Sanctions and the war in Ukraine: VAT considerations

Tax may not be the first issue to come to mind when reflecting on the war in Ukraine and the response of Western governments, but equally it cannot be ignored. The sanctions imposed raise a large number of questions - and the answers to those questions are not always clear at this stage. Can taxes in Russia be paid and if so how? What are the tax implications of any operational changes put in place to manage ongoing business? What is the impact on transfer pricing arrangements? How will tax authorities view "blocked income"?

Thinking of VAT specifically, this is likely to become a pressing issue as VAT payments become due. There may be questions about how to pay VAT returns in Russia without triggering the sanctions, particularly if funds need to be transferred to Russia in order to make payments.

Another VAT impact will be in relation to affected transactions that are aborted or where there is non-payment for such transactions. Clearly it will be important to analyse each situation individually to see whether supplies or payments have been made or whether the impact of sanctions changes the character of such payments or arrangements. HMRC's recent guidance in Revenue & Customs Brief 2 (2022) and related guidance in HMRC's manuals may be relevant in determining the VAT treatment of any resulting compensation payments. In non-payment situations, it would appear that bad debt relief claims may be necessary, though the requirement to wait at least six months and the need for the debt to be written off (rather than treated as a temporary issue) means that this is more likely to be a long-term solution only.