As of the first of January 2021, under the new Brexit regulations, businesses that import goods into the United Kingdom from around the world have access to a new VAT (Value Added Tax) system.
The new system is known as PVA: Postponed VAT Accounting. It allows businesses to acknowledge and account for the VAT on their VAT Return, but negates the need to pay it immediately (i.e, at the port of entry).
The idea of this postponement in payment is to lessen the disruption to a businesses cash flow when importing.
In fact, businesses that already import from outside the EU may already be reaping the cash flow benefits of PVA because it will have removed the need to account for the import VAT typically due upon the port of entry.
Although Postponed VAT Accounting may seem complex and foreign initially, the process is relatively simple. In this blog we’ll cover what PVA is, as well as how it works and how it may impact businesses that trade with Northern Ireland.
What is Postponed VAT Accounting?
At the end of the Brexit transition period, VAT becomes payable on any imports entering the United Kingdom that are deemed to have a value exceeding £135.
Whereas previously this would have commonly only affected imports from countries like the United States, China and Australia, it now applies to imports originating from EU countries.
These additional VAT bills, as well as customs hold ups whilst waiting for the VAT to be settled, could cause major disruption to a businesses cash flow – especially in the case of small businesses and startups. Thus, Postponed VAT Accounting attempts to lessen that impact by allowing businesses to acknowledge the VAT payment, but pay it at a later date without having their importations disrupted.
Essentially, it works in a similar manner to the reverse charge format that was previously used for EU trade ahead of Brexit.
Instead of paying the import VAT on the point of entry and then reclaiming it on the businesses subsequent VAT return, the VAT is settled as input and output on the same return.
The overall outcome remains the same, businesses just avoid the initial upfront payment.
Registering for VAT. Should your business do it, or shouldn’t it? Read the pros and cons of registering for VAT in our blog.
How does Postponed VAT Accounting work?
The postponed import VAT will be accounted for on your VAT return by filling in three of the nine required boxes (This is correct at the time of writing, but should legislation update, we will update our blog accordingly.)
HMRC confirmed that the three boxes specific to PVA returns are:
- Box 1: The VAT due on sales and other outputs. VAT due on imports in this period can be accounted for using Postponed VAT Accounting.
- Box 4: The VAT reclaimed on purchases and other inputs. Any VAT reclaimed on imports across the subsequent period can be accounted for using Postponed VAT Accounting.
- Box 7: The total value of purchases and other inputs excluding VAT. The total value of all imports of goods should be included on the monthly statement, excluding any VAT that you have accrued.
If you choose to not use Postponed VAT Accounting and instead opt to retain the traditional method of paying VAT upon the imported goods entering free circulation, you will only need to complete boxes four and seven.
It is worth bearing in mind that the values are unable to be manually adjusted in the VAT return boxes under Making Tax Digital and must instead be recorded in the main accounting software.
Online monthly PVA statements are the most important way of safely managing and recording your PVA, as the report will display the import VAT has been postponed in the previous month.
C79 forms should continue to be used for VAT paid upon entry at customs that hasn’t been postponed.
However, this is where correctly recording and managing your Postponed VAT Accounting becomes so crucial.
A Postponed VAT Accounting Report will only display imports that have been declared at customs, not those which have been deferred.
If a declaration has been deferred, the estimated import VAT on the imported goods must be estimated and then correctly accounted for in the following VAT return once the declaration is prepared, the import VAT calculated and then clearly stated on the subsequent report.
As always import VAT must be calculated after duty taxes and other costs, so it’s unlikely that a correct figure will be able to be estimated from a supplier invoice alone.
Also ensure to download and retain copies of your Postponed VAT Accounting reports, as they will become crucial parts of your VAT record-keeping.
Is it mandatory to use Postponed VAT Accounting?
Use of the Postponed VAT Accounting scheme is entirely optional and is best used appropriately at the discretion of the business.
The main benefit of Postponed VAT Accounting is that it lessens disruption to the importation of goods from the EU which are now subject to new customs duties and checks. For small businesses this disruption could be the difference between breaking even or recording a negative cash-flow.
Businesses are still free to pay VAT upfront once the goods enter free circulation into the UK. To do so, businesses must acquire monthly C79 reports from HMRC under the legislation for non-EU importations.
Please note that Postponed VAT Accounting will become mandatory if the submission of customs declaration is deferred, i.e by benefiting from the initial six-month customs deferment period available at the close of the Brexit transitional period.
Postponed VAT Accounting is available for use by all existing VAT-registered businesses in the UK. Businesses in Northern Ireland will meanwhile continue to be considered as part of the EU VAT area, which means that goods arriving from the EU into Northern Ireland will not be considered as imports and will not incur import VAT.
Businesses in Northern Ireland can however still use postponed VAT accounting for the importation of goods from non-EU countries.
Postponed VAT Accounting and Northern Ireland
Arrangements made between Northern Ireland and the EU following the Brexit agreement mean that Northern Ireland has unique VAT and customs legislation which is entirely separate to that of England’s, Scotland’s and Wales’.
Whilst businesses based in Northern Ireland can still utilise postponed VAT accounting when recording importations with other non-EU countries, Northern Irish businesses do not need to use Postponed VAT Accounting when moving their goods from the Republic of Ireland or other EU countries. This is because the movement of goods is still declared as EU supplies and acquisitions, which incur no import tax.
Current guidance also advises that goods travelling between Northern Ireland and the mainland UK will not incur import tax and will be treated as domestic sales and purchases in respect of VAT.
Goods that are imported into Northern Ireland from outside the EU from one registered business to another (B2B) and that are deemed to have a value below £135 will however be subject to mandatory Postponed VAT Accounting.
Postponed VAT Accounting is relatively straightforward and brings with it relief to businesses who may have been worried about experiencing significant importation disruption. It allows businesses who currently trade with the EU to remain fairly unaffected by Brexit in terms of VAT, which is a major relief for businesses with tight cash flow.
Though Postponed VAT Accounting comes with little to no negatives, it does bring with it an element of additional administrative requirements.
To ensure that your record keeping is up to date, make sure that you consult with a trusted accountant who can help keep your VAT returns up to date. At iFinance Department, we have years of experience in turning complex accounting into simple filing, and we’d be happy to help. To get started, view our services here, or book a free initial consultation with us.