After around 12 months of significant upheaval, organizations trading in goods are taking a period of reflection to assess how well their post-Brexit international supply chains have been working. Others have carried out exercises to address any gaps that may have appeared with their VAT and Customs Duty compliance obligations.
This article focuses on several areas where experience shows that organizations have struggled to meet all of their indirect tax compliance requirements due to Brexit-related changes.
An important point of context is that Brexit has resulted in more imports into the UK (previously, goods coming to the UK from the EU did not need to be imported). Many businesses are inexperienced with import/ customs formalities, increasing the potential for errors to arise. This greater risk of errors on imports is further compounded by many companies, at least during the first few months of 2021. Having had insufficient time to prepare for the new Brexit requirements, they may not have been aware of all the compliance obligations arising from their product movements. HMRC introduced several easements at the start of the year to support businesses; however, they may have added to some of the uncertainty. Most recently, the goalposts have again moved on, introducing checks and controls on imports of agri-food products from the EU, with businesses struggling to keep track of the various changing milestones. Another such example is the ability to delay customs duty declarations.
Delayed customs duty declarations
Businesses had, and still have, the ability to opt to delay their Customs declarations for goods imported into the UK from the EU since 1 January 2021. The deferral means that a full customs duty declaration is not needed for an import for a period of 175 days. Under the deferral 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 defer declarations. It appears that some imports have been made in this way without the importing businesses 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. 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 import period. In many cases, this is not happening.
HMRC has stated that they will not seek to charge a penalty for errors where reasonable care has been taken to follow the guidelines 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. On the basis that the organization is fully taxable, there would be no potential lost revenue for HMRC to seek to charge a penalty (as the import VAT is declared and recovered simultaneously). However, this may suggest to HMRC that deeper compliance issues within the organization may prompt further review.
Recovery of import VAT
Another area where there have been compliance difficulties is the recovery of import VAT. HMRC introduced postponed import VAT accounting (“PIVA”) from 1 January 2021, which allows importers to defer the payment of import VAT to 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, organizations must 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, leading to delays.
While PIVA is a positive development, a decision has to be made for each import as to whether it will be used. This results 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 recovering it via a VAT return when HMRC issues a C79 certificate.
This dual system and the need to have an account separate from the HMRC Gateway to access the online PIVA statements has confused businesses. It is also not uncommon for companies to have imported goods and have “missing” import VAT, either because they deferred the declaration, did not use PIVA (and so should receive a C79), or the transaction is missing from the PIVA statement. Where an import is missing from the PIVA statement, organizations will need to write to HMRC to rectify this; however, owing to HMRC’s lengthy processing times, this can be a long process.
Incoterms
Incoterms 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 to minimize misunderstandings. However, experience has shown it is not uncommon for inconsistencies/ confusion between buyer and seller about the terms used, particularly who will act as the exporter from the origin country and importer into the destination country.
Brexit has compounded this as there are now more transactions that are imports and exports.
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 these mismatches and inconsistencies can be costs or delays of having to complete customs import formalities and financial costs of paying import taxes when they were not expected. In some situations, the seller may also have to maintain a VAT registration in the country of import that could otherwise have been avoided.
How to know what you don’t know
For imports into the UK, 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 organizations “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 the business expected to have made, 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.
In summary
Brexit has increased the number of export and import transactions and often by businesses not experienced in customs requirements. This gives the potential for an increase in errors. This was magnified by how the UK/EU trade deal was agreed upon, with businesses having very little time to prepare and spending time reactively, with a primary aim of ensuring their products could move. Now that much of that initial reactive period has passed, organizations have more time available to identify gaps that may have appeared with their VAT and customs duty compliance obligations and take corrective action.