Currently, the UK’s membership of the EU customs union and inclusion in the EU VAT area means there is a relatively straightforward process. Before goods enter the UK an importer is identified to settle the import VAT and customs duty responsibilities. In most cases, the organisation identified as the importer is a UK business that is VAT registered and entitled to recover some or all the import VAT paid at the border provided it retains evidence that it has paid import VAT. This evidence is a form generated by HMRC and called a C79.
HMRC's new policy paper published earlier this month states that HMRC has been made aware of situations in which import VAT has been incorrectly recovered by ‘non-owners’. The non-owners initially identified were toll operators acting on behalf of foreign clients. These businesses receive raw materials from abroad on behalf of their client. The toll operator then processes these raw materials on behalf of their client before redistributing the finished products in the UK or abroad. Critically these toll operators do not take ownership of the goods that they are responsible for processing.
In HMRC’s view the only person that can act as importer for VAT purposes (and thus recover import VAT) is the owner of the goods at the point of import. This means that toll operators acting on behalf of their client will be refused the right to recover import VAT from 15 July 2019. Instead, foreign businesses trading with UK toll operators may either try to recover VAT from HMRC using what is referred to currently as the 13th Directive mechanism or in some cases they may be required to register for UK VAT for the first time. Needless to say, neither option will be particularly attractive.
While toll operators and their customers will need to think very carefully about this change, HMRC’s brief goes on to say that other organisations that identify themselves as importers for VAT purposes may also be affected. Some UK organisations purchasing goods from abroad sell the goods, before they land in the UK, to their customer. This means that when the goods land in the UK the owner of the goods is not the same party that owned the goods when they left the country of origin. HMRC’s brief makes it clear that even if a business owned goods before import into the UK it should not be acting as importer for VAT purposes (and therefore is not entitled to recover import VAT).
This policy casts significant doubt on a number of long-established working practices that are designed to reduce the VAT compliance burden on foreign businesses wishing to trade with UK suppliers. Careful consideration of this new policy is needed. In particular it appears possible that the importer acceptable for VAT purposes may be different to the definition of importer for other import entry purposes (including customs duty purposes).
Perversely, as the UK works to reduce the friction of cross-border trade in goods, this policy announcement could cause significant disruption.
Philip Munn is a VAT partner at RSM