Don’t let tax be taxing

Q: We recently had a problem with confusion over our VAT return and the issue of paying import duty on goods we bought from abroad. We used Xero to do our accounts and we were inputting import duty as an expense to the company. But we were told that’s wrong.

What do we need to know?

A: This issue has come to the fore since the UK left the EU at the start of the year. Before Brexit, companies buying goods from the EU could take advantage of the reverse charge system on VAT. That has now changed.

When you buy a good worth £120 from a UK seller they will charge you £100, plus £20 VAT; at the end of the quarter, they have to pay that VAT over, and if you’re buying in, you can reclaim that VAT. But when you’re importing, it’s different.

Typically, when you buy goods from overseas, you settle it by commercial invoice, and when the good reaches the UK border, the 20% duty has to be paid in order for customs to release it. The key thing to remember is that you pay for the net amount of the goods direct to the person you’re buying from, but you pay the VAT separately, direct to HMRC by way of your freight agent/3PL.

So while it is technically part of the VAT system, in this case it’s called import duty. What usually happens is your freight agent provides your VAT number to HMRC and then the agent will invoice you for the VAT. This is where it can look like an invoice but in fact, it’s an invoice for the duty of 20% on the goods arriving, paid directly to HMRC.

Paying import duty on goods from overseas is similar to paying VAT, but in order to for it to be picked up on your VAT return – and reclaimed – you need to ensure that it’s accounted for as a VAT liability as opposed to a general expense liability.

As the import duty is a cost, you will be issued with a C79 certificate detailing all the duty that’s been paid against your VAT number. With this, you use that certificate as part of your VAT return in order to reclaim the 20% import duty.

Anyone using software to do their VAT return will know there are certain boxes to complete, and BOX 4 is the key one for reclaiming VAT. It’s very important that even though import duty is a liability for the company, it is accounted for as a VAT overhead, which then gets picked up, allowing you get a refund (assuming you have the right documentation for the duty paid). You should have a C79 to be able to reclaim.

We recently worked with clients that were using Xero to reconcile their bank account. They paid £100 for some goods and then £20 and they put it down as a cost to reflect an expense to the company. But it’s actually a VAT liability that should be inputted against your VAT code so the return will pick it up in box 4, and allow you to reclaim it.

If you just enter it as an expense, HMRC will never know about it and it will end up costing them £120 when it should have cost £100.

The key point is simple: make sure you’re recording your VAT/import duty as a liability and not a cost to your company to ensure your VAT return is correct and you don’t pay unnecessary tax.

If you’re in need of advice or support in this or any other area, we’re right here for all your needs. You can contact us for help from tax and payroll to accounting and banking.