Horrors hidden in import VAT rules
If businesses incorrectly reclaim import VAT on goods they don’t own, they can be in for a nasty surprise. HMRC has clarified its policy in this area as Neil Warren explains.
There’s a lot going on in the VAT world at the moment, so Revenue and Customs Brief 15/2020 issued by HMRC on 2 October 2020 is probably not on your bedtime reading list.
This Brief covers a very practical issue, looking at situations when import VAT is reclaimed by a VAT registered business or organisation on goods it does not own. This should not happen unless the importer is acting as agent for the owner, so claims input tax and charges output tax when the goods are resold in the UK (s 47, VATA 1994).
True story – lease of equipment
About six years ago, a Chinese based company imported some equipment into the UK worth £1m. Let’s say duty of £100,000 was paid and VAT of £220,000 on the duty inclusive figure. The equipment was leased by the Chinese company to a VAT registered UK business for an annual fee of £250,000. What are the VAT issues?
The Chinese company has no permanent establishment in the UK but is making taxable supplies of leasing – this is a service. However, when an overseas business supplies services to a VAT registered UK customer, the VAT is dealt with by the customer doing the reverse charge. This avoids the overseas supplier having to register for UK VAT and charge output tax.
In other words, annual output tax of £50,000 (on the annual fee of £250,000) should be included in Box 1 of the lessee’s VAT returns and the same amount is claimed as input tax in Box 4. The input tax claim assumes the equipment is wholly used for taxable purposes, ie there is no exempt, private or non-business use.
The problem was that the UK equipment hirer (lessee) was declared as the importer and claimed input tax of £220,000 on its own VAT return, supported by a C79 certificate. This seemed to be a good idea because it had a UK VAT registration in place, unlike the Chinese company.
Can you see the problem? A business cannot claim input tax or import VAT on goods that belong to someone else.
13th Directive claim
The correct route should have been for the Chinese company to be declared as the importer - it would have reclaimed the £220,000 VAT from HMRC by making a 13th Directive claim ie a VAT refund to a non-EU business. The claim is made on form VAT65A, and the annual deadline date is 31 December, in relation to VAT paid up to the previous 30 June (VAT Notice 723A).
The potential horrible outcome of this story could have resulted in a large VAT bill, if:
- The incorrect input tax claim by the lessee comes to light two or three years later, and HMRC raise an assessment for £220,000 plus interest.
- It is now impossible for the Chinese company to salvage the problem by doing a 13th Directive claim as owner of the goods because it has missed the deadline to do so.
In my story, the problem only came to light at the end of the five-year leasing agreement when the equipment was being sold to a third party in the UK.
The question was whether the Chinese company should register for UK VAT and account for output tax (yes) or the UK lessee should make the sale and charge VAT because it claimed input tax (no).
However, the piece of good luck was that the incorrect input tax claim made by the lessee five years earlier was now out of time under the four-year error correction limit. The UK and Chinese companies had escaped a major problem by the skin of their teeth.
The above scenario is included in the Brief 15/2020, under the section: “Goods imported for onward leasing”