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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.

1st Oct 2019
Independent VAT Consultant
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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!  

Example

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.

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

Current procedure:

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.

Conclusion

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.

Replies (8)

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By Malcolm McFarlin
02nd Oct 2019 10:50

I agree excellent cash flow for the trade. I was working in HMRC when postponed accounting was being used, based at Liverpool VAT office. There were many traders who claimed the input tax but forgot or omitted to declare the corresponding output tax in Box 2! That was in the days when there was no interest on assessments and no penalties.
It was one of the first checks made as a visiting VAT officer .

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By Malcolm McFarlin
02nd Oct 2019 10:54

Postponed accounting caused a great deal of confusion

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By sammerchant
02nd Oct 2019 10:52

I see that the new regulations were passed by Statutory Instrument. These are rarely, if ever, subject to any scrutiny by Parliament. They should be used sparingly, rather than the way they are resorted to now.

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By AndrewV12
02nd Oct 2019 11:21

It looks a good system, not to complicated, builds on some current vat rules.

Wow, who the hell would have thought we would be going down this road on the 23 June 2016 ( I think it was that date it was a long ago).

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By ireallyshouldknowthisbut
02nd Oct 2019 12:10

Of course Neil, MTD will fix this sort of thing so such errors cant possible happen as the computer will get it right.

Of course it will!

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Hallerud at Easter
By DJKL
02nd Oct 2019 14:11

I think my main concern could more be some accountants lacking sufficient knowledge to correctly advise their clients re such changes; posts on Accounting Web suggest to me that such a change in approach will readily pass by myriad parties whose role is meant to be to advise their clients, they will be unable to advise what they themselves are unaware has changed.

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JD Portrait
By John Downes
02nd Oct 2019 14:50

The new scheme extends to rest of the world imports EXACTLY the same procedure that we've all been using for EU imports for years. Seems sensible enough to me, and I really can't see you are making a fuss about.

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By stephen_walton
03rd Oct 2019 07:53

Whilst I understand the potential fraud risks the Government have finally woken up to the true and hard facts that many businesses that predominantly import from the EU simply do not have the initial hard cash (not assets) to continue trading if no such concession was granted and the scale of SME failure could be catastrophic if this is not implemented.

Furthermore the DDP situation is exceptionally worrying and confirmation as to the acceptance of the revised proposed duties issued on 13 March would bring further comfort to importers

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