In 2019, HMRC introduced a new policy that import VAT cannot be recovered by an entity that is not the owner of those goods at the time they are imported. HMRC stated that the correct procedure is for the owner to be named as the importer of record on the customs declaration and recover the import VAT themselves.
Until then, import VAT recovery by non-owners was often done for administrative ease when the owner of the goods was located abroad, and had no other need for a UK establishment or VAT registration. It therefore made practical sense for the local importer to deal with the customs formalities themselves and recover the VAT, which is usually tax-neutral in the supply chain.
HMRC’s announcement therefore prompted a concerned response from industry and representative bodies, who noted many situations where it was the sector norm for goods to be imported by a third party, and that those importers now risked incurring an irrecoverable VAT bill. HMRC agreed to review its position but, in October 2020, issued Revenue and Customs Brief 15 (2020) which simply confirmed the policy, and suggested alternative customs procedures by which importers might obtain import VAT relief.
Any remaining hopes that HMRC might back down from its position seem to have now been dashed by a recent order issued by the Court of Justice of the European Union in a separate case referred to it by the Slovakian courts, which largely supports HMRC’s view.
The Brexit effect
So far, HMRC’s policy has only been a problem for businesses that import goods they do not own from outside the EU. But from 1 January 2021, once the UK has left the EU’s VAT and customs system, HMRC’s new policy will also affect the VAT recovery of non-owners that bring goods into the UK from the EU (arrivals of which are currently treated as intra-EU acquisitions of goods) as these will become imports for VAT and customs purposes.
Businesses commonly affected include toll manufacturers or repairers who import their customer’s goods for processing or repair, and toll operators who import drugs and medicines in the course of organising clinical trials on behalf of pharmaceutical companies.
A vaccine blocker?
The block on VAT recovery by non-owners has come at a particularly bad time for the health sector as it might affect coronavirus vaccines if they are imported under this type of contract. The EU is currently planning to introduce a temporary zero-rate which will cover domestic, intra-EU and imports of Coronavirus vaccines and similar medical supplies until the end of 2022, which would overcome this problem within the EU. So far there has been no announcement from the UK government that it intends to do the same.
The good news for business that import goods that they do not legally own is that there are alternative procedures that can be used to avoid an irrecoverable VAT liability. All will involve taking extra steps, such as making applications to HMRC and/or the involvement of the overseas owner, so it is important to consider these urgently:
- It may be possible for the owner of the goods to recover the VAT themselves, by registering for VAT in the UK, if eligible.
- If not eligible, the owner should consider submitting a claim to HMRC to recover the import VAT under the ‘13th Directive’ mechanism. This can be administratively cumbersome and is subject to strict time limits.
- Manufacturers and processors should consider applying to use a customs procedure that suspends or refunds import VAT, such as temporary import or inward processing relief. These are subject to a stringent authorisation process with HMRC and require specific customs declarations to be made both on arrival and when the goods are re-exported.
HMRC’s recent confirmation that importers are not entitled to recover import VAT on goods they do not own creates yet another Brexit trip hazard for businesses importing goods from the EU after 1 January 2021.