What is Postponed VAT Accounting
Postponed VAT 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 VAT Frauds
When I first learned about the planned reintroduction of postponed VAT 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!
VAT Accounting 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.
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.
Postponed Accounting for VAT How-To
Despite my reservations, postponed VAT 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.
How to start using postponed accounting
There is no requirement to obtain permission to apply postponed VAT accounting. Except for businesses which submit an authorised simplified declaration before 1 January 2021, VAT registered businesses can apply postponed accounting from that date provided the imported goods are for use in their business and they have included their Economic Operators Registration and Identification (EORI) number on their customs declaration. VAT must be accounted for in the VAT return which includes the date on which the goods are imported.
Consequently, traders who are eligible to defer customs declarations will have to estimate their imported VAT from their own records and make any necessary adjustment when they receive the statement confirming actual import VAT due after submitting their deferred declaration.
The timing for declaring import VAT alters for businesses which import goods into special arrangements including customs warehousing and duty suspension. Import VAT is accounted for in the VAT return which covers the date on which the goods are released for use in the UK.
Businesses are still working towards 2021 without full certainty on how cross border trade will operate. For example, a promised update on the VAT treatment of imported consignments not exceeding £135 in value is awaited. In addition, guidance specific to trade between Northern Ireland will not be finalised until negotiations are concluded with the EU.
Perhaps with a consciousness that supply of import agent services may not readily meet demand, HMRC’s guidance also points to customs training providers as a source of assistance.
For those businesses which do go through to tackle Customs declarations themselves, they will have to apply for access to Customs Handling of Import and Export Freight (CHIEF) system and have compatible software.
The CHIEF system is being replaced by Customs Declaration Service (CDS), but the target date for implementation has moved back and there is to be a period of the systems running in parallel.
The Government has announced that border controls will be introduced in three stages up to 1 July 2021 to smooth the transition.
- – In the first phase controlled and excise goods will require full customs declarations but people importing standard goods will have up to six months to make their declarations and pay tariffs.
- – In the second phase from April 2021, all products of animal origin and regulated plant products will have to have pre-notification and the relevant health documentation.
- – In the third phase from July 2021, full customs declarations will have to be made at the point of importation and tariffs paid. All animal and plant border checks will take place at Border Control Posts in the UK.