Category Archives: Brexit

VAT & Customs Duty – Valuation for import purposes

By Marcus Ward 5 August 2022

Methods of calculating import value

There are six methods for calculating the value of imported goods to assess the amount of Customs Duty and import VAT a business to pay. The same value is also used for trade statistics.

All six methods are outlined below and should be tried in order. If Method 1 does not apply, try Method 2. If that does not apply, try 3 and so on. However, Method 5 can be tried before 4.

Method 1

The transaction value – the price payable to the seller. This is the most common valuation and is used in most cases.

Try Method 2 if there has been no sale of goods.

Method 2

The customs value of identical goods, produced in the same country as the imports.

Try Method 3 if there are no identical goods.

Method 3

The customs value of similar goods, which must be:

produced in the same country
able to carry out the same tasks and be
commercially interchangeable

Try Method 4 if there are no similar goods.

Method 4

The selling price of the goods (or identical or similar goods) in the UK.

Try Method 5 if there are no UK sales of the goods.

Method 5

The production cost of the goods, including the cost of any materials, manufacturing and any other processing used in production.

Try Method 6 if this production cost information is unavailable.

Method 6

Reasonably adapting one of the previous methods to fit unusual circumstances.

Legislation

In the UK valuation is covered by the Taxation (Cross-border Trade) Act 2018 & The Customs (Import Duty) (EU Exit) Regulations 2018 and The VAT Act 1994, Section 19.

What to include in the Method 1 calculation

If they are not already included in the seller’s price, the importer must add the costs of:

delivery to the EU border
most commissions (except buying commission)
royalties and licence fees paid by you on the imported goods as a condition of sale
containers and packing
any proceeds of resale the seller will receive
goods and services you provide to the seller for free or at a reduced cost – eg components incorporated in the imported goods, or development and design work carried out outside the EU and necessary for the production of the imports

If you import goods from a processor – ie a business that assembles or otherwise works on one or more sets of existing products to create your new imported products – transaction values can be built up by adding to the processing costs the value of any materials or components you provided to the processor.

What to exclude from your calculation

Items to be left out of the customs value if certain conditions are met include:

delivery costs within the EU
EU duties or taxes
taxes paid in the country of origin or export
quantity and trade discounts and those relating to cash and early settlement, that are valid at the time the goods are valued
dividend payments to the seller
marketing activities related to the imports
buying commission
export quota and licence costs
interest charges
rights of reproduction
post-importation work, eg construction or assembly
management fees

Further details here.

Claiming VAT incurred overseas

By Marcus Ward 20 July 2022

A UK VAT registered business is able to recover VAT it incurs in the EU. However, this is not done on the UK VAT return, but rather by a mechanism known as an “13th Directive” claim (Thirteenth Council Directive 86/560/EEC of 17 November 1986).

Via this procedure a UK business reclaims overseas VAT from the tax authority in the country it was incurred. This is different to the Retail Export Scheme.

Who can claim?

Any UK business which has a certificate of status and meets the following conditions:

The conditions

the UK business has not undertaken any business which would require it to register for VAT in the country in which the claim relates
a business must not have any fixed establishment, seat of economic activity, place of business or other residence (place of belonging) in the country of refund
a VAT invoice is obtained
the VAT was incurred for goods or services which give rise to the right of deduction (see below)

VAT not claimable

The following rules must be applied to a claim, and some claims are specifically refused:

Partial exemption

A business must apply the appropriate recovery rate for purchases using its partial exemption method.

Non-business expenses

Expenditure incurred in another country which relates to non-business activities is not claimable under the refund scheme.

Non-refundable supplies

VAT on the following supplies cannot be claimed

incorrectly invoiced
goods purchased which are subsequently exported

Further, the “usual” rules that apply to a UK VAT claim must be followed.

I have summarised what VAT is not claimable in each EU Member State here.

Minimum claim

Each country has a set minimum claim, but it is mainly around the €50 pa figure.

Time limit

Deadlines to request a refund are not standard and vary country to country. However, they are mainly 30 June or 30 September, and the claims are on a calendar year basis year (it is possible to make quarterly claims which have different deadlines).

How to make a claim

Claimants must send an application to the national tax authority in the country where the VAT was incurred.

Unfortunately, since Brexit, the claims procedure is more complex. There is no longer a single portal and the procedure to request refunds is not standard across the EU. A business needs to research the country specific information on VAT using links provided on the EU Taxation site and a claim for each country must be sent using the procedure set out by that country.

Full rules and procedure to follow can be found in Directive 86/560/EEC

Please note: Some countries require that a claim to be filed by a tax representative authorised by the local tax administration.

Time limits for the country of refund to process an application

The country of refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.

Payment method

The refund will be paid in the country of refund or, at the applicant’s request, in any Member State. In the latter case, any bank charges for the transfer will be deducted by the country of refund from the amount to be paid to the applicant.

Penalties

All countries take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed, and further refund applications suspended.

Claims refused

If the country of refund refuses an application fully or partly it must notify a claimant of the reasons for refusal.

If this happens an appeal against the decision may be made using the appeals procedure of that country.

Interest on delayed applications

Interest may be payable by the country of refund if payment is made after the deadline.

Claims on UK VAT returns

VAT incurred overseas must not be claimed on a UK VAT return. If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.

VAT: The Reverse Charge

By Marcus Ward 24 June 2022

Normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed, and it is the customer who must account for any VAT due. Don’t get caught out!

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ (RC) procedure must be applied. Where the RC applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax.

The effect of these provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus, creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.

Where the RC procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must

account for output tax, calculated on the full value of the supply received, in Box 1
(subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4
include the full value of the supply in both Boxes 6 and 7

Value of supply

The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

VAT Implications of Transfer Pricing – Valuation

By Marcus Ward 21 April 2022

When can Transfer Pricing (TP) adjustments affect the application of VAT?

There is a continuing potential conflict between the way sales are valued. For TP purposes value is determined via arm’s length (open market value) versus the subjective value, ie; the price actually paid, for VAT purposes.

More detail on VAT valuation/consideration here.

Transfer Pricing

The arm’s length principle is the international transfer pricing standard that the Organisation for Economic Co-operation and Development (OECD) member countries have agreed, and which should be used for tax purposes by Multinational Enterprise Group (“MNE group”) and tax administrations, including the price, match comparable market conditions and that profits are fairly divided between the jurisdictions in which MNE operates.

According to the OECD TP Guidelines, by seeking to adjust profits by reference to the conditions which would have been obtained between independent enterprises for comparable transactions and under comparable circumstances, ie; in “comparable uncontrolled transactions” the arm’s length principle treats the members of an MNE group as entities operating separately rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent entities, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from those that would be obtained in comparable uncontrolled transactions.

VAT

It is not generally required for VAT purposes that the consideration which must be present in order for a transaction to be qualified as taxable, has to reflect the market value of the goods or services supplied. In fact, as to the concept of “consideration”, it is settled case law of the CJEU that the taxable amount for the supply of goods or services is represented by the consideration actually received for them.

It is an important area of tax and I recommend reading the EC Working Paper for any business or adviser involved in international supplies. It is also an interesting read for students of the tax technical side of such supplies.

We have a strong global structure of skilled advisers which are able to assist if you have any queries.

VAT: Fulfilment House Due Diligence Scheme registered businesses list

By Marcus Ward 16 February 2022

HMRC has issued updated guidance for businesses which need to check whether an entity which stores goods in the UK on its behalf is registered with the Fulfilment House Due Diligence Scheme (FHDDS).

The published list is alphabetical order by company name.

The list should be used if you are a business that is not established in the EU to see if the business that stores your goods in the UK is registered with the FHDDS.

If your business is outsourcing or considering outsourcing its fulfilment operations, then the fulfilment house you are using or intending to use of must be legally accredited by HMRC to do so.

Businesses that must be registered

Businesses are required to be registered if it stores any goods where all of the following apply:

the goods were imported from a country outside the EU
the goods are owned by, or stored on behalf of, someone established outside the EU
the goods are being offered for sale and have not been sold in the UK before

It is illegal to operate outside of the scheme and any fulfilment company found doing so will be prevented operating a fulfilment business and may be subject to a £10,000 penalty and a criminal conviction.

VAT: Trading with the EU from 1 January 2022

By Marcus Ward 14 December 2021

Further to my article on the new changes from next year, HMRC has published information on the rules of origin for trade between the UK and EU.

The Bulletin covers the rules of origin and the forthcoming changes to the requirement for supplier declarations to support proof of origin.

VAT: HMRC – Customs changes from 1 January and 1 July 2022

By Marcus Ward 6 December 2021

Further to my article on new procedures, HMRC has issued a reminder of customs changes that come into effect on 1 January 2022.

It is now less than a month until full controls are introduced.

The Changes

Customs declarations

Businesses will no longer be able to delay making import customs declarations under the Staged Customs Controls Most importers will have to make declarations and pay relevant tariffs at the point of import.

Border controls

Ports and other border locations will be required to control goods moving Great Britain and the EU. This means that unless goods have a valid declaration and have received customs clearance, they will not be able to be released into circulation, and in most cases will not be able to leave the port. From 1 January 2022, goods may be directed to an Inland Border Facility for documentary or physical checks if these checks cannot be done at the border.

Rules of origin for imports and exports

The UK’s deal called the Trade and Cooperation Agreement (TCA), means that the goods imported or exported may benefit from a reduced rate of Customs Duty (tariff preference). To use this a business will need proof that goods which are:

. imported from the EU originate there

. exported to the EU originate in the UK

Commodity codes

Commodity codes are used worldwide to classify goods that are imported and exported. They are standardised up to six digits and reviewed by the World Customs Organisation every five years. Following the end of the latest review, the UK codes will be changing on 1 January 2022. HMRC guidance is available on finding commodity codes for imports into or exports out of the UK which includes information on using the ‘Trade Tariff Tool’ to find the correct commodity codes.

Postponed VAT Accounting

A VAT registered importer is able to continue to use Postponed VAT Accounting (PVA) on all customs declarations that are liable to import VAT (including supplementary declarations).

Further changes from 1 July 2022

The following changes will be introduced from July 2022:

requirements for full safety and security declarations for all imports
new requirements for Export Health Certificates
requirements for Phytosanitary Certificates
physical checks on sanitary and phytosanitary goods at Border Control Posts

Businesses must be prepared for these changes and I recommend that an experienced representative is used.

VAT: Trading with the EU. Changes from 1 January 2022

By Marcus Ward 23 November 2021

From 1 January 2022 the rules for selling to, and buying from, the EU will change.

HMRC have issued information about these changes.

Broadly, from 1‌‌ ‌January‌‌ ‌2022, businesses will no longer be able to delay making import customs declarations under the Staged Customs Controls rules that have applied during 2021. Most businesses will have to make declarations and pay relevant tariffs at the point of import. However, see details of Postponed Accounting.

Please also see a publication issued by the Cabinet Office which includes a Policy Paper on The Border Operating Model.

VAT: HMRC to end making payable orders to NETPs

By Marcus Ward 9 November 2021

HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.

Background

HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.

New Gform

To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.

Access

HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.

Information required

Information requested on the Gform will include:

VAT registration number
address
email address
bank account information
payable order information if necessary

VAT: Freeports – what are they? Are they beneficial?

By Marcus Ward 12 October 2021

Further to the background to Freeports here I consider the latest developments.

What are Freeports?

Freeports are a specific port where normal tax and customs rules do not apply. Imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports, before exporting again without paying the tariff on the original imported goods (however, a tariff may be payable on the finished product when it reaches its final destination).

Freeports are similar to Free zones, or “Enterprise Zones” which are designated areas subject to a broad array of special regulatory requirements, tax breaks and Government support. The difference is that a Freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support.

Use

Goods brought into a Freeport are not subject to duties until they leave the port and enter the UK market. Additionally, if the goods are re-exported no duty is payable at all.

If raw materials are brought into a Freeport and processed into final goods before entering the UK market, duties will be paid on the final goods.

Background

If a business chooses to use a Freeport to import or export goods, it will be able to:

get relief from duties and import taxes
use simplified declarations processes to reduce administrative burdens
choose which rate of Customs Duty to use if processing the goods changes their classification

If goods are purchased in the UK, a business will continue to pay duties and import taxes using the normal UK rates.

Where are they?

The eight new Freeports are located at East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside.

Authorisation needed to use a Freeport

A business can apply to use the Freeport customs special procedure (a single authorisation combined with easier declaration requirements) to import goods for:

processing and then export or for sale in the UK
storage and then export or for sale in the UK

Declaring goods entering the UK Freeport

A form C21 is used to declare goods entering the UK. This can be done before the goods arrive in the UK or when the goods have arrived in the UK.

Declaring goods exported

A business will normally need to submit an exit summary declaration when goods are exported from the UK. When an exit summary declaration is not needed, a business will need to give an onward export notification to HMRC.

Disposing of goods which have been processed or repaired

When a business has finished processing or repairing goods, it must leave the Freeport and dispose of the goods by either:

re-exporting them outside the UK
declaring them to another customs procedure
transferring them to another Freeport Business Authorisation holder
destroying them – usually only possible under customs supervision
using other simplified disposal methods

VAT on supplies in the Freeport

A business will be able to zero rate supplies within a Freeport of:

goods declared to the Freeport
services carried out on goods declared to the Freeport

When a zero rated VAT invoice is issued, it must include the reference “Free zone”.

Zero rating of goods applies if:

they are declared to the Freeport
they are sold from one authorised Freeport business to another in the Freeport
both Freeport businesses are registered for VAT (unless they are exempt from registering for VAT and HMRC has approved this exemption)

Benefits

The Government says that Freeports and free zones are intended to stimulate economic activity in their designated areas. Government backed economic studies have found the main advantage of Freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the Freeport can benefit from cheaper imported inputs in comparison to those outside the area. However, some commentators such as the UK Trade Policy Observatory (UKTPO) suggest that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, it is important to ensure that trade is not simply diverted from elsewhere and that wider incentives are needed.

Evasion

Considering that the European Parliament has called for Freeports to be scrapped across the EU because of tax evasion and money laundering and that they are where trade can be conducted untaxed, and ownership can be concealed it is likely that there will be a certain degree of evasion. This a result of the lack of scrutiny on imports and means that high-value items, eg; art, can be bought and easily stored in Freeports without the kind of checks and controls they would normally face.

Summary

Any business that regularly imports and/or exports goods should consider if a Freeport will benefit their business model. This is particularly relevant if work is carried out on imported goods.