VAT Flat Rate Scheme and Postponed Import VAT

The Postponed VAT Accounting (PVA) system for imported goods was introduced on 1 January 2021 and allows most VAT registered businesses to pay and, subject to the normal rules, simultaneously reclaim import VAT through their VAT return. This avoids import VAT being paid to HMRC and reclaimed through the VAT return often many months later. It provides a significant cash flow advantage.

Under the Flat Rate Scheme, a business pays HMRC a percentage of its Flat Rate Turnover each period but cannot reclaim VAT on most expenses, and certainly not on goods purchased or imported for resale. An allowance for input tax is built into the flat rate percentages used to calculate the VAT payable.

If PVA is not used a business will pay import VAT when goods arrive in the UK. A Flat Rate Scheme trader cannot recover this VAT (unless the import is of capital goods meeting the £2000 threshold.) A business importing standard rated goods for resale with a customs value of £10,000 would pay import VAT of £2,000 which could not be reclaimed.

Where the PVA system is used the HMRC guidance on the Flat Rate Scheme advised the total value of imported goods was to be included in the Flat Rate turnover. The VAT paid on the imported goods would be determined using the business Flat Rate percentage.

The Flat Rate percentage varies. The highest rate is currently 16.5% but the lowest is 4%. For many retail businesses, the Flat Rate is 7.5% and using the example above the retail business would have paid import VAT of only £750. A VAT “saving” of £1,250 over a business that paid import VAT upfront.

The logic behind this guidance was never entirely clear and HMRC seem to have spotted this unexpected benefit. As a result, HMRC has announced a change for VAT returns starting on or after 1 June 2022. Where the Flat Rate Scheme and PVA is being used the value of imported goods should no longer be included in Flat Rate Turnover. Instead, the VAT due on imports should be calculated separately and added to the amount of VAT shown as payable on the VAT return in box 1.

Businesses using the Flat Rate Scheme will then pay the same amount of import VAT regardless of the method used to pay the import VAT. There is still a short window for businesses using the Flat Rate to import goods and apply the advantageous treatment.