A recent brief issued by HMRC (Revenue and Customs Brief 2 (2019)) deals with the incorrect recovery of import VAT by businesses where they have not necessarily been the “importer of record”. This can arise in one of two ways:
- either by a toll operator incorrectly recovering the import VAT;
- or the business initially owning the goods selling them on, just prior to importation.
HMRC has no evidence to suggest that businesses knowingly applied the wrong treatment and is therefore not looking to pursue historical VAT claims.
With effect from 15 July 2019, HMRC will only authorise input tax claims which have been made using the correct procedures. This short transitional period has been provided to businesses to alter their business processes, to ensure that VAT recovery is made by the correct person in future.
Import VAT deduction can only be claimed by the true owner of the goods, who as “importer of record” would be entitled to reclaim the import VAT in accordance with section 24 VATA 1994, provided they satisfy the legislative conditions for doing so.
This issue manifests itself in two situations: toll operating companies and business sales (pre-importation).
Toll operating companies
This is where companies ordinarily operate in a manufacturing environment. They provide their raw materials or semi-finished goods to a third-party service provider i.e. toll operator. The toll operator provides a subset of manufacturing processes on behalf of the companies, using those materials or goods for a fee.
HMRC has become aware that toll operators usually operate a similar business model in that they import the goods e.g. pharmaceutical goods, process them and distribute them within the UK for clinical trials.
The toll operators do not take ownership, and do not resell, the goods. Title to the goods at all times remains with the overseas owners. However, the toll operators do on certain occasions distribute the goods on instruction from the owner. Further to this, they also act as “importer of record”, paying import VAT to HMRC and further recovering such VAT via the import VAT certificate (C79) which has been issued in its name. This is done mainly in line with the service offered to their customers, in that it provides an administration and cashflow benefit for the overseas owners.
There is no provision within UK VAT law which authorises them to deduct such VAT. The correct procedure is for the overseas supplier to register for VAT and act as “importer of record”. Alternatively, where there is no VAT registration obligation, a 13th VAT Directive reclaim should be made.
Business sales (pre-importation)
This situation involves businesses selling the goods on, just prior to importation. However, the business disposing of the goods continues to be recorded as “importer of record” on import VAT declarations, accounts for such VAT to HMRC and receives the import VAT certificate.
This is incorrect. The new business that has acquired the goods should act as the “importer of record” and therefore should recover the VAT in line with the C79 certificate which it is to receive.
What action is required?
In light of HMRC accepting that previous guidance on this matter was not clear, and by reason of the businesses operating these procedures doing so in good faith, HMRC is not looking to pursue historical VAT claims.
It will only operate the correct procedure from 15 July 2019 onwards, assuming there has not been a duplication of input VAT claims.
Who is potentially affected?
This clarification of policy is likely to impact a number of businesses currently recovering VAT in circumstances which HMRC considers to be incorrect.
Accordingly, this revised procedure will affect the following businesses:
- Non-owners of goods who have reclaimed import VAT on goods imported into the UK; and
- Toll operators.
It will necessitate significant changes being made to the systems by toll manufacturers before the 15 July deadline. Overseas owners may need to register for UK VAT or alternatively, where no registration is required, to submit a 13th Directive reclaim. The strict timelines associated with such 13th Directive claims will need to be adhered to.
This is likely to provide “a taste of things to come”, post-Brexit.