Following the U.K.’s departure from the EU, many U.K. businesses are faced with import value-added tax (VAT) for the first time—within the U.K., and also, depending on agreed Incoterms (International Commercial Terms), the EU.
Where goods are imported, import VAT is normally payable at the time of import before the goods are released from customs. This VAT is then recoverable according to the rules of deduction in the country in which it is incurred using the appropriate procedure.
Where VAT is actually paid at the border it is deducted on the next VAT return if the taxpayer is VAT-registered in the country of import and required to file periodic VAT returns, or recovered via a 13th Directive claim if the non-EU importer is not VAT-registered in the member state of import.
However, for claims under the 13th Directive, member states can invoke “reciprocity” and refuse to make a refund to claimants. For example, several member states, including Germany and Poland, maintain a list of countries that are able to submit 13th Directive claims. At the time of writing, the U.K. did not appear on these lists.
Where VAT is postponed to the VAT return then import VAT must be accounted for on the next VAT return. In all cases, including postponed accounting, the import VAT can only be deducted or recovered if the taxpayer holds the correct evidence—and has the correct profile. This in itself highlights the importance for businesses to understand the evidence requirements and ensure that procedures are implemented to obtain and preserve the records required.
Correct VAT Profile
When goods are imported into the U.K. or the EU and then sold (in the U.K. or EU) there may be a requirement for the seller to obtain a local VAT number and charge local VAT. In such a case, the import VAT is deducted or reported on the local VAT return.
Where an extended reverse charge is applicable, there is no requirement for the seller to charge local VAT. If the seller is not VAT-registered in the member state of sale for other reasons, then the import VAT paid is recovered via a 13th Directive claim—unless reciprocity is invoked.
Reciprocity is normally invoked by a member state if its taxpayers cannot make similar claims. For example, since there is no similar mechanism for U.S. sales tax, Spain and Italy do not accept 13th Directive claims from U.S. taxpayers.
This point is particularly important since Brexit and the end of the transition period where contracts may have been agreed before Brexit and with Delivered Duty Paid (DDP) Incoterms.
Prior to Brexit, if a U.K. company had a contract to deliver goods to a German company under Incoterm DDP, the delivery could be treated as an intra-EU dispatch and there would be no need for the U.K. supplier to have a German VAT number.
However, post Brexit, if the Incoterms remain as DDP then the U.K. company must register for VAT in Germany and charge local VAT on the sale unless an extended reverse charge can apply because of the nature of the goods. The implications of Incoterm DDP should also be considered for new contracts with customers where goods will be delivered abroad.
As an absolute minimum, a properly completed Single Administrative Document (SAD)—C88 in the U.K.—must be available as evidence.
Further, the most crucial part here is that the importer (the one who has the right to deduct the VAT) must be shown in Box 8. U.K. companies importing into the EU will be required to appoint an EU established customs representative (normally a freight forwarder) and this entity’s details must appear in Box 14. It may be possible for the importer to make use of the freight forwarder’s deferment account, and sometimes when freight forwarders do this, they incorrectly put their own details into Box 8. Understandably, wires are crossed and confusion around the process is appearing, as more impetus to handle VAT affairs correctly lies with the importer.
In some member states, a completed SAD stamped by the customs authority and showing the amount of VAT paid/deferred in Boxes 47 and 48 is sufficient evidence to deduct the VAT. Some member states such as Spain issue a form similar to the C79 in the U.K. as the evidence to deduct, whilst others such as France require a body of proof showing the import and the subsequent local sale.
These are additional considerations to comply with for businesses that previously only traded intra EU and therefore never became involved in imports.
So—What Can Go Wrong?
There are several areas of risk that could lead to non-deductibility of import VAT, or worse—loss of the VAT and penalties.
- The freight forwarder imports the goods into the wrong member state creating a need for a VAT registration as mentioned in my previous article. In this case import VAT should be recovered after a VAT number is obtained but there will likely be a late registration penalty.
- The freight forwarder completes the SAD incorrectly. This could be due to a lack of knowledge on the part of the freight forwarder or even an inaccurate instruction from a customs officer.
- The additional evidence issued by the tax office is not retained by the taxable person who imported the goods and who will seek to recover the import VAT.
- Review contracts to identify the correct importer—this is particularly important for contracts with EU counterparties following Brexit.
- Where Incoterm DDP applies, negotiate with the customer for a different Incoterm if possible.
- If you are required to sell under DDP, you must assess the VAT implications of the imports that you make:
- Is a VAT number required for the local sale or does the extended reverse charge apply?
- If a VAT number is required, then import VAT paid (or postponed) is deducted on the VAT return following the import.
- Identify the evidence required and ensure you have it. If a VAT number is not required, then the import VAT may be recovered via the 13th Directive.
- For example: if you import goods into Italy and sell them to an Italian VAT registered customer, then the extended reverse charge applies to the sale and reciprocity applies to the 13th Directive claim meaning the import VAT paid at 22% is lost.
- Where import VAT is deductible/recoverable you should ensure you have the correct evidence. In this regard you should:
- ensure that your freight forwarder understands how to complete the SAD;
- ensure that your freight forwarder does not veer from the agreed procedure, including place of import;
- ensure that you receive the SAD in a timely fashion and review it against a checklist;
- ensure all relevant staff, including procurement and logistics, are properly trained on these issues.
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: firstname.lastname@example.org