Brace for Brexit 21: Preparing for postponed VAT accounting
Businesses must take two preliminary steps before they can use postponed accounting to delay payment of import VAT. New HMRC guidance explains what importers must do.
Up until 31 December 2020, import VAT is payable upon goods arriving into the UK from outside the EU. That VAT is usually paid by the freight agent, or the buyer may have a deferment account.
Import VAT from 2021
From 1 January 2021, the way import VAT (and duty) is accounted for will change, regardless of whether a trade deal is reached with the EU or not. You need to take action now if you import any goods into GB.
Any goods entering the UK, from anywhere in the world (including EU), will be subject to import VAT. Import duty may also be due - that remains a matter for the future trade deal with the EU, but the VAT element is a known certainty.
The GB buyer (importer) is usually the party responsible for paying import VAT, although the seller may be responsible if that is what they have decided.
Usually import VAT must be paid before the goods are released, but the main benefit of Postponed VAT Accounting (PVA) is that the importer can account for import VAT on their VAT return
Freight agent (UPS) will give HMRC the buyer’s GB VAT and EORI number - this allows the goods to pass without payment of VAT. The buyer accounts for this import VAT by declaring it on their VAT return in Box 1 (output) and in Box 4 (input) so there is no cashflow impact. The buyer also includes the net value in Box 7 (purchases excluding VAT).
If the business is partially exempt, then import VAT is declared in full in Box 1 but input tax recovery in Box 4 will be determined by the partial exemption calculation.
The import VAT is not based on the value of the goods alone, but on the value of goods, plus cost of carriage, plus import duty (if any).
Goods valued at £1,000 enter the GB. The carriage costs are £50, and 1% import duty (£10.50) is also due. The import VAT is calculated as: £1,000 + £50 + £10.50 = £1,060.50 x 20% =£212.10 VAT.
It is not as simple as adding 20% to the net price of your goods to work out your Box 1 and 4.
Register for CDS
An importer is not required to use Postponed VAT Accounting, but it makes sense from a cashflow perspective. The importer will need to see their monthly import VAT statements in order to make accurate VAT returns.
The import statements can only be accessed if the importer is registered for the Customs Declaration Service (CDS). If you use postponed accounting, in order to make accurate VAT returns, the business must view the information in their CDS account.
- To access the CDS the business must have a GB EORI number. If you do not have an EORI number, you can apply or one. The EORI number is issued instantly once the application is submitted.
- If you do not have access to the CDS already, you should register ASAP.
In the middle of every month HMRC will publish the imports and VAT for the previous month. This contains the values used to populate Box 1 and Box 4 of the VAT return. These import statements will be available online only, and only for six months. The statements will be on your registered CDS portal and we recommend you download them within six months otherwise they will be lost.
The CDS access is also needed for movement of goods between GB and Northern Ireland.
As this is a new approach and as this applies to both EU and non-EU imports, then the chances are the majority of UK businesses will be affected by these rules.
If the business wants to postpone their import VAT, they will need to get themselves set up with an EORI number and CDS registration as soon as possible. Both can be done online and take 10 minutes each to fill in/submit.
If a business already has a VAT deferment account, the option is there to retain that and continue using that approach, but businesses will want to review their position to see if a deferment account still works for them. Each business is different and should seek advice before applying for or cancelling a deferment account.
Here we have some very clear guidance from HMRC, and businesses can now act and get themselves ready for the end of the transition period.
There is still much to do but like eating an elephant, it can’t be done in one sitting. By nibbling away at each part, a piece at a time, eventually the elephant is gone, the business is nourished and ready for what 2021 brings with it.
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Jason has over 20 years’ experience working exclusively in indirect taxes (VAT, import duty, SDLT) with owner-managed businesses, corporates and not for profit sectors. He particularly enjoys challenging HMRC decisions, representing clients in tribunals or during inspections.
Experience includes land and property, partial exemption and...