Cargo shipment transport trade

Brexit: VAT and Customs - Where is my import VAT?

Rob Marchant, Partner, VAT and Customs Duty services
19/10/2021
Cargo shipment transport trade

This article was first published on Forbes online.

Experience has shown that many organisations are struggling with the changes arising from Brexit to the process for bringing goods to the UK and the consequent requirements for customs declarations and paying and reclaiming import VAT. Frequently, businesses are unsure whether they have paid import VAT and, if so, how it is to be reclaimed. Getting this wrong can lead to expensive irrecoverable VAT costs as well as the risk of penalties for no/ incorrect customs declarations. There appears to be several reasons behind the uncertainty:

Misunderstandings about how to operate the new Postponed Import VAT Accounting (PIVA) scheme.

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.

Whilst PIVA is a positive development, a decision has to be made for each import as to whether it will be used and 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.

From a process perspective, some businesses have been unaware of the need to have an account separate from the HMRC Gateway to access the online PIVA statements. The set-up of this account is a one-off exercise. For more details on this see our previous ARTICLE HERE. When preparing their VAT return, organisations are then required to access their online Customs Declaration Service (CDS) account to download their PIVA statement in order to then include the import transactions 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.

Import declarations having been delayed.

2. Delayed customs duty declarations

A Brexit easement introduced earlier this year allows businesses to opt to delay submission of their Customs declarations for goods imported into the UK from the EU since 1 January 2021. This means that a full customs duty declaration is not needed for an import for a period of 175 days following arrival. Under this scheme, the importer must either submit a simplified declaration or make an entry of relevant data in their own records when the goods are imported, and follow-up with a detailed supplementary declaration within the 175 days limit; if this is not done then the goods are deemed to have not been legally declared, and could be subject to forfeiture and penalties.

Experience shows that some businesses were not aware that there was an ability to delay declarations and it appears that some imports have been made in this way without the importing businesses being fully aware of what this means and the actions that subsequently need to be taken.

As well as the compliance risk of not subsequently making the full import declaration/ having the information available to do so, there is also an impact on the import VAT position as businesses who opt to delay declarations should estimate the amount of import VAT payable and account for this using Postponed Import VAT accounting on the relevant VAT return for the period in which the import took place. In many cases, this is not happening.

HMRC have indicated that they will not seek to charge a penalty for errors where reasonable care has been taken to follow the guidance when preparing the VAT return. Where an estimation of the import VAT due is not declared on the VAT return, this would indicate that reasonable care has not been taken.

Use of a temporary EORI number.

3. Temporary EORI number

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 then contact HMRC to both link the temporary EORI number to the UK VAT registration and actual EORI number and to subsequently 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.

Confusion as to whether the supplier or customer is acting as importer of record and the significance of incoterms.

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.

Insufficient communication with the customs agent completing the customs entry.

5. Communication with the customs agent

Most businesses choose to appoint a 3rd party customs agent or broker to file their import declarations for them. This person is usually, but not always, connected with the logistics company that arranges the physical movement of the products. Whilst there are situations where the customs agent is financially liable for any import taxes due, they are generally only acting as agent for the importer in completing the import entry. They are reliant on the information provided to them and any incomplete or contradictory information can result in delays whilst this is resolved or errors with the import entry. The accuracy of the customs entry is therefore reliant to a large degree on the quality of the communication between the customs agent and the shipper. In situations where, as noted above, there is confusion between the seller and customer as to who is to act as importer, this is likely to cause difficulties for the customs agent in implementing the instructions at the time of completing the customs entry.

In summary

The consequence of the uncertainties/ areas of common difficulty described above is that it not uncommon for businesses to have imported goods and to have "missing" import VAT. As most businesses trading in goods are able to reclaim the VAT they incur it is crucial to ensure that the correct administrative steps are taken so that the import VAT paid does not become an unexpected cost. Where there are errors with import entries it suggests that there are process failings which should be addressed.

 How to know what you don't know
 From an import into the UK perspective, one way to assess Brexit's impact so far is to review the business' MSS data. This is a data set available from HMRC that details exactly what information has been declared to HMRC for all imports in the period. Obtaining and reviewing this data can be eye-opening for a business as organisations "don't know, what they don't know."  Reviewing the data may find unexpected imports, incorrect classification codes, or a failure to claim preferential origin, meaning that duty has been overpaid. Of course, the data could also reveal errors that not enough customs duty has been paid. But the principal point is that the data will show the business precisely what has been declared to HMRC so far, providing a platform to assess whether improvements can be made. If the reports don’t show imports that the business expected to have made then it suggests that the imports are either being declared by someone else or that the declarations have been delayed. Either situation would result in compliance actions that the business should take.

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Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London