer of Record, our client was able to avoid taking on this burden.
