VAT for B2B imports

The basic rule is that import VAT is due, at the prevailing rate for the item, when goods are customs cleared for free circulation into the UK. For business-to-business (B2B) transactions where there is an import of goods into the UK from outside of the UK, the parties can agree between them who will act as the importer and be named on the customs declaration when the goods are declared for "free circulation" into the UK. This is typically determined by the incoterms ® – the international commercial terms – agreed between the parties.

In most cases, the buyer in the UK would be named as the importer, because they're already established and typically VAT registered in the UK. This means they are more able to deduct the VAT that's paid at import. If the overseas seller acts as the importer, it can often create an additional VAT registration requirement for them.

A possible exception is where goods are supplied with installation. In this case, ownership of that item typically resides with the seller until such time that the item has been installed on the customer's premises. Here, the default position is for the overseas seller to act as importer, register for UK VAT to account for and recover the import VAT, and charge the customer UK VAT on the installed supply.

VAT for B2C imports

Determining what VAT to pay and who pays it depends on whether the consignment being imported is valued at more or less than £135 as an intrinsic value and whether the goods are sold via an online marketplace.

For goods valued at £135 or less and sold directly by the seller (not sold via a marketplace), the seller must register for VAT but only account for VAT on the sale (ie no import VAT). If a marketplace is involved, then typically the marketplace will be  responsible for paying VAT to HMRC.

If the value of the goods is more than £135, the VAT treatment depends on the incoterms used. If it’s Delivered Duty Paid (DDP), the seller must register for VAT, account for import VAT and charge UK VAT to the purchaser. This gives rise to valuation from a customs point of view. If the terms are not DDP, the purchaser is liable for the import VAT and duty, although often these taxes are collected at the point of sale and paid by the seller on behalf of the customer.

Completing the customs declaration

The way a customs declaration is completed determines the amount of import VAT that's due and who is responsible for paying it when the goods are cleared for free circulation. The declaration should reflect what commercial arrangements the parties have agreed between them.

The declaration also determines the mechanism of payment for import VAT, whether it's paid:

• up front when the declaration is made,
• deferred using a deferment account (this means that payment is deferred until the following month), or
• postponed and paid via the UK VAT return (known as postponed import VAT accounting or PVA).

Most businesses use the PVA route because it means no cash outflow, though there are conditions to be able to use it. Very few businesses will choose to pay at the point of clearance.

Deducting import VAT that's been paid

A VAT registered business is entitled to deduct import VAT paid, provided those goods are used to make taxable supplies and the business retains the required evidence.

HMRC’s policy is that only the legal owner of the goods (the person with the right to dispose of the goods) is entitled to deduct the import VAT. This can be an issue in industries such as pharmaceuticals, where goods are imported for testing purposes. Similarly, UK-based repair businesses often work on products they don't own, so can't recover the import VAT.

This can also be an issue for goods which are imported and subject to a lease, where again HMRC’s policy is that the owner of the leased goods is the only party entitled to deduct the import VAT.

There are ways and mechanisms to mitigate the impacts, but they differ on a scenario-by-scenario basis.

The Northern Ireland question

Northern Ireland has a special status of essentially still being part of the EU for goods purposes. As a result, goods moving from an EU country to Northern Ireland are not treated as imports but as intra-EU movements.

Technically there is a trade border between Great Britain and Northern Ireland for goods that move between the two and special measures have been implemented to facilitate the movements. Businesses can use the Trader Support Service to help complete these declarations.

Export VAT

For VAT purposes, exports from the UK to non-UK countries are zero rated provided certain conditions are met.

VAT systems across the world are broadly similar, so the expectation is that import VAT is due in the country where the goods are shipped to.

In most cases, to apply the zero rate to the export, you need to obtain satisfactory evidence within three months that the products have left the country. The evidence can include the HMRC clearance document, or commercial evidence, such as an authenticated airway bill, plus a basket of evidence to prove the transaction took place. This would typically include: the invoice, customer order, delivery note and the packing list.

If the seller does not collect the evidence in time, UK VAT must be accounted for until the evidence is obtained.

VAT rules for indirect exports

There are different VAT rules for indirect exports, where the customer collects the goods from the UK seller or appoints a delivery company to pick it up on their behalf. These transactions carry additional VAT risks because the seller has less control over the export process and supporting evidence.

For an indirect export where the customer collects the goods directly, the seller is reliant on the customer providing evidence that the goods have been exported. Collecting the VAT upfront until the purchaser provides the evidence to justify zero-rating the export can help mitigate that risk.

Where you have chain transactions (A sells to B, B sells to C, and so on) there can only be one export from the UK. It can be tricky to work out which one of those transactions qualifies as the export.

Different methods of exporting – for example, a fast parcel carrier, postal service, or freight company – will all have their own evidence requirements. Check the requirements before you start, and make sure you're capturing the right information correctly. Good paperwork is essential.

Ensuring you’re compliant

Compliance with VAT rules on imports and exports depends on maintaining accurate evidence and making sure you're clear how the goods are treated in the destination country. This includes whether the seller has requirements overseas.

For imports, businesses using PVA can access their statements directly from HMRC. This lists all transactions processed through PVA. Alternatively, import VAT certificates show how much VAT you've paid on imports to allow you to recover the VAT as input tax on your VAT return.

These documents are only available online for a limited period so it’s important to access your HMRC account regularly to download them and ensure they feed through to the VAT return.

Common pitfalls

Common errors include claiming VAT without owning the goods or entering an incorrect EORI (Economic Operators Registration and Identification) number on the customs declaration, which can result in VAT being allocated to the wrong business or delays in clearance.

A business might think they've got a certain arrangement with their supplier, but what’s agreed in principle may be very different to what goes down on the paperwork.

Beware of incoterms and make sure the paperwork follows the agreed terms of who the importer and responsible parties will be. Check licensing requirements, as goods imported or exported without the correct licence can be destroyed.

Many companies will use an agent to complete a customs declaration on their behalf and simple admin errors are common. If you have multiple VAT registrations, or EORI numbers, it could be that they have used the wrong one, or the paperwork might contain incorrect or inaccurate description of goods.

Companies can also get caught out by a reliance on agents to retain paperwork. Businesses should ensure they issue customs agents with clear instructions.