October 2021
Experience has shown that many organizations are struggling with the changes arising from Brexit to the process for bringing goods to the UK, 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 and the risk of penalties for no/ incorrect customs declarations. There appear to be several reasons behind the uncertainty:
- Misunderstandings about how to operate the new Postponed Import VAT Accounting (PIVA) scheme.
- Delayed import declarations
- Use of a temporary EORI number.
- Confusion as to whether the supplier or customer acts as the importer of record and the significance of incoterms.
- Insufficient communication with the customs agent completing the customs entry.
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, 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 and additional costs.
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 has confused businesses and requires amendments to existing VAT return preparation processes.
Some businesses have been unaware of needing an account separate from the HMRC Gateway to access the online PIVA statements. The set-up of this account is a one-off exercise. When preparing their VAT return, organizations are then required to access their online Customs Declaration Service (CDS) account to download their PIVA statement to 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.
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. Some imports have been made this way, without the importing companies fully aware of what this means and the actions that subsequently need to be taken.
As well as the compliance risk of not 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 indicated 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.
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 complete, and sometimes longer. This can mean that businesses have committed to sending products to the UK but are not set up to import themselves. If their customer is unwilling/ it is not commercially desirable for the customer to act as the importer, the supplier is left with no choice but to obtain a temporary EORI number from HMRC so that the supplier can be the 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 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 quickly erode the supplier’s profit margin.
It is essential to be aware that an EORI number enables an import to occur; it does not confer any ability to reclaim the UK import VAT paid. To reclaim the import VAT, once the VAT registration is approved, it is necessary to contact HMRC to link the temporary EORI number to the UK VAT registration and actual EORI number and 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 several 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.
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 which particular legal entity acts as the importer. There can also be confusion about whether the supplier or customer acts as the 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 so that the seller makes a ‘simple’ sale of goods within the UK. Whatever the commercial decision, this needs to be communicated to the customs agent facilitating the import entry.
Organizations regularly have to refer back to the import entry documents to identify which entity has been named 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 to minimize misunderstandings. However, experience has shown that 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 paying 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.
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. While 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 while this is resolved or errors with the import entry. Therefore, the accuracy of the customs entry is mainly reliant 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 is not uncommon for businesses to have imported goods and “missing” import VAT. As most companies trading in goods are in principle entitled to reclaim the import VAT they pay, it is crucial to ensure that the correct administrative steps are taken so that the import VAT does not become an unexpected cost. Where there are errors with import entries, it suggests that process failings should be addressed.