Article originally published on 9th November and updated on 28th December
The Government has recently published the Brexit Omnibus Bill 2020, which includes a number of tax measures to deal with Brexit, write Glenn Reynolds and Richard Cowley of our Indirect Tax practice.
One of the measures contained in the Bill is the introduction of postponed VAT accounting for imports of goods coming into Ireland, the introduction of which is subject to Ministerial Order.
The UK officially left the EU on 31 January 2020 and entered into a Transition Period during which the UK continues to be treated as if it were an EU Member State. The Transition Period will end at 11pm on 31 December 2020 and Great Britain will then be regarded as a “third” country for VAT and customs purposes (separate rules apply to Northern Ireland). Goods that are purchased by Irish businesses and transported from Great Britain to Ireland will be regarded as “imports” from 1 January 2021 and will be subject to different VAT and customs rules from those that currently apply.
VAT on imports
Irish VAT arises on the importation of goods into Ireland from non-EU or “third” countries. The current position is that, unless a trader operates a deferment account, VAT is payable at the time the goods are imported into and cleared for free circulation in Ireland. This VAT may be recovered through the taxpayer’s Irish VAT return (to the extent that there is an entitlement to VAT recovery), however, this results in a cash-flow funding cost for the Irish business.
If this position were to remain unchanged, there would be a significant increase in the level of VAT cash-flow funding costs incurred by Irish businesses from 1 January 2021 due to the volume of goods acquired from Great Britain.
What does postponed VAT accounting mean?
The proposed measure included in the Bill means that importers of goods into Ireland would not have to make an upfront cash payment of the import VAT. Instead, they will be able to record the import VAT in the VAT return for the VAT period in which the import takes place under the VAT “reverse charge” accounting procedure, in a similar way that VAT is accounted for on the acquisition of goods into Ireland from other EU Member States.
A new box will be included on Irish VAT returns to record the VATable value of imports (which includes the cost of the goods imported as well as any duty and other costs such as insurance and freight) subject to postponed import VAT accounting.
This will effectively preserve the current VAT position for trading with Great Britain and will be VAT cash-flow neutral for businesses that are entitled to full VAT recovery.
Who will qualify?
The measure will not only apply to the import of goods from Great Britain but will be available automatically to all importers who are VAT and Customs registered in Ireland on 31 December 2020 and are importing goods from any “third” country. This should provide a cash-flow benefit for Irish businesses that are currently importing goods from countries including USA, Asia, Switzerland, Norway etc.
For those registering for VAT and Customs after 31 December 2020 there will be additional formalities to complete in order to qualify for postponed import VAT accounting.
The Bill provides that qualification for the scheme may be subject to certain criteria and conditions and Revenue will be given powers to exclude a person from the scheme if they do not meet the relevant qualifying conditions.
Preparing for the change
Businesses importing goods from “third” countries and Great Britain should ensure that their systems will be able to capture such acquisitions and ensure that VAT will be accounted for under the reverse charge procedure from 1 January 2021.
Timely reporting of VAT will be critical for all businesses, and not just those operating with limited or no VAT recovery entitlement.
Incorrect application of the relief
It is critical to note that the Bill as currently drafted provides that where the procedure is applied at import and VAT is not recorded in the correct VAT return period, then import VAT will be deemed to have been due and payable at the time of import but not paid, which could lead to a VAT underpayment and associated interest and penalties.