When a business exports goods from the UK the sales can be zero-rated, but a business has to fulfil certain criteria for the zerorating to apply. Following Brexit, exports are supplies of goods to any destination or customer outside the UK, except for sales from Northern Ireland which is still within the EU single market for VAT purposes.
There are two distinct categories of exports: direct exports and indirect exports (ex-works). With direct exports, the supplier of the goods arranges the transport and export of the goods themselves, and with indirect exports, it is the customer that arranges the transport and export of the goods. In both cases, the supplier must obtain evidence that the goods have been exported from the UK within three months of their removal.
Direct Exports
A direct export occurs when the complete transaction from supply to export is under the control of the UK supplier or owner of the goods. HMRC’s internal guidance in the VAT Export and Removal of Goods from the UK Manual at VEXP20300 states that the location of the customer is not a relevant factor provided the goods are exported under the control of the supplier.
This means that when dealing with a direct export the supplier can sell goods to a UK customer (either a business or private individual) and provided the supplier arranges the export to a destination outside the UK, the supply can be zero-rated.
Examples of direct exports include situations where the UK supplier or an agent employed by the supplier (e.g., a freight forwarder) is responsible for the physical export of the goods.
This is a little-known fact, including (worryingly) within HMRC who recently took a case to the Firsttier Tribunal (FTT) where a taxpayer had undertaken direct exports.
In Procurement International Limited v HMRC [2024] UKFTT 949 (TC), HMRC considered that the appellant incorrectly zero-rated as direct exports certain supplies made by it. The assessments totalled £485,258.33.
The appellant’s business was that of a reward recognition programme fulfiller. In essence, the appellant supplied goods to customers who ran reward recognition programmes on behalf of their customers, who, in turn, wanted to reward their customers and employees.
The reward programme operators (RPOs) provided a platform through which those entitled to receive rewards could choose and order such rewards. The RPO would then place orders with the appellant for requested goods, which were delivered directly to the reward recipient (RR).
HMRC formed the view that where the RPO was registered for VAT in the UK, the appellant should not have treated any supply delivered to an RR outside the UK (pre-31 December 2020, including to an EU RR) or outside Great Britain (from 1 January 2021). HMRC considered that the UK presence of the RPO caused the supply to be made to the RPO in the UK or GB and be subject to VAT at the standard rate.
The appellant argued that the supplies had been correctly zero-rated as direct exports and cited VAT Notice 708 Paragraph 2.10 (pre-BREXIT) and 2.8 (post-BREXIT), which defined a direct export as arising where the supplier sends goods to a destination outside the UK (in the pre-Brexit version ‘and EU’), and was responsible for arranging the transport or appointing a freight agent.
This applied even when the customer was established in the UK. The FTT decided that the supplies were zero-rated as supplies of goods which had been exported pursuant to VATA 1994, s 30(6).
Practical Tip
If a business arranges the export of goods itself, it can zero rate the sale even if its customer is a UK business or individual.