Potential solutions to VAT issues: Customs special procedures

IP allows goods from outside the UK to be imported into the UK to be used in processing or manufacturing operations. When imported under IP into the UK, these goods are not subject to import duty, import VAT and/or Excise duty, and commercial policy measures.

Under the new UK-EU FTA, if the further processing of those goods complies with the FTA’s Rules of Origin (RoO), the finished goods may be exported into the EU under preferential treatment.

IP is particularly useful for any size of niche company that does regular customer repairs/upgrades and trade shows/exhibitions, equipment demonstrations or samples to customers.

Example 1: A Scottish manufacturer imports raw materials from China, which are subject to further processing in Scotland, and then exports the finished products to the EU. If both raw materials imported into Scotland (UK) for processing, and the finished goods imported into the EU follow the standard import/export procedure:

• When importing into Scotland from China, the importer will have to pay duties and import VAT on the raw materials
• When importing into the EU from Scotland, the importer will also have to pay duties and import VAT on the finished products

By using Inward Processing: Raw materials are imported into Scotland under IP, and the processing operations make the finished goods compliant with the UK-EU FTA’s RoO:

• When importing into Scotland from China, the raw materials won’t be subject to duties and import VAT
• When importing into the EU from Scotland, the importer may claim preferential treatment under the UK-EU FTA, upon presentation of the relevant proof of origin

More information on Inward Processing can be found on GOV.UK.

Customs warehousing allows the owner to hold imported non-UK goods in the UK and choose when to pay the duties or re-export the goods.

The amount of working or processing allowed on goods held in warehouses is limited to keeping them preserved with a view to subsequent distribution. However, it is possible to process goods under Inward Processing or under customs control on the premises of a customs warehouse.

Within UK-EU trade, this means that goods from third countries may be imported into the UK under CW and can be held there without payment of duties and import VAT, either for the purposes of re-exporting them into the EU, or to release them for free circulation in the UK.

Customs warehousing is a useful procedure for companies wishing only to store goods without releasing them for free circulation in the UK, regardless of size.

Example 2: A Scottish retailer imports a clothing consignment from China into Scotland (UK), which is meant to be split for distribution to the UK, and the EU. If the clothing consignment is imported into Scotland (UK) following the standard import/export procedure:

• When importing into Scotland from China, the importer will have to pay duties and import VAT on the entire consignment
• When importing into the EU from Scotland, the importer will also have to pay duties and import VAT on that part of the consignment

By using Customs Warehousing:

• When importing into Scotland from China, the goods won’t be subject to duties and import VAT, and will be stored in the authorized Customs Warehouse
• When the consignment is part distributed within the UK the trader will have to pay duties and import VAT, upon the goods’ release for free circulation into the UK
• The goods imported into the EU will also have to pay duties and import VAT upon entering the EU-market

More information on Customs warehousing can be found on GOV.UK.

Outward Processing (OP) means that UK goods may be temporarily exported from the customs territory of the UK to undergo processing operations. The processed products resulting from these goods can be re-imported and released for free circulation with total or partial relief from import duty.

If a trader is authorised to use OP, they can get customs duty and import VAT reduced on goods exported out of the UK for process and repair, and re-imported to the UK.

The trader can apply for an Outward Processing authorisation if they are established in the UK. The trader does not have to own the goods that are exported, neither does the person re-importing them – another person can do that if they have the trader’s permission.

The trader will be responsible for working out the duty to claim and showing HMRC the calculations used. The amount is based on the costs of processing or repairing the exported goods and bringing them back to the UK – also, known as the rate of yield.

OP is a customs special procedure especially useful for manufacturing companies.

Example 3: A Scottish retailer exports one roll of cloth to a dress maker in the USA. Dresses made from the cloth are then re-exported to Scotland (UK). If the exported cloth and the dresses imported into Scotland (UK) follow the standard import/export procedure:

• When re-importing into Scotland, the importer will have to pay duties and import VAT on the full customs value amount

By using Outward Processing: When importing into Scotland from USA, the goods will be partly relieved from duties and import VAT, according to the rate of yield computed by the trader.

More information on Outward Processing can be found on GOV.UK.

Transit is a customs procedure which allows the movement of goods to, from, through or between the countries that have signed the Common Transit Convention, without the need to complete customs declarations until they end their transit movement. Neither are they required to pay customs duties and other charges on the goods until they end their transit movement.

Transit can help traders move goods from the UK to other common transit countries more quickly and without paying import duties in those countries, because customs declarations and duties are not required at each border crossing. This means traders may complete some customs processes either at an office of departure or destination, or at their own premises.

Transit is useful for any size of company that moves goods across different borders, such as the EU’s countries, to reach their final destination.

Example 4: A Scottish exporter of frozen fish is exporting into Switzerland, with the transportation of the goods being made by road through the EU. If the exported goods follow the standard import/export procedure:

• When the goods enter the customs territory of the EU from Scotland (UK), EU duties and import VAT will be due
• When the goods enter Switzerland (CH) from the EU, CH duties and import VAT will also be due

By using Transit:

• When the goods enter the customs territory of the EU from Scotland (UK), EU duties and import VAT will be suspended
• When the goods enter Switzerland (CH), the Transit suspension ends and CH duties and import VAT will be due

Transit Declarations: Common mistakes

More information on Transit may be found on GOV.UK.

Traders can get relief on certain goods they import from outside the UK if they are used for specific purposes. This can include repairs, maintenance, or processing.

Authorised Use may be used by businesses established in the UK, to claim relief for goods such as civil aircraft and aircraft parts, shipwork goods, fish, cheese, bicycle parts, and military equipment.

The trader will have to provide HMRC with the rate of yield regarding the use of these goods, which is the number of processed products made from the quantity of goods entered under this procedure. For example, simply repairing and returning goods will have a yield rate of 1:1, but if the trader imports 300 metres of cloth to produce 100 identical items of clothing, the rate of yield will be 3:1.

Authorised Use may be used by companies with manufacturing capacity, providing processing is made on the relieved goods.

Example 5: A Scottish company imports fish into Scotland (UK) from Norway for processing and the imported goods follow the standard import procedure:

• When the goods enter the customs territory of the UK from Norway, duties and import VAT will be due

By using Authorised Use:

• When the goods enter the customs territory of the UK from Norway, duties will be partly relieved according to the yield rate, but import VAT will be due in total.

Example 6: A Scottish company imports a piece of machinery into Scotland (UK) from Brazil for repairing, which will be re-exported to Brazil again:

• When the goods enter the customs territory of the UK from Brazil, duties and import VAT will be due

By using Authorised Use:

• When the goods enter the customs territory of the UK from Brazil, duties will be partly relieved according to the yield rate, but import VAT will be due in total

More information on Authorised Use may be found on GOV.UK.

A Temporary Admission authorisation allows traders to keep imported goods in the UK for up to 2 years before being re-exported, without being required to pay duties or import VAT on them, provided they are intended for alteration. Examples of where this procedure might be used would be in the case of goods imported for purposes such as exhibiting at a trade fair or taking part in a music show.

Full duties and import VAT relief will be provided for goods appearing on the eligible goods list, which can be found on GOV.UK. If the goods do not appear on the list of eligible goods, or the use the trader wants to put them to is not covered, it may still be possible to get a reduction in duty payment.

To dispose of the goods, the trader can either re-export them from the UK, declare them to inward processing (if the trader wants to process them beyond carrying out repairs) or customs warehousing (if the trader wants to store them prior to re-export), release them for free circulation (although duties and import VAT suspended at import will be due), or destroy the goods.

Temporary Admission is very useful for any size of niche companies who do regular customer repairs or upgrades, and trade shows or exhibitions, equipment demonstrations or samples for customers.

Example 7: A Scottish company is importing musical instruments from Germany (EU) for a year-long cultural program and the imported goods follow the standard import procedure:

• When the goods enter the customs territory of the UK from Germany, duties and import VAT will be due

By using Temporary Admission:

• If the goods are in the eligible goods list, when the goods enter the customs territory of the UK from Germany, no duties and import VAT will be due, provided the goods are re-exported in 2 years’ time
• If the goods are not in the eligible goods list, when the goods enter the customs territory of the UK from Germany, duties will be partly relieved, provided the goods are re-exported in 2 years’ time

More information on Temporary Admission can be found on GOV.UK.

If a trader imports goods regularly, they can apply for a Duty Deferment Account (DDA) to delay paying most customs charges, namely duties, excise duty and import VAT.

A DDA allows the trader to make one payment a month through a Direct Debit instead of paying for individual consignments.

A DDA is an useful tool for any trader importing goods regularly into the UK, regardless of its size.

More information on the Duty Deferment Account can be found on GOV.UK.

If the trader is registered for VAT and imports goods, they can account for import VAT on their VAT Return instead of paying the VAT by duty deferment.

More information on accounting import VAT on the VAT return can be found on GOV.UK.

Traders re-importing goods into the UK that have previously been exported may claim a duty and import VAT relief under Returned Goods Relief (RGR). The relief does not apply where those goods were exported from the United Kingdom as a result of their removal from Northern Ireland.

The goods must be re-imported in an unaltered state, apart from any work that may have been carried out to keep the goods in working order. The goods cannot have been upgraded to increase their value.

RGR is a procedure that may be useful for businesses selling items directly to consumers, such as e-commerce businesses.

Example 8: A Scottish company is selling goods to a customer in Italy (no preferential duty applicable), which are then returned to the UK by the customer. The returned goods are imported into the UK under the standard import process:

• Duties and import VAT are due upon importation

By using Returned Goods Relief:

• No duties nor import VAT will be due upon importation

Certain goods are subject to excise duty, a tax charged on the importation and manufacture of alcohol, tobacco and oils. When excise goods are moving in excise duty-suspension within the UK or EU (for Northern Ireland movements only), the movement must take place between persons and premises that have been approved for that purpose by the competent authorities in the UK or EU member state where they are based.

Excise goods may only be moved in excise duty-suspension once they are in ‘free circulation’. In the UK this covers goods that have been wholly produced in the UK, or goods that have been imported into the UK and for which all import formalities have been completed and customs duties have been paid. For Northern Ireland, it can also mean goods imported into the EU for which all import formalities have been completed and any customs duties or associated charges have been paid.

If the trader is based in the UK and intends to receive, store and dispatch ‘free circulation’ excise goods in duty-suspension, they will need to have their premises approved as an excise warehouse, which is a specific type of tax warehouse. As the operator of the excise warehouse, the trader will also need to be approved as an authorised warehouse keeper.

Companies trading in excise goods that need to be moved and stored may use storage procedures.

More information on receiving, storing and moving excise goods can be found on GOV.UK.