Three years post-Brexit: what challenges remain for UK importers?

Ian Worth, Director, VAT and Customs Duty Services

Although Brexit occurred over three years ago, challenges remain for businesses importing goods into the UK from the EU, with continual developments in the VAT and customs landscape. We have provided a summary below of the recent issues we have seen our clients face, and actions you can take to minimise your VAT and customs duty exposure.

UK VAT registration

We continue to see confusion around the requirement, or lack thereof, to register for UK VAT.

One critical point to consider is the importance of fully understanding any contractual terms and conditions, especially when it comes to agreeing the Incoterms® of any goods imported into the UK. We have seen several instances where a particular Incoterm® has been agreed, and noted on documentation, but this doesn’t reflect the commercial reality. This can have significant knock-on effects, especially if the goods get stuck at the border, as a result of the correct registrations not being in place.

Notably, there is no UK VAT registration threshold for businesses that are not established in the UK. If you are an overseas business, it is important to consider this when entering into agreements to import goods into the UK for the first time. This is the case because importing goods does not on its own create a liability to be VAT registered. Instead it is the ownership and onward use of those goods that will decide that requirement.

There can be significant risks if this isn’t understood fully at the outset:

registering for UK VAT when you didn’t need to, and incurring administrative and compliance costs that could have been avoided
not registering for UK VAT at the right time – this could mean goods are stuck at the UK border or you’re scrambling to get the registrations in place (taking into account HMRC’s processing times).

Import VAT recovery

For UK VAT registered importers, various conditions must be met in order to enable an importer to recover the import VAT incurred importing goods into the UK.

We have summarised a couple of the more common areas below.

Ownership: Back in 2020, HMRC confirmed that only the owner of the goods at the time of import can recover the import VAT incurred. Even if an entity is the importer of record, if it does not own the goods then HMRC will not allow recovery of the import VAT.

Evidence to recover import VAT: Brexit brought with it the option to postpone the payment of import VAT using Postponed Import VAT Accounting (PIVA). With the introduction of the Customs Declaration Service (CDS) last year, importers can access their PIVA statements and/or C79 import VAT certificates online. These documents are the evidence to support import VAT recovery.

It is important that:

you have access to CDS
you check that the PIVA statements and C79s are correct
you retain copies of these documents within your VAT records.

You can find more information on registering for CDS in our insight - How to access monthly import VAT statements.

Irrecoverable import VAT can therefore be an unexpected, and possibly significant, cost. As this will have a knock-on effect on profit margins, it is therefore important to fully understand your supply chains before importing goods into the UK.

Use of customs intermediaries

For most businesses, the use of customs intermediaries is an essential requirement for being able to import goods, but concerns have been frequently raised in regards to the quality of service provided across the sector.

In recognition of this, the UK Government launched a consultation in June 2023 on the introduction of a voluntary standard for customs intermediaries, with plans for this to be implemented in due course. HMRC is currently liaising with the British Standards Institution and trade associations on the specific design and implementation of the standard.

The importance of training and educational offerings was noted as part of the consultation, with a consensus from respondents concerning the lack of knowledge around customs processes, resulting in inaccurate declarations. We can therefore expect an emphasis on certification and accreditation requirements within the sector, but HMRC has also indicated that more information and guidance will be provided to support customs intermediaries in their role.

It is important to note that customs intermediaries are exactly that – acting as a go-between to pass your customs data to HMRC through specialised software. In most cases, they bear no risk or responsibility for the accuracy of the declarations they submit. It is therefore highly important that the instructions you provide to your customs intermediary are clear and accurate, concerning all aspects of the declarations, from classification and valuation to the EORI number and how import VAT is accounted for. Checking that your instructions have been adhered to is also of vital importance.

Tariff classification challenges

The classification of goods for customs purposes can be a complex exercise and we have seen a growing interest from HMRC in this area, both at the border, and through post-import audit activity. The commodity code assigned to an item principally drives the duty and import VAT rate, and misclassifications can thus result in inaccurate declarations, underpayments or overpayments of duty / VAT, and a poor compliance record.

We have seen HMRC challenge the classification for a number of goods and in some cases, goods have been detained or seized at the border, creating disruptions to supply chains and often leading to unexpected costs It is important to note that HMRC are not always right, and businesses should seek expert advice after receiving seizure notices or duty demands.

Traders often rely on suppliers and agents to provide classifications, but the increased enforcement demonstrates the importance of internal reviews, especially where the classification of a product proves to be contentious. Noting the duty implications, we recommend that businesses are confident in the classifications assigned and seek advice where unsure.

Customs valuation and transfer pricing

HMRC is also showing a growing interest in the customs valuation of goods at the border, particularly in regard to related party transactions, in an effort to target undervaluation, which is also under the spotlight in the EU.

In more than 90% of cases, Method 1 (Transaction Value) is used to value goods for customs purposes when a sale takes place. However, HMRC has indicated that Method 1 will not be accepted when there are post-import adjustments to the price payable for the goods.

Considering the competing objectives between customs valuation and transfer pricing, HMRC has suggested that transfer pricing studies will be examined in detail to ensure that all dutiable elements of a transaction are covered.

As such, businesses are advised to review their transfer pricing agreements and ensure that these are fit for purpose from a customs perspective. Where adjustments take place post-import under Method 1, we recommend that businesses review the eligibility of this position and consider the potential requirement to use alternative valuation methodologies.

If you have any questions on the issues raised in this article, or wish to discuss your supply chains, please contact Rob Janering, Ian Worth or your usual Crowe contact.