In October 2020 HMRC reaffirmed its position regarding import VAT and who is entitled to reclaim VAT paid on imports under current UK legislation (see Notice Revenue and Customs Brief 15). If you import goods to ‘process’ (testing, measurements, calibration, repair etc) them for financial gain, and you are not the owner of the goods, the notice suggests that only the owner of the asset is entitled to reclaim back the VAT or account for it using Postponed Vat Accounting (PVA). This is clearly an issue for the Test, Measurement and Calibration Industry (TMCI).
However, as the brief states under HMRC authorised special procedures, non-UK goods can be imported for repair or processing whilst import duty and VAT is suspended. However, once a business has obtained an authorisation from HMRC, it is not without significant issues.
For the temporary movement of goods across borders there are three potential HMRC authorisations that could be sought:
This authorisation allows for the temporary importation of goods by non-owners where there is a process performed that results in financial gain by the processor. This is the authorisation you should use if customers, from anywhere outside of the UK, send you goods for testing, measurements, calibration, repair etc and you charge them for the service and re-export it back.
At first sight, this also seems to alleviate the VAT and Duty issue, however, I would advise you to take legal financial advice if the goods you are processing are for financial gain before deciding whether Temporary Admission or Inward Processing is most appropriate. Temporary Admission is to facilitate the temporary movement of goods for various reasons but generally where there is no financial gain. The process of applying for Temporary Admission and its operation is very similar to Inward Processing.
This authorisation should not be confused with Inward Processing; it is completely different. This authorisation allows you to send your goods temporarily outside of the UK for processing such that no VAT or Duty is payable on re-import on the true value of the goods but only the cost of processing those goods.
In the rest of this article, we will consider further the Inward Processing (IP) Authorisation only.
How IP works
If you are only importing a maximum of three times a year items to process or repair, HMRC allows you to use a process known as Authorisation by Declaration. This means the Application can be done at the time of import for goods valued up to £500,000 for import. HMRC will take a deposit for the VAT and Duty at the time of import usually from a deferment account, this money is only repaid on successful completion of the Bill of Discharge which must be sent to HMRC illustrating when the goods were re-exported with the customs entry numbers. The correct customs procedures codes must be used at both import and export to support this.
If a business is importing goods for process or repair more than three times a year, they will need to apply to HMRC for a Full Authorisation.
To import goods under this Full Authorisation the business (or their agent) will need to enter the correct customs import information in the HMRC CHIEF system. This is normally done by the customs broker/freight forwarder or fast parcel courier who have a direct interface with the HMRC Chief system. However, it is very important that the ‘importer’ manages this process extremely carefully and sends instructions to the person making the declaration to ensure all information is entered correctly. Instructions should include:
Reason for import/re-export
Description and identification numbers
True value using one of the Customs Valuation rules see HMRC Notice 252
Country of origin
CPC code for import/export
IP Authorisation Number and Customs Supervising Office.
You have a specified time limit to process and re-export the goods on completion. When exporting, similar information to the above will be required along with the export CPC code.
Once you have completed the export correctly, it is recommended that you obtain and check the C88/E2 document at both import and export or check the HMRC MSS data (Management Support System which you need to pay for) to ensure the import and export are completed correctly without errors. If there are errors, you are liable for them. If the errors show the IP process is incomplete, you will be liable for the VAT and any duty on the true value of the goods.
Depending on the time period granted in the IP for the import and export of the goods, you will need to complete a Bill of Discharge with HMRC for every item that was imported over the period. This will require specific details from the records of import and subsequent export.
IP Application Process.
To apply for IP, you need to tell HMRC the following:
- The tariff headers for all the instruments you are going to import over the next five years. There is an issue here because, in TMCI, it is difficult to even approximately predict this. Furthermore, your authorisation is limited to these declared codes so if a customer sends you something that is not covered (you will have a VAT liability), you need to reapply and retrospectively correct the import – not easy.
- The approximate true value of the goods and how many for each tariff Header over the five years.
- The economic code of the process and the HMRC supervising office.
- How long it will take you to process the goods and re-export them.
The above are just a few of the questions. Once your authorisation is granted (and you may need a deferment account – not straight forward and usually involves personal guarantees) it will also state what Placement and Discharge customs offices should be used, for example, East Midlands Airport.
IP In Practice
If you are a major international corporation with your own logistics department, transport systems and links to the HMRC CHIEF system, the IP is workable as you are in complete control. For example, an aircraft engine manufacturer having engines shipped back for overhaul. The value of the overhaul is high making any cost in administering the IP insignificant and you have total knowledge of the engines true value, tariff code, weights etc. You would probably only be completing 100 or so of these high-value events a year.
However, if you are an SME you may potentially have some serious problems with the IP system. You will be totally reliant on the Fast Courier networks completing your import clearances on your behalf. Therefore, you should engage with a Customs Broker or Freight Agent who can help with this process, however, in many instances this will not always be possible.
Take the TMCI example:
- You will be dealing with hundreds if not thousands of ‘low revenue-generating value’ items per year that may carry a high ‘true value’.
- You will not necessarily know who is sending something in, from where, how and when.
- If you do know what is being shipped, you need an arrangement with the Fast Couriers that they contact you for customs clearance instructions.
- If the Fast Couriers do not alert you and ask for clearance instructions, they will import it as a bulk or permanent item, and you will have the unclaimable VAT liability to pay. They will use their judgement according to your customers’ shipping documentation on what information to enter in the HMRC import declaration.
- If they do contact you for clearance, you will need to:
- Tell them to import under your IP authorisation.
- Give them the correct CPC code and your EORI number.
- Declare the INCOTERMS and any insurance value on the shipment if applicable.
- Declare the description, tariff code, identification, weight and TRUE VALUE of each item.
- TRUE VALUE. Here is a major issue for most third-party service providers. Firstly, you are responsible for this. You must provide and keep evidence on what value was used and why. In effect, you are expected to know what the value is of potentially thousands of manufacturers equipment of which each may have hundreds of product models and many of which have multiple configurations and options that affect the price. Impossible. It is not good enough just to accept the customer’s declared value, they might not know anyway as they may be a third party themselves. It is fraudulent to declare a deliberately low value. Furthermore, there is the complication of; what is the value of an item that could be many years old and obsolete? The biggest issue with this ‘true value’ is that you, as the importer, are liable for it. In arriving at the value, you must use HMRC’s Notice 252 valuation methods.
- Note previously, the IP authorisation states where the Placement and Discharge be completed, e.g. East Midlands Airport. You have absolutely no control over this.
- Having provided the Fast Couriers with all this information they then have to clear it correctly.
- Assuming that the above is achieved, then you will need to re-export within the IP timeframe and instruct the Fast Couriers on how this needs to be done to correctly close out your IP return. This normally involves pre-alerting the Fast Courier by email of the consignment.
From experience to date in 2021 since Brexit, we can tell you that the above will not happen without significant errors. A company we work with in TMCI have so far reported 30 IP’s over two months and the Fast Couriers have imported or exported most of them incorrectly. This is despite a controlled Returns Authorisation System being in operation with their customers and very accurate information being supplied for customs clearance. Correcting these mistakes requires the Fast Couriers to amend entries but that is simply not happening because they are overwhelmed. This company now has a VAT liability in the order of several tens of thousands of pounds for a generated revenue from the work of a few thousand pounds unless these errors are corrected.
Many businesses may not even be aware of the fact they need to apply for inward processing and may at some point in the future be subject to a HMRC audit whereby they could face significant demands for repayment of VAT and other penalties which could be very costly.
David Hooper MBA is a Managing Director of Hooper and Co International Trade Consultancy Ltd, a Company involved in providing training, consultancy and support to businesses involved in imports exports and customs procedures. He is also Director of Independent Freight Solutions Ltd; a Customs Broker and Freight Forwarder based in Nuneaton Warwickshire.