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Brace for Brexit 2: Postponed accounting

The law will change for VAT on imported goods from 1 January 2021, but to help businesses postponed accounting will be introduced on the same date.

27th Oct 2020
Independent VAT Consultant
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Brace for Brexit

How it works

Postponed accounting will be introduced on 1 January 2021. This will mean that a VAT registered business will not pay VAT on imported goods when they arrive in the UK. The VAT payment will be postponed and instead declared in Box 1 and Box 4 of the next VAT return submitted by the business. The net payment for the goods and any duty will be included in the Box 7 inputs box.

Cash flow boost for business

I have worked in VAT long enough to remember when we last had postponed accounting in the UK before it was abolished in 1984 by Chancellor Nigel Lawson. The abolition produced a one-off cash flow boost of £1bn for the government because it resulted in a time delay between paying VAT at the border and then claiming input tax. The opposite now applies and there will be negative cash flow outcome for the government. An importer that is not VAT registered will still pay VAT when the goods arrive in the UK.

VAT returns

HMRC has made it very clear that trading in goods with EU countries will be the same as for non-EU countries. References to goods sold into the EU as ‘dispatches’ will end, as will the description of ‘arrivals’ for goods coming into the UK.

Does that mean that Boxes 2, 8 and 9 of our nine-box VAT return can be removed after 1 January 2021, because they only relate to EU sales and purchases of goods, which will no longer get special treatment?

The answer is no, because these boxes will still be needed by businesses based in Northern Ireland, which will continue to make EU acquisitions and dispatches as part of the Northern Ireland Protocol. But for businesses based in Great Britain, only six boxes will be relevant from 1 January 2021.

Example

Janet is VAT registered and imported £50,000 of women’s clothing and £5,000 of children’s clothing on 31 January 2021. She will resell the goods in the UK. Janet will declare £10,000 (20% x £50,000) in Box 1 of her VAT return that includes January 2021, and claim the same amount as input tax in Box 4 because the goods are being used for a taxable business purpose. The net expense of £55,000 is included in Box 7. No VAT is payable on the children’s clothing because they are zero-rated.

Key issues

It is important to be clear on three issues:

  • Postponed accounting will apply to all imports of goods from 1 January 2021 ie EU and non-EU imports.
  • Customs declarations on imports of non-controlled goods can be deferred by up to six months until 1 July 2021. But the postponed accounting entries on VAT returns must still be made according to the date of the import, even if this involves an estimation of the figures.
  • The Box 4 entry on VAT returns must go through the same input tax tests as a purchase invoice from a UK supplier, ie adjusted for any exempt, non-business or private use. This claim will be supported by C79 documents issued by HMRC.

Conclusion

Going back to the early 1980s, when I worked for Customs and Excise in Milton Keynes, postponed accounting on imports seemed to work very well. That was in the days when a business had to get permission from the department to use a computer to complete its VAT returns! Most smaller businesses operated manual bookkeeping systems such as Kalamazoo.

I am therefore confident that the reintroduction of postponed accounting in 2021 will not be a big problem for our clients. But to quote the boy scouts’ motto: Be Prepared.

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Replies (6)

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By Moonbeam
28th Oct 2020 09:59

I started off by thinking January 2021 is a year away. I then had a nervous breakdown.
Then I read your article and was reassured.
thank you.

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By dialm4accounts
28th Oct 2020 12:16

Hi Neil. Thanks very much for this.
If a business is on the flat rate scheme, they can't currently reclaim VAT on EU acquisitions (in other words, they include it in box 2, but not box 4).
Would you expect this to continue in January 2021, please - in other words, a business on the flat rate scheme would include the VAT payment in box 1, but not in box 4?
Thanks.

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joe
By Smokoe Joe
28th Oct 2020 12:49

I am assuming therefore the UK import agent requires a valid UK VAT number from the importer to clear the goods as they do now anyway, if not then VAT will be paid before clearance?

Can you help with this, not EU but assume this applies to all imports.

A client is an NETP based in US, so at present they import goods and get a C79

The goods are sold with VAT to VAT registered UK retail chains

So for example they import goods with a cost of £20,000, they are charged £4,000 import VAT by the import agent (and say £1,000 duty @ 5%).

The sale price is say £50,000 net so the buyer pays them £60,000.

On the VAT return they declare £10,000 output VAT, reclaim the £4000 input VAT from the C79 and pay the £6000 difference to HMRC

How will this work after 01/01/21?

I am thinking they only pay the £1,000 import duty, the VAT return will show £14000 output VAT and £4,000 input VAT and they pay over the £10,000 with the VAT Return, so they get a cashflow advantage on the £4,000 from import to VAT return, which could be up to 4 months if they import on day one of their VAT quarter?

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By Steve Botham
28th Oct 2020 12:53

Big tip. Make sure early that your business is eligible to use PAS. HMRC has indicated that only businesses with a good compliance record can use PAS.

At the moment there is no indication as to which businesses HMRC sees as non-compliant - it could be you. Instead of winning the lottery you could face goods caught up at the port as you hurriedly try to finance the VAT on the import.

I've seen no official resource for checking your business's status - all that is left at this stage is to call the National Helpline. Yes, I do appreciate the difficulties with that.

Newly registered businesses, including those from EU member states with new registrations following the end of the transition period, will face a challenge - they have no track record. Could new VAT numbers have to wait for say twelve months before using PAS?

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By Hugh Scantlebury
28th Oct 2020 13:16

Correct, from 1 January 2021, following the end of the Brexit Transition Period, and if you’re a UK VAT-registered business, you will need to account for import VAT on your VAT Return (also called postponed VAT accounting). Full details of the new regulations can be found at:

https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on...

To support the new arrangements additional options have already been included into the definition of VAT Rates with our Cloud based accounting systems at Aqilla. When defining Reverse Charge VAT it is now possible to define whether VAT boxes 1, 4, 6, & 7 or just boxes 1, 4, & 7 are to be reported as is the case for PVA.

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By NewlyQualified
02nd Nov 2020 10:48

Thank you - well explained and simple to understand.

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