Flat rate scheme: new VAT return rules for imported goods

Postponed VAT accounting

Postponed VAT accounting (PVA) was introduced to coincide with the UK’s final departure from the EU on 31 December 2020. It means that when a business imports goods into GB from outside the UK, they do not pay VAT when the goods arrive but instead account for VAT on the next return with the reverse charge.

For businesses that do not use the flat rate scheme (FRS), this means that they must account for output tax in Box 1 of the return and claim input tax in Box 4 of the same return. The input tax entry is subject to the usual restrictions that apply to domestic purchases, i.e. it is reduced to reflect any exempt, private or non-business use of the goods in question.

TPVA is a “win win” situation. It is better to not pay VAT in the first place, rather than pay it and reclaim it on a future date. There is no application process with HMRC, the business simply instructs their customs agent to elect for it on each shipment of goods.

A business cannot adopt PVA unless it has an EORI number issued by HMRC. It is a simple application process, and usually takes only three or four days to be approved.

FRS users and imports of goods

HMRC’s initial guidance from January 2021 was that a business should include the VAT-inclusive value of imported goods in the figure to which it applies the relevant FRS percentage. And because FRS users cannot claim input tax, it does not make any entry in Box 4 of the relevant VAT return.

Example. Jane the florist has imported plants and shrubs from the Netherlands worth £10,000 for the quarter ended 31 March 2022. Her quarterly sales figure for the same period is £30,000 including VAT.

The relevant FRS percentage for a florist is 7.5% with the category of “retailing not listed elsewhere”. Jane’s VAT payable for the quarter is £30,000 + £12,000 = £42,000 x 7.5% = £3,150 (the VAT-inclusive value of her imports, i.e. £10,000 + £2,000 VAT).

June 2022 changes

For VAT periods beginning on 1 June 2022 and later, a business must change the way of accounting for VAT on imported goods if it adopts PVA and also uses the FRS. It must exclude the imports from the FRS turnover and instead account for 20% VAT on imports in Box 1. So, in the example of Jane, her total VAT payable will increase from £3,150 to £4,250, i.e. (£30,000 x 7.5%) + (£10,000 x 20%).

There is a potential reduction in the VAT payment here - compared to the previous rules - if a business imports zero-rated goods. This is because the VAT payable in Box 1 with PVA is based on the rate that applies to the goods in question. For example, children’s clothes, books and many food items are zero-rated.