Russell Hughes, VAT Consultant at Accordance explains how pharmaceutical businesses can stay compliant during a period of increased activity.
VAT
The coronavirus crisis has posed immense challenges for a number of industries, with many facing an effective cessation of business activity. Like many other manufacturing businesses the pharmaceutical industry has faced challenges, but demand for some goods – among them hand sanitiser – has been so great that non-pharmaceutical companies have even turned production lines over to its manufacture.
Some pharmaceutical businesses may be overwhelmed by current demand, and may find that they are supplying customers in greater quantity and even supplying customers in new countries. In the midst of a global pandemic, VAT obligations could be easily overlooked. But it is essential that pharma sector businesses keep a keen eye on sales, supply chains and obligations to remain compliant.
Overall considerations
Any pharma business seeing increased demand and sales needs to consider a number of factors.
Key is to understand supply chains. A good first step is a coherent and thorough supply chain mapping and review exercise. This should be a jumping off point for reviewing VAT accounting procedures, and is necessary to understand requirements under the new Four Quick Fixes accounting system, which will be discussed later.
Business to consumer (B2C) sales
Some companies are experiencing high demand from individual consumers across the EU. For intra-EU B2C sales, each Member State has a threshold which once exceeded means businesses must become VAT registered in the Member State where the goods are delivered. Once VAT registered, they will be required to charge local VAT on the sale of their products and then file the relevant VAT declarations. Therefore, it is important that businesses keep a close eye on thresholds and ensure that they are compliant with local VAT obligations.
Business must also navigate their way through the complexities of having to apply the different VAT rates that are used across Member States. There can also be differences in when the standard rate is applied, which has the most significant impact if an item is zero rated in the UK but standard rated in other Member States. It will be important for businesses to consider the impact this can have on their profits, especially if prices are advertised at a VAT inclusive amount to all customers. As a result of the pandemic, a number of countries have introduced reduced VAT rates for goods that are essential in combatting Covid. This can include personal protective equipment and other items. It is essential that businesses supplying such items are aware of the reliefs available in order to maximise their profitability on the sale or reduce the selling price to benefit their customers.
Business to Business (B2B) sales
For B2B sales, the obligations for suppliers making EU sales will differ to those selling B2C. If goods are being delivered from one EU Member State to another, it is usually the customer that will account for the VAT due, so no additional registration is required for the supplier.
Despite this, it’s very important for the supplier to ensure that they meet the invoicing and reporting requirements in the country of dispatch, and also have the evidence to show the goods have moved cross border. Failure to do this can lead to exposure to penalties and interest and in the worst case, having to account for VAT on a sale which cannot be recovered from the customer.
B2B sales can incur greater complexity when the products are sold to a customer in another country and the goods are sourced locally. In this scenario, VAT registration may be required depending on the country involved and the status of the customer. VAT will be incurred on the local purchase of those goods unless there is a zero rate of VAT applied. Therefore, it will be essential for the supplier to ensure that this VAT can be recovered in order to maximize the profitability of the transaction. If a requirement to be VAT registered exists, this can be used to secure recovery but in cases where no registration is required, alternative routes will need to be considered.
The EU’s Four Quick Fixes
In addition to coronavirus related business changes, in January of this year the EU implemented its Four Quick Fixes. These are part of the bloc’s move to harmonise VAT systems in relation to intra-EU trade, and have had a significant impact on pharmaceutical companies who trade cross border. The changes are intended to simplify, but changes can and do provide businesses with many challenges in their implementation.
The four new rules which have been introduced are:
Call-off stock harmonisation – This will have an impact for any pharma businesses whose suppliers operate a call-off stock facility. This could be in respect of raw materials or any other items used in the manufacturing process such as packaging. It will also have a big impact on suppliers in these situations. As this quick fix can significantly change existing VAT accounting and is compulsory, it needs to be considered carefully.
Chain transactions – Where there are three or more parties in a transaction and goods are delivered from the first to last party, the VAT accounting implications can be complex. This quick fix provides clarity in respect of one variation of chain transactions which has always caused problems and led to many challenges from local tax authorities.
Mandatory use of VAT numbers - This fix impacts all businesses involved in the intra-EU supply of goods, and makes it mandatory to quote the customers VAT number from another Member State on the invoice.
Evidence of Intra-EU supplies – This fix harmonises the rules on the evidence to support the zero rating for these transactions. If this evidence is obtained there is a presumption that the zero rating can apply which the tax authorities have to disprove. However, the nature of the evidence required can be challenging for many businesses.
It will be important for the business to understand what these new rules mean and how they apply to their current supply chain. It may be necessary for pharma businesses to review and amend current VAT accounting practices to ensure they are compliant with the conditions of the new quick fixes. Failure to do so can result in exposure to penalties and interest and additional administration in resolving issues which can in itself be costly and time consuming. We’ve been offering guidance on the Four Quick Fixes for some time; our white paper offers further information and we recently ran a webinar to offer clarity on the new rules and assist businesses in meeting the requirements set out.
Though the causes driving increased demand may be less than desirable, increased sales is ultimately positive for businesses in the sector. However, it leaves a lot to be considered. Overall, in the midst of a complicated economic and health panorama, it’s essential not to lose sight of compliance obligations.