Postponed VAT accounting: How it works for businesses importing goods into the UK

Since 1 January 2021, businesses registered for VAT that import goods into the UK from anywhere in the world can use a new system called postponed VAT.

This lets them account for the VAT on their VAT Return, rather than paying it immediately (e.g. at the port of entry).

A UK-European Union (EU) trade deal was reached before the transition period ended on 31 December 2020. However the postponed VAT system would have been in place regardless of whether there was a deal or not.

The purpose of postponed VAT accounting is to avoid an impact to your cash flow when importing.

In fact, if your business already imports from outside the EU then it might see cash flow benefits because it removes the need to account for the import VAT typically due.

Note that this article is not a general discussion of post-Brexit VAT and taxes, or a discussion of post-Brexit customs.

For those details, see our comprehensive customs and VAT after Brexit blog.

What is postponed VAT accounting?

Since the end of the Brexit transition period, VAT becomes payable on imports coming into the UK from anywhere in the world if they're over £135.

This will now include imports from the EU.

The postponed VAT accounting system aims to avoid the negative cash flow impact on businesses that are hit by this additional VAT bill and will avoid having goods held in customs until the VAT is paid.

The way it works is very similar to the reverse charge mechanism used for EU trade prior to Brexit.

Rather than physically paying import VAT and then reclaiming it on the subsequent VAT return, the VAT is accounted for as input and output VAT on the same return.

The outcome is the same but the importer has avoided the physical payment.

Use of the postponed VAT accounting scheme is optional. If you wish, you can pay the VAT upfront when the goods enter free circulation in the UK (at the port of entry, for example, or after release from a customs warehouse).

This will require you obtain monthly C79 reports from HMRC, as currently is the case for non-EU imports.

However, postponed VAT accounting is mandatory if you defer the submission of customs declarations - such as making use of the initial six-month customs deferment period after the end of the transition period.

Postponed VAT accounting can be used by all VAT-registered businesses in the UK, although businesses in Northern Ireland will continue to be considered part of the EU VAT area, so goods arriving from the EU will not be considered imports and will therefore not incur import VAT (see below).

However, businesses in Northern Ireland can still use postponed VAT accounting for imports from non-EU countries.

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How does postponed VAT accounting work?

The import VAT is accounted for on your VAT Return in three of the '9 boxes' that you need to fill in.

Note that the fast-changing world of Brexit means that some advice you might see about which boxes to complete could be out of date.

The following has been recently confirmed by HMRC:

• Box 1 - VAT due on sales and other outputs: Include the VAT due in this period on imports accounted for through postponed VAT accounting.
• Box 4 - VAT reclaimed on purchases and other inputs: Include the VAT reclaimed in this period on imports accounted for through postponed VAT accounting.
• Box 7 - Total value of purchases and all other inputs excluding any VAT: Include the total value of all imports of goods included on your online monthly statement, excluding any VAT.

If you don't use postponed VAT accounting, and instead pay the VAT immediately when the imported goods enter free circulation, you will need to complete boxes four and seven only.

Note that these values can't be manually adjusted in the VAT return boxes under Making Tax Digital (MTD) and must be recorded in the main record-keeping software.

Key to managing postponed VAT accounting are the online monthly statements. This new report will show simply the import VAT that has been postponed during the previous month.

As mentioned earlier, the C79 report should continue to be used for VAT you've paid at customs (that is, that's not been postponed).

The postponed accounting report will only show imports for which there have been customs declarations and therefore won't show imports that have been deferred.

If declarations have been deferred, you'll need to estimate import VAT and then correct it in your next VAT Return once the declaration has been prepared and the calculated import VAT appears on a subsequent report.

Remember that import VAT should be calculated after duty and other costs. Because of this, it's unlikely to be acceptable to estimate import VAT based on the supplier invoice alone.

The postponed accounting report will form a vital part of your VAT accounting records. Therefore, you'll need to download and retain copies for your records in case the information is no longer available online.

Postponed VAT accounting and Northern Ireland

The Northern Ireland Protocol following Brexit and the end of the transition period means Northern Ireland has unique VAT and customs arrangements for trade with EU countries, compared to England, Wales and Scotland.

However, businesses in Northern Ireland can make use of postponed VAT accounting, just like businesses in England, Scotland or Wales.

But there will be no need to use postponed VAT accounting when moving goods from the Republic of Ireland or other EU countries because these will continue to be treated as intra-community supplies and acquisitions - just as they were prior to Brexit/end of the transition period.

For goods travelling between Northern Ireland and mainland UK, current guidance suggests these movements will not incur import VAT and instead will largely be treated as they are today in respect of VAT - that is, like domestic sales and purchases.

Notably, where goods are imported into Northern Ireland from outside the EU from one business to another (B2B), and with a value below £135, postponed accounting will be mandatory.

Conclusion on postponed VAT accounting

Postponed VAT accounting is intended to bring relief to businesses worried about importing goods. It's fundamentally simple to use and should mean most businesses that currently trade with the EU are unimpacted by Brexit in respect of VAT.

There are no negatives when it comes to making use of postponed VAT accounting, so there can be few if any objections within most businesses.

However, it remains a fresh administrative requirement and one that's not been tested yet in any business.

You should look at what's required and try to spot any implementation sore points for when it comes to dealing with postponed VAT accounting. If you're in any doubt, reach out to your accountant or tax adviser if you have one.

Editor's note: This article was first published in December 2020 and has been updated for relevance.

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