Understand the VAT applicable to contract work on goods in France

What is a contract work?

Correctly identifying a contract work is a crucial step in securing your VAT returns. According to tax legislation, these transactions are qualified as the provision of services (French Tax Authorities' guidelines - BOI-TVA-CHAMP-10-10-50-40). This concept, framed by administrative guidelines, involves transforming a material or object to give it a new form.

More specifically, contract work is defined by the fact of carrying out this transformation on goods belonging to a customer, also called the client. The company that performs the work, the manufacturer, never becomes the owner of the goods entrusted to him.

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The four conditions of contract work

For an operation to be legally considered as contract work, four cumulative criteria must be met, as defined by the tax authorities (French Tax Authorities' guidelines - BOI-TVA-CHAMP-10-10-50-40).

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Ownership of goods

A manufacturer who receives the goods from his client (the client) must not at any time become the owner of the goods. The goods remain the property of the customer throughout the processing process.

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The origin of raw materials

The client is not obliged to provide all the raw materials. The manufacturer can provide complementary materials. However, for the operation to remain a service, the cumulative value of the customer's materials and the workforce (the method) must exceed the value of the materials added by the manufacturer. If this condition is not met, the transaction is reclassified as a sale (supply contract), which changes the VAT due date (Administrative Doctrine - BOI-TVA-CHAMP-10-10-50-40).

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The return of materials

In principle, the materials entrusted by the customer must be returned to him identically after transformation. This means that they remain individualized at the manufacturer. However, administrative tolerance exists for transactions between professionals (subject to VAT). The refund can be made at the equivalent amount if certain conditions are met (French Tax Authorities' guidelines - BOI-TVA-CHAMP-10-10-50-40):

• The raw materials are supplied by the customers before the start of the shaping process.
• The quantities of finished products delivered correspond precisely to the quantities of raw materials used.
• The manufacturer can present detailed material accounts to the tax authorities.

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The creation of a new product

The intervention of the manufacturer must lead to the creation of a new product. This new property must have a different function from that of the basic materials entrusted by the customer. This condition makes it possible to clearly distinguish contract work from other services, such as repair, cleaning or simple packaging, which are not considered to be shaping (Administrative Doctrine - BOI-TVA-CHAMP-10-10-50-40).

Contract work: which VAT regime should be applied?

Being a supply of services, custom work follows the rules of common VAT law applicable to this category. Qualification is essential to determine the applicable VAT rate as well as the supplier's reporting obligations.

For transactions involving the flow of goods between different Member States of the European Union, simplification measures have been put in place (Administrative Doctrine - BOI-TVA-CHAMP-10-10-50-40). The objective is to avoid that the purchaser does not have to identify himself for VAT in each country where his goods transit to be processed there.

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Practical cases of simplification for intra-community transactions

In order to streamline trade, the treatment of VAT for contract work benefits from significant simplifications in several cross-border scenarios, avoiding complex administrative procedures for companies.

The client is established in France

If a French client sends goods for one or more services in one way to other Member States, he does not have to declare a transfer assimilated to a delivery. The services are invoiced to him and he must Autoliquidate VAT in France. The same is true if he buys goods in another EU country to have them processed (in the same country or another) before repatriating them to France.

The seller of the property is established in France

When a French seller sends a good to a manufacturer (in France or in another Member State) on behalf of a principal established in another EU country, the transaction is treated as a intra-community delivery exempt from VAT. The service provider, if he is French, invoices his service without tax to the client, who will have to self-settle the VAT in his own country.

The service provider (s) are established in France

If a client established in another Member State sends goods to France for one or more services in one way, he is exempt from identifying himself for VAT in France. French manufacturers provide services not located in France. They must therefore issue a Invoice without VAT with the mention “reverse charge” and declare the operation in the European Declaration of Services (DES).

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