Tax Talk: Trading with the EU
There have been several accounting changes since Brexit, many of which have affected cross-border VAT. How can postponed import VAT accounting (PIVA) help?
PIVA was introduced from 1 January 2021 to enable businesses that import goods into the UK (whether from the EU or not) to account for and recover import VAT on their VAT returns. Previously, they had to pay the VAT at the border and recover it at a later date. PIVA is not compulsory and only applies where the consignment value exceeds £135. It offers substantial cash flow benefits to businesses that opt to use it.
What has changed?
Before 31 December 2020, businesses that purchased goods from EU member states could treat this as an intra-community acquisition. If they met certain conditions, the dispatch of goods within the EU was zero-rated for VAT. The EU customer acquiring the goods would both account for the acquisition VAT and also recover the corresponding amount as input tax through its VAT return, if it was fully taxable.
Following the end of the Brexit transitional period, movements of goods between the UK and the EU are now considered ‘imports’ and ‘exports’. This means import VAT is due on goods coming into the UK from the EU and customs declarations are submitted both when the goods leave the EU, and when they arrive in the UK.
Under the EU–UK Trade and Cooperation Agreement, most goods that originate in the EU are not subject to customs duty, but the requirements for this are strict, so businesses could face unexpected costs when importing into the UK if the conditions are not met.
Incoterms: the details matter
This change makes the incoterms agreed with customers even more important. They determine which party is responsible for accounting for the import VAT and customs duty, and dealing with insurance, documentation and customs declarations.
Most businesses opt to use the incoterm ‘delivered duty paid’ (DDP). This requires the seller to arrange carriage and transport of the goods to the named place, pay the import VAT and customs duty, and submit the customs declarations. So the seller acts as the importer of record. This may mean the seller has to register for VAT in the customer’s country.
There are other incoterms available, like ‘delivered at place’ (DAP), where the customer has to pay the import VAT and customs duty, and deal with the import documentation. But here, the customer may not appreciate the additional costs. So it’s vital for both parties trading between the UK and EU to agree their incoterms and fully understand the tax obligations this creates from the outset.
How does PIVA work?
With PIVA, businesses can defer the payment at the border, and just account for the import VAT on their VAT return in Box 1. They can also recover this in Box 4 of the same return. If the business is fully taxable, this creates a nil effect. The total value of the imports, excluding VAT, is declared in Box 7.
A downloadable monthly statement from HMRC summarises the import VAT ‘postponed’ each month. Businesses must keep the statements with their VAT records as evidence for import VAT recovery, and this should be reconciled with their import VAT records.
Businesses that opt to take advantage of the cash flow benefits PIVA offers must tell their customs agent that they plan to use PIVA. The customs agent will need to insert ‘G’ as the method of payment in Box 47e (if using the CHIEF system) of the customs declaration. If using the Customs Declaration Service (CDS), the VAT registration number of the business must be entered at the header level in data element 3/40.
What are the options?As PIVA is not compulsory, businesses can still choose to pay the import VAT at the border and recover it at a later date (via their VAT return). For this they need a monthly C79 certificate from HMRC.
Those that opt to delay their customs declaration must use PIVA and will need to estimate the import VAT due based on the date of import. Once the delayed declaration is submitted and the true import VAT value appears on the monthly statement, the estimate can be adjusted in the next VAT return.
How we can helpIf your business is involved in imports but has not yet switched to PIVA, you should consider doing so as soon as possible. Our indirect tax team can guide you through the sign-up process and make sure you are fully compliant. Our global network can also help if an EU VAT registration is needed.