Brexit brings back 1980s postponed accounting VAT rule
Postponed accounting for VAT imports is due to return after a 35-year absence when the UK leaves the EU, as Neil Warren explains.
If you worked in accountancy (or VAT) up until 1984, you may remember that VAT on imported goods was dealt with by postponed accounting, where the importer had a UK VAT number. I was working for Customs and Excise in Milton Keynes in that year, so it was a very important part of my life. Postponed accounting was abolished by Nigel Lawson in his 1984 Budget speech.
How it works
Postponed accounting means that the importer does not pay import VAT when the goods arrive at the UK port or airport: it is deferred. The importer instead posts the VAT to Box 2 of their relevant VAT return (acquisition tax). Assuming they can claim input tax in full on the goods (no private, exempt or non-business use), the same amount is claimed as input tax in Box 4 on the same return.
This system means that there are no adverse cash flow issues of paying VAT and waiting up to three months to claim input tax as we have at the moment.
Same for EU and non-EU imports
If we leave the EU without an agreement regarding VAT (no-deal Brexit), imports from EU countries will be subject to duty and VAT when they arrive in the UK. This situation has always applied to imports from outside the EU. In effect, there will be no difference in VAT treatment for goods arriving from France or America.
The new regulations for postponed accounting have been passed (SI 2019/60) and will come into effect on a day to be named by the Treasury. HMRC has not yet confirmed if postponed accounting will be available in scenarios other than a no-deal Brexit.
Potential for fraud
When I first learned about the planned reintroduction of postponed accounting, I was struck by the potential horrific risks to the tax yield.
All EU goods are currently imported VAT-free but the EC Sales List system is in place so HMRC and other tax EU bodies have an idea about what goods are moving across EU borders. The government has confirmed that UK businesses will not be required to complete EC Sales Lists following a no-deal Brexit.
Think of the VAT frauds that could emerge if goods arrive in the UK VAT-free, with the government relying on business owners to do the correct self-accounting entries on their VAT returns.
We know from the last few weeks how much confusion the planned reverse charge rules for the construction industry were likely to create!
Say a business owner buys a new yacht from Russia and claims it will be wholly used for business purposes (commercial hiring). Currently, they have to pay the VAT when the goods arrive in the UK and make an input tax claim in Box 4 of their next return. This will almost certainly create a repayment VAT return and likely interest from HMRC’s pre-repayment team.
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Using postponed accounting there is no VAT repayment because Box 2 cancels out Box 4. Will the HMRC query still arise? To me, it sounds like the stable door could be opened for a very dangerous wild horse.
VAT return boxes
Let’s work through the above example with some numbers, considering what happens now with VAT and what would happen under postponed accounting.
Example with numbers
Steve imports a boat from Russia for £500,000
Steve will pay customs duty at import, say £50,000, and then VAT on the duty inclusive amount ie £110,000. He will claim input tax in Box 4 of his return, supported by a C79 document. He will also record the purchase in Box 7 of his return (the inputs box).
HMRC will review Steve’s VAT return (likely to be a repayment) and may challenge his view that 100% of the yacht will be for business use. HMRC may perhaps agree with Steve a reasonable input tax apportionment, such as 50% of the VAT can be claimed instead.
Postponed accounting procedure:
VAT of £110,000 will still be charged, but it is not paid at the point of import - only the duty will be paid. Steve will include the following postponed accounting entries on his return, again based on the C79 document:
Box 2: £110,000
Box 4: £110,000
Box 7: £550,000
Box 9: £550,000
The above entries highlight an important point; Box 8 will include all exports of goods (both EU and non-EU) after the UK leaves the EU, and Box 9 will include worldwide imports. At present only EU purchases and sales of goods are included.
Will HMRC’s team in Salford query this VAT return, which is no longer likely to be a repayment? What happens if Steve omits the entry completely from the return by mistake?
In my opinion, it’s all a bit haphazard and a car crash waiting to happen.
Despite my reservations, postponed accounting is excellent news for business cash flow.
If I recall correctly, its end in 1984 produced £1bn of extra cash flow for the exchequer because of the timing differences. I suspect that the reintroduction when the UK leaves the EU will cause an adverse cash flow outcome of probably three times this amount, due to inflation and economic growth. This must mean higher taxes or higher government borrowing.
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.