Brexit: VAT and Customs

1. Postponed Import VAT Accounting

HMRC introduced PIVA from 1 January 2021 to allow importers to clear their imports through Customs without physical payment of import VAT. Instead, the import VAT is “postponed” and accounted for on their VAT return so that they “pay” and often reclaim the import VAT at the same time, giving rise to cash flow benefits. Where PIVA is used, organisations will need to ensure that the GB VAT number and GB EORI number (Economic Operators Registration and Identification number) are linked. When this is not the case, VAT becomes payable before the goods are released, which can lead to delays and additional costs.

Some customs agents and brokers apply a blanket approach and will opt to use PIVA for all imports, but organisations should receive notification of this and may be asked to sign a document to this effect. Alternatively, a decision may need to be made for each import as to whether PIVA will be used. This is resulting in importers having a mix of imports where PIVA is applied and others where the ‘old’ system of paying the import VAT at the time of entry and then subsequently recovering it via a VAT return when a C79 certificate is issued by HMRC. This dual system has caused confusion for businesses and requires amendments to existing VAT return preparation processes.

HMRC’s Customs Handling of Import and Export Freight (CHIEF) system has now been replaced by the Customs Declaration Service (CDS) for UK imports. From a process perspective, some businesses have been unaware of the need to have an account separate from the HMRC Gateway to access C79 certificates and PIVA statements. The set-up of this account is a one-off exercise. For more details on this see our previous article. When preparing their VAT return, organisations are then required to access their online CDS account to download their PIVA statements and C79 certificates so that the import transactions can be included on their VAT returns. Many businesses are unfamiliar with this process which risks import transactions not being included in the relevant VAT returns, which is a VAT compliance failing.

Finally, businesses should keep in mind that in the UK only the owner of the goods is entitled to recover the import VAT paid, subject to the usual rules, on their importation into the UK.

2. Delayed customs duty declarations

For businesses starting to import into the UK for the first time it can come as a surprise that registering for UK VAT tends to take several months for the registration application to be finalised and a UK VAT number issued by HMRC. This can mean that businesses have committed to sending product to the UK but are not set-up to make the importation themselves. If their customer is unwilling/ it is not commercially desirable for the customer to act as the importer then the supplier is left with no choice but to obtain a temporary EORI number from HMRC so that the supplier can be importer. A temporary EORI number can typically be obtained within several days. The temporary EORI number is then used to make the import and the business will have to pay the import VAT due at the time of importation in order to clear the goods through Customs into the UK. This is not the end of the matter though and without further action the import VAT will be an unexpected cost and could easily erode the supplier’s profit margin.

It is important to be aware that an EORI number simply enables an import to take place, it does not confer any ability to reclaim the UK import VAT paid. To reclaim the import VAT it is necessary, once the VAT registration is approved, to amend the customs declaration to use the actual EORI number (not the temporary one). This will then generate the evidence needed to reclaim the import VAT on the next VAT return submission. Businesses should keep in mind that this process is likely to result in delays of a number of months before the import VAT is finally reclaimed. Please note, that this will only be effective for those import entries that cleared on or after the effective date of VAT registration.

Once the permanent EORI number has been issued, it will also be important to notify the customs agent that this should be used for imports going forward and that the temporary EORI number should not be used.

3. Incoterms®/ identity of importer 

The tax rules require a specific entity/ person acts as the importer of goods. It can be common for multinational groups to be unclear as to which of their specific legal entities is acting as the importer. There can also be confusion as to whether it will be the supplier or customer that acts as importer. Frequently there is a tension between the overseas seller not wanting to be the importer into the UK, as to do so would create VAT and customs duty obligations for them to manage, versus the customer preferring the supplier to handle the import formalities in order that the seller make a ‘simple’ sale of goods within the UK. Whatever the commercial decision, this needs to be communicated to the customs agent who will be facilitating the import entry.

Organisations are regularly having to refer back to the import entry documents to identify which entity has been named as the importer of record.

A further area of confusion is Incoterms®. These are a set of rules which outline the role between buyers and sellers for the delivery of goods under contracts for international trade. The primary aim of Incoterms® is to make the respective responsibilities of the buyer and seller clear in order to minimize misunderstandings. However, experience has shown it is not uncommon for there to be inconsistencies/ confusion between buyer and seller about the terms being used and in particular who will act as the exporter from the origin country and importer into the destination country.

Businesses dealing in international trade use Incoterms® to define contract terms such as:

• who handles customs procedures such as paying the duties and import VAT
• where the goods will be delivered
• who arranges transport; who is on 'risk' for the goods
• who is responsible for insuring the goods.

The consequences of all the points of confusion noted above can be costs or delays of having to complete customs import formalities, and financial costs of having to pay import taxes when they were not expected. In some situations, the seller may also have to set-up and maintain a VAT registration in the country of import that could otherwise have been avoided.

4. Incoterms®/ identity of importer

The tax rules require a specific entity/ person acts as the importer of goods. It can be common for multinational groups to be unclear as to which of their specific legal entities is acting as the importer. There can also be confusion as to whether it will be the supplier or customer that acts as importer. Frequently there is a tension between the overseas seller not wanting to be the importer into the UK, as to do so would create VAT and customs duty obligations, versus the customer preferring the supplier to handle the import formalities in order that the seller make a ‘simple’ sale of goods within the UK. Whatever the commercial decision, this needs to be communicated to the customs agent who will be facilitating the import entry.

Organisations are regularly having to refer back to the import entry documents to identify which entity has been named as the importer of record.

A further area of confusion is Incoterms®. These are a set of rules which outline the role between buyers and sellers for the delivery of goods under contracts for international trade. The primary aim of Incoterms® is to make the respective responsibilities of the buyer and seller clear in order to minimize misunderstandings. However, experience has shown it is not uncommon for there to be inconsistencies/ confusion between buyer and seller about the terms being used and in particular who will act as the exporter from the origin country and importer into the destination country.

Businesses dealing in international trade use Incoterms® to define contract terms such as:

• who handles customs procedures such as paying the duties and import VAT
• where the goods will be delivered
• who arranges transport; who is on 'risk' for the goods
• who is responsible for insuring the goods.

The consequences of all the points of confusion noted above can be costs or delays of having to complete customs import formalities, and financial costs of having to pay import taxes when they were not expected. In some situations, the seller may also have to set-up and maintain a VAT registration in the country of import that could otherwise have been avoided.