Who should account for import VAT?
Will the incorrect treatment of import VAT cause companies to fail post Brexit?
Background
Although Incoterms® define the responsibility of the buyer and the seller relating to the movement and shipping of goods, they do not address the transfer of ownership of those goods. It is common that a UK purchaser will be responsible for the importation, unless delivered duty paid (DDP) terms apply. However, they might not take title to the goods for some time, e.g. if the change in ownership is linked to settlement.
To avoid post clearance demands for import VAT, tax which could not then be recovered, companies need to ensure that they take ‘ownership’ of the goods, in terms of their VAT treatment, at the appropriate time. This is particularly relevant following the implementation of postponed VAT accounting. As import VAT is now accounted for via a bookkeeping exercise, with no requirement to pay any money to HMRC, importers may fall into the trap of accounting for import VAT when a delay in the transfer of ownership does not allow for it.
Customs Brief 2(2019)
In 2019, HMRC published a paper to explain the correct treatment for the deduction of import VAT paid by a taxable person who was not the owner of the relevant goods:
This paper made it clear that HMRC had not accounted for import VAT correctly in the past and that it would not make the same mistake again. The particular area of concern related to importers that entered goods into the UK for processing, where ownership did not change, i.e. the importer was paid to process or repair goods belonging to someone else.
Customs Brief 15(2020)
This initial guidance was limited in scope and, in 2020, a further paper was published. This looked at specific examples, such as leased goods and goods placed in a customs warehouse:
The second policy paper, stated that the views set out in Revenue and Customs Brief 2 (2019) remained correct. Again, it was stressed that only the owner of the goods should declare them at import if the associated import VAT was to be recovered.
This second piece of guidance remained limited in scope, e.g. it did not detail what would apply in relation to regular imports.
HMRC Internal Instructions
HMRC subsequently updated its internal instructions to its Officers, setting out the fundamental basis for import VAT recovery linked to the ownership of the goods:
https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit13300
This set out two key principles:
1. “Meaning of Ownership
When we refer to the owner as having ownership of the goods, this needs to be seen specifically in the VAT context of ownership being ‘the right to dispose of goods as owner’. It is accepted that, as long as the contract of ownership envisages that title will pass at some future date (usually on payment), title does not need to have passed at that earlier point. Typically, contractual arrangements will often allow the ‘owner’ to use and dispose of the goods as they see fit.”
Based on the above, where the UK importer does not own the goods at the time of their clearance, the purchase agreement must allow the onward sale of the goods prior to the overseas supplier being paid.
2. “Where ownership has passed before import into the UK
In some situations, overseas businesses may sell goods to their UK customers prior to importation into the UK. The overseas seller may continue to act as the ‘importer of record’ on UK import declarations, pay the import VAT to HMRC and receive the import VAT certificate (C79). However, in these circumstances it is the UK ‘owner’ who has the right to recover the import VAT.”
It follows that the UK importer should not take title to the goods prior to their entry into the UK, which is entirely possible if the goods have been purchased in advance. This point is of particular note to any customs agent that might represent the overseas shipper, given that they will act as their client’s indirect representative and so be jointly liable for any under declared import VAT.
