Value-added tax (VAT) regulations are not always straightforward. While it may be a well-established concept, for example, many business owners either misunderstand or ignore the fact that only the owner of goods at the time of their import is entitled to deduct import VAT that is due—and only then if the correct evidence is held.
With many businesses continuing to operate incorrectly, cases on the matter have been heard in the Court of Justice of the European Union (CJEU), and tax authorities, including those of the U.K. and Germany, have recently had to issue guidelines to clarify and reinforce the position.
In 2019, the U.K. tax authority, HM Revenue & Customs (HMRC) had to issue a Business Brief to clarify the position. HMRC confirmed in the document that its previous guidance was not clear on the matter, and so adopted a light touch on earlier non-compliance.
And Brexit has only complicated the matter—until this year, many freight forwarders had not previously dealt with imports.
Of course, HMRC’s light touch on non-compliance will only last so long. It is important, therefore, that businesses ensure they understand and comply with the VAT rules around imports to avoid potentially costly misunderstandings, errors and—on occasion—deliberate shortcuts.
Freight Forwarders as Importers
There have been cases in the past in which a logistics provider has intentionally acted as an importer because the owner of the goods in question did not have a VAT registration.
In its Business Brief, HMRC refers to an example of toll manufacturing in the pharmaceutical industry—a practice in which a company with specialized equipment has an arrangement to process raw materials or unfinished goods for another company. In this particular case, the toll manufacturers were importing active ingredients owned by a U.S.-based pharmaceutical company, turning these ingredients into tablets, and then distributing them on behalf of the owner to be used in clinical trials. But this arrangement was wrong. The toll manufacturers were paying the import VAT, when it was actually the responsibility of the U.S. company, who should then have submitted a repayment claim under the EU 13th Directive.
A recent CJEU case, Weindel Logistik Service (C-621/19), concerned a Slovakian company that reconditioned machinery on behalf of a Swiss customer who owned the goods. As part of its service, Weindel took care of the import of the machinery, and dealt with customs formalities including paying and deducting the import VAT. This practice was deemed by the CJEU to be non-compliant with the EU VAT Directive.
Incorrect Identities and Origins
Incorrect identification of the importer can be problematic. Within the U.K. and the EU, imports are declared on a Single Administrative Document (SAD), on which the name of the consignee/importer is required to be shown in Box 8. There have been situations in the U.K., however, where freight forwarders have used their own deferment account to deal with import VAT, which requires them to enter their Economic Operators Registration and Identification (EORI) number in Box 8 of the SAD.
The issue here is that, even though the goods were imported—usually in good faith—by the freight forwarder on behalf of the goods’ owner, the evidence required to deduct the import VAT was incorrectly issued in the name of the freight forwarder, and thus failed to comply with the regulations.
In addition, although it does not directly affect the payment of import VAT, the routing of goods should always be clear. Consider the example of a U.K.-based company selling goods to a German customer. The goods were to be first physically imported into the Netherlands before being dispatched to Germany, but the freight forwarder misunderstood and imported the goods directly into Germany. This created an unwanted requirement for the supplier in the UK to be VAT-registered in Germany.
Under the Union Customs Code (UCC) , only businesses established in the EU can act as the declarant. U.K. companies must, therefore, now engage EU-based freight forwarders to act for them and enter their details as declarants in Box 14 on the SAD.
Since the U.K. officially left the EU on January 1, 2021 many freight forwarders have found themselves having to deal with imports for the first time and this is, perhaps understandably, leading to misunderstandings and errors.
To take an example, a company selling goods delivered duty paid (DDP) to a French customer had to first import those goods into France and then sell them locally. The SAD was completed correctly, with the U.K. supplier shown as the importer in Box 8, but the French forwarder, apparently under instruction from French Customs, was asked to put the French customer’s name in Box 8 since it refers to “consignee.”
It was pointed out to the French Customs officer that doing so means the U.K. supplier would not have the evidence needed to deduct the import VAT. But this argument fell on deaf ears, and the U.K. supplier had to renegotiate the International Commercial Terms (incoterms) so that the French customer becomes the importer of record. Frustratingly, had the U.K. company followed the instructions to comply with French Customs, it would have fallen foul of tax office requirements.
When you consider that this is just one example of many, it is little surprise that new post-Brexit arrangements are proving to be a real headache when it comes to import VAT compliance.
There is certainly a great deal of confusion and uncertainty around import VAT. A lack of clear guidance from HMRC and the impact of Brexit have only served to muddy the waters. While some of the issues may only become clear after the event, and therefore too late, the following points should go some way to providing UK businesses with some clarity.
Before making any imports, companies should consider why they are importing those particular goods, and what the company will do with them after import. Companies should ask whether they have a VAT number in the country of import or if they will require one, whether the VAT is paid or if there is postponed accounting, and how the import VAT will be recovered—will it be via a refund directive claim, for instance, or by VAT return?
It is important, too, that the supplier gives very clear instructions to the freight forwarder about where the goods will be imported and how the documents should be completed.
In the case of longstanding supply chains, a business may already know much of this information, of course. Following Brexit, though, many of those supply chains may only recently have become subject to import VAT and may be unclear themselves.
VAT regulations are not always straightforward, and recent circumstances have conspired to make import VAT even less so. Any business involved in international imports should consider taking a step back and giving some thought to navigating this potential regulatory minefield.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
David Stokes is Director VAT, Europe, with Sovos.
The author may be contacted at: email@example.com