Tax costs associated with importing for UK SMEs
Imports are currently defined as goods which enter the UK from outside Europe but post-Brexit this may expand to include products from Europe. SMEs must ensure they understand their tax responsibilities when importing so they can be prepared for the potential changes next year.
VAT is charged on importation and can either be paid upfront to the agent clearing the goods or deferred using the UK Duty and VAT Deferment Scheme which enables payment to be made the month following import, a useful option for managing cash flow. This VAT cost can be recovered as long as the business is VAT registered and the import meets certain criteria.
Goods entering the UK, declared for customs purposes are categorised using the harmonized system of tariff nomenclature which is an internationally standardized system of names and numbers to classify traded products. This classification determines the customs duty rate applied for those goods. For example, cars can attract a duty rate of 10% versus certain computer and electronic parts which attract a 0% rate of customs duty.
Customs duty is essentially an outright cost to businesses when the goods are entered into free circulation in the UK. However, there are customs procedures which may be of benefit to businesses, which can assist to mitigate, delay or suspend the payment of this cost. These customs procedures require the underpinning criterion to be applied accurately by businesses.
Businesses importing goods contingent on customer demand may wish to consider customs warehousing or excise warehousing for goods which attract excise duty. A business may import goods with the intention of selling them in the UK but at the point of importation have not confirmed the end customer. By entering the goods into the appropriate warehouse scheme, the requirement to pay the duty and import VAT at the point of importation would effectively be suspended, until the final customer is established, and the goods enter free circulation. In the event the business is not able to identify a UK customer, the goods can be re-exported if required without incurring customs duty and import VAT costs. This is an example of just one procedure which can provide a level of flexibility for businesses who made need to adjust their business operating model to respond to a change in demand.
Businesses may also wish to consider applying for Authorised Economic Operator (AEO) status. The AEO concept is broadly based on the Customs-to-Business partnership introduced by the World Customs Organization (“WCO”). AEO status, issued by HMRC in the UK, signifies that a business has met a range of criterion and standards across their end-to-end supply chain, compliance, record keeping and customs operations. Benefits for AEO certified businesses are an integral part of the EU legislation governing the AEO status. The AEO benefits are dependent on the type of authorisation held. The AEO scheme is also recognised in countries outside of the EU, including the US, China and Japan.