VAT specialists at UK top 10 accountancy and advisory firm Azets warn that international VAT and Customs Duty rules are like an iceberg ready to strike unsuspecting businesses in the North East.
They state that although importers and exporters may have a general awareness, many do not fully understand the extent and complexity lurking “under the surface”.
The wake-up call comes amid increased HMRC scrutiny; Azets is currently assisting a number of clients to resolve multi-million-pound issues relating to the movement of goods over international borders.
Such issues often revolve around overclaimed or underpaid VAT, unforeseen overseas VAT registrations or insubstantial evidence to support zero-rating of export sales.
UK businesses are also getting increasingly caught out by issues surrounding Customs Duty, especially ensuring goods are classified correctly and assigned the correct country of origin.
Louise Phillipps, the Newcastle-based VAT Director for the North East, said: “Businesses in the North East often don’t have the resource or technical skills to address these areas and as such, are being subjected to Tax Authority reviews or are vulnerable to goods being held up at borders, impacting supply chains financially and in terms of delivery times.”
Azets’ VAT team urges local businesses to proactively manage their position to ensure they avoid these problems.
Louise added: “We are still seeing many businesses operating internationally who are unaware of the VAT and Customs rules that need to be adhered to when moving goods over international borders.
“Clearly, when goods are physically held up at Customs borders everyone on the operational side of the business views it as a major issue. However businesses can often proceed without knowing they have any problems at all, such as a VAT issue which can go under the radar and continue to build until a Tax or Customs Authority knocks on the door.
“It is very much like an iceberg where they may be able to see matters to address on the surface but under the surface there is a large and potentially dangerous mass which can cause untold damage.”
She added: “We are definitely seeing an increase in activity from HMRC in this area and have active engagements with businesses facing issues running into millions of pounds. We want to raise awareness among businesses so they can proactively manage their position.
“Businesses need to ask themselves if they know the potential risks and if any are relevant to them, as well as assessing how well they know their own processes.”
Common issues Azets’ VAT team is seeing include:
Businesses mistakenly recovering VAT on imports when they don’t own the goods involved – for example, goods which have been brought to the UK for purposes such as testing, repair or some other process, and are then sent back overseas.
Businesses involved in ‘drop shipments’, i.e. where a business arranges for goods to be shipped directly from their supplier to their customer. This can frequently lead to an unforeseen overseas VAT registration.
Businesses entering into supply and install contracts whereby goods are exported from the UK and installed overseas. This can also potentially generate an overseas’ VAT registration obligation.
The use of the incorrect details on import/export documents may leave the company exposed.
Assigning incorrect classification codes or country of origin to goods can lead to customs penalties and goods being held up at borders. These complex rules can impact on commercial relationships if suppliers provide incorrect information to customers.
Mistakes by freight forwarders and customs agents. In one example a company potentially missed out on circa £160,000 in recoverable import VAT due to errors by the agent. Clear communication and instruction are therefore key.
Brexit added significant complexity for those businesses that historically were used to frictionless trade with the EU.
As well as the potential for significant HMRC assessments and penalties for non-compliance – starting at 30% – consequences also include cash flow issues, delays at borders, returned goods and commercial problems.
Louise said: “It is so important that different departments within the business talk to each other. Freight forwarders are keen to keep the goods moving and logistics teams make may decisions but not inform the finance/tax team.
“This is where problems can begin. It is important that everyone is aligned internally and is talking to each other to minimise issues and ensure compliance. Where businesses have unusual transactions or are unsure of the correct treatment, professional advice should always be sought as early as possible and certainly before the goods are physically moved.”
Louise advised that, as well as reviewing supply chains, advising on compliance, providing training and dealing with HMRC investigations, Azets can also provide proactive support to business owners who may be seeking to sell their business in the future and want to ensure their VAT and Customs position is in order before going to market.
