HMRC’s position on import VAT recovery by non-owners came under scrutiny in the recent First-Tier Tax Tribunal case of TSI Instruments Ltd [2025] UKFTT 1278. It’s an important case because it confirms the conditions which need to be met for import VAT recovery, something that should be checked by all businesses as non-compliance with them could create some large and unexpected costs.
Introduction
TSI Instruments Ltd imported goods owned by its customers into the UK for repair and servicing. Between 2013-2019, it paid import VAT on those goods, subsequently recovering the VAT through its UK VAT returns.
HMRC challenged TSI Instruments Ltd’s entitlement to recover this import VAT – amounting to approximately £8.4 million – on the basis that the company was not the owner of the goods.
TSI Instruments Ltd’s challenged this on the basis that there was a direct and immediate link between the import VAT and its taxable supplies of repair services. It further argued that UK VAT legislation does not specifically preclude recovery of import VAT by non-owners and that by suffering the cost of the import VAT, the principle of ‘fiscal neutrality’ was breached.
The First-Tier Tribunal found in favour of HMRC, citing that EU legislation (Article 168 of the Principal VAT Directive) made it clear that the import VAT must form a cost-component of TSI’s supplies of repair services and, as it did not, the ‘direct and immediate’ link was broken.
In order to mitigate the import VAT cost, the Tribunal suggested that TSI Instruments Ltd could have utilised Inward Processing Relief (IPR) or, as an alternative, have the owner of the goods act as importer of record (thereby incurring the import VAT themselves).
Although the ruling does not set legal precedent, it does re-affirm HMRC’s stance on the matter – import VAT can only be recovered where:
- The importer owns the goods.
- The goods are used within the importer’s taxable activities, and the import VAT cost is reflected in the value of its supplies.
History
Prior to 2019, HMRC’s guidance on import VAT recovery by non-owners was ambiguous. Businesses operating toll manufacturing or repair models often relied on informal interpretations of HMRC’s position. In response to growing uncertainty, HMRC issued Revenue and Customs Brief 02/2019, which clarified that only the owner of the goods – is entitled to recover import VAT.
Following Revenue and Customs Brief 02/2019, HMRC issued Brief 15/2020, which reaffirmed its position that only the owner of goods is entitled to recover import VAT. This clarification was accompanied by updates to HMRC’s internal VAT manual (VIT13300), which now explicitly states that import VAT may only be claimed by the person who owns the goods or has the right to dispose of them as owner. The guidance also clarified the meaning of ownership in a VAT context, noting that it refers to the right to dispose of goods as owner, not necessarily legal title.
Customs relief
Businesses in similar situations may consider IPR as a way to mitigate the impact of unrecoverable import VAT.
IPR allows businesses to suspend import VAT and customs duty on goods imported for processing, repair, or refurbishment, provided the goods are subsequently re-exported. Key features include:
- Relief from import VAT and duty during the processing period.
- Authorisation from HMRC (standard or simplified).
- Record-keeping and discharge requirements.
- Retrospective authorisation in limited cases.
IPR is particularly relevant for toll manufacturers, repair centres, and service providers who do not take ownership of goods but perform work on them before returning them to the customer.
However, use of IPR is strictly monitored by HMRC and where non-compliance is found, HMRC can be quick to remove IPR authorisation.
Future outlook
While the decision in TSI Instruments Ltd does provide some clarity, questions still remain about the post-Brexit position, specifically for transactions commencing after 1 January 2024.
The European (Withdrawal) Act 2018 and the Retained EU Law (Revocation and Reform) Act 2023 brought an end to the supremacy of EU legislation over domestic UK legislation (‘direct effect’) from 1 January 2024 onwards, but retained the principle that domestic legislation should be interpreted consistently with EU VAT Directives (‘indirect effect’ or the ‘Marleasing Principle’).
As a result, until there is precedent case law on the post-Brexit position, uncertainty will remain.
In summary
The TSI Instruments case highlights the risks of assuming entitlement to import VAT recovery without clear ownership or a demonstrable link to taxable supplies. While the decision does not set precedent, it aligns with HMRC’s increasingly firm stance and should prompt businesses to review their import arrangements.
Where ownership cannot be established, businesses should consider customs reliefs and ensure their VAT recovery strategy is robust and defensible.
For further information on anything discussed in this article, or how we can help you, please contact your usual Crowe contact.
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Tighter controls may be needed to reduce the possibility of PIVA being used to avoid the payment of VAT.
Global trade rules are shifting fast. Governments are ending duty-free loopholes for low-value goods.
Those importing goods will need to consider customs duty, and the sellers of both goods and services will need to consider VAT too.
Many professional services firms have had an increase in their bank interest income earned on client deposits.