Many businesses rely on overseas suppliers for products, materials and components. However, the costs involved in importing can have a significant impact on the working capital available to business. Postponed import VAT accounting can help businesses to manage this impact.
For example, if a company imports £10,000 of shoes from Italy, they might pay around £1,000 in duties and £2,000 in shipping costs. Once the goods arrive at the UK border, the company also becomes liable for VAT costs of £2,300 on the total cost of receiving those goods.
The postponed accounting rule means that the company would be able to delay the payment of this VAT. In this article, we'll explain more about how this works.
What is postponed import VAT accounting?
Postponed import VAT accounting (also known as PVA) allows businesses to import goods into the UK without paying the import VAT immediately. Instead, the business records the VAT due on their next return, and the payment is due once that return is filed.
The scheme was introduced in January 2021 and works in a similar way to the reverse charge mechanism previously used to capture VAT due on EU imports. By allowing companies to postpone the VAT on imports and reclaim VAT at the same time, companies will see a significant boost to their cash flow. “As an SME especially, paying VAT at the border can mean a huge amount of working capital is being tied up, and that can be for a number of weeks,” says Clare Bowen, Director of accounting and business advisory firm Monahans.
How does PVA work?
“As a jewellery company we hold quite a large inventory because our stock increases in value, but that does mean we have needed to plan cash flow carefully because of the need to pay import duties and VAT on each shipment,” says Phil Spencer, Managing Director at London DE.
For the last five years, London DE has paid VAT upfront with duties and fees as each gem shipment lands in the UK. The company pays the VAT due on the import from its working capital, and can then reclaim the VAT on its next VAT return. “Potentially, postponed VAT could be a game changer for us," says Spencer, "largely because of the ability to retain more capital for day-to-day business.”
Who can use the postponed VAT accounting scheme?
Any business importing goods into Great Britain — from anywhere in the world — can use this type of accounting, providing they are VAT-registered, or are prepared to become so, says Bowen. There's no need to specifically register for the scheme. “It’s entirely optional," Bowen says, "but for SMEs it can be a real boost to cash flow.” Keeping track of VAT costs throughout the year in your management accounts can help demonstrate the potential value of this to your business.
If your business is importing to Northern Ireland the rules are slightly different. In this case, the scheme can be used for goods imported from outside the UK and EU.
How do you account for postponed VAT?
If a business wants to use postponed VAT accounting for items that have been imported, then they will need to track any postponed VAT liabilities in their tax return, and within monthly reports. Under the Making Tax Digital (MTD) system [1], businesses can access monthly statements that will show any VAT that has been postponed in the last month.
HMRC rules state that businesses must account for postponed import VAT in the same accounting period that covers the date the goods were imported. The postponed accounting report is a vital part of your VAT accounts, so it’s important to keep a copy of all postponed VAT liabilities.
Simply put, the business should record the VAT that would normally be paid at the border and provide their VAT number for the import records. If you are using a mainstream cloud-based accounting platform, it will include PVA functionality as standard, making the process even easier.
How do I complete my VAT return if I use PVA?
You’ll need three pieces of information to account for postponed VAT. These are:
- The VAT due on imports for the accounting period through postponed VAT accounting.
- VAT reclaimed for the period on imports accounted for through postponed VAT accounting.
- The total value of all imports during the period, not including VAT.
This information is entered into the VAT return as follows:
- VAT due on sales – include the VAT due in imports through PVA in this period, using the information in your online statement.
- Making Total input VAT – Include any VAT reclaimed in this period on imports accounted for through PVA.
- Total value of purchases – Add the total value of all goods imported in this period, net of VAT.
For some businesses, especially those who do not regularly import from the EU, the postponed VAT accounting scheme is a relatively new idea. “We hadn’t really heard much about it, and were just paying VAT upfront,” says Spencer. “But for a business like ours, I’d much rather be using capital to drive the business rather than having it tied up in VAT.”
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