What is Postponed VAT Accounting?

Postponed VAT Accounting (PVA) is a system introduced in the UK that allows businesses to account for import VAT on their VAT Return, rather than paying it upfront at the point of importation. This system was implemented after the UK left the European Union (EU) on January 1, 2021, as part of the Brexit transition. Postponed VAT Accounting aims to ease cash flow for businesses that import goods into the UK by deferring the VAT payment to a later date.

In this in-depth article, we will explain how Postponed VAT Accounting works, its benefits, who can use it, and how to account for it on your VAT return.

How Postponed VAT Accounting Works

Under Postponed VAT Accounting, businesses that are VAT-registered in the UK no longer have to pay VAT at the time of importing goods. Instead, the import VAT is accounted for and declared on the business's regular VAT return.

This means that the business does not need to make an immediate payment of VAT when goods arrive in the UK, improving cash flow by delaying the VAT payment until the business files its VAT return. Businesses can then simultaneously reclaim this VAT as input tax on the same VAT return (if the goods are eligible for VAT recovery).

Here’s how the process works step by step:

1. Import Goods into the UK: When your goods arrive from overseas, you’ll declare the goods to UK customs. Rather than paying VAT on the goods immediately, you will account for this VAT through your VAT return.

2. Postpone VAT on Your VAT Return: The VAT due on the imported goods will be accounted for in your next VAT return. You’ll declare the VAT in two places: once as output tax (what you owe) and again as input tax (what you can reclaim if your business is entitled to recover VAT on the goods).

3. Declare on Your VAT Return: You declare the VAT on imported goods on your VAT return, which includes the following:

   • Box 1: Include the VAT due on the imported goods.

   • Box 4: Reclaim the VAT on imported goods (if you’re entitled to do so).

   • Box 7: Include the total value of the goods you’ve imported.

By doing this, the VAT amount is netted off, meaning there is no need to pay the VAT upfront.

Who Can Use Postponed VAT Accounting?

Postponed VAT Accounting is available to:

• All VAT-registered businesses in the UK that import goods into the country.

• Goods imported from anywhere in the world: Whether you’re importing goods from the EU or non-EU countries, you can use the Postponed VAT Accounting system.

There is no requirement to apply to HMRC to use Postponed VAT Accounting, and businesses can simply start using it if they are VAT-registered and import goods.

Benefits of Postponed VAT Accounting

The main benefits of Postponed VAT Accounting are:

1. Improved Cash Flow: Businesses no longer need to pay import VAT immediately at the time of importation, meaning they don’t have to wait to reclaim it later. This helps reduce the upfront financial burden on businesses, freeing up cash that would otherwise be tied up in VAT payments.

2. Simplified VAT Accounting: Postponed VAT Accounting allows businesses to account for import VAT through their VAT returns, making the accounting process more straightforward. It also aligns VAT on imports with the domestic VAT accounting process.

3. Consistent VAT Treatment: PVA provides consistent treatment of imports, whether goods are coming from the EU or other countries, meaning businesses don’t have to worry about different VAT rules for different regions.

4. No Need to Wait for VAT Reclaim: Businesses can account for import VAT and reclaim it simultaneously on the same VAT return, reducing the need to wait for refunds and making the VAT process more efficient.

How to Account for Postponed VAT Accounting on a VAT Return

When using Postponed VAT Accounting, businesses will need to declare the VAT due on imported goods in their regular VAT return. Here’s how it works:

• Box 1 (VAT due on sales and other outputs): Enter the VAT due on imports. This will be the amount of VAT that would have been payable at the time of importation.

• Box 4 (VAT reclaimed on purchases and other inputs): Reclaim the VAT on the imported goods (if the business is entitled to recover VAT). The amount entered here should match the amount in Box 1 if you are entitled to full VAT recovery.

• Box 7 (Total value of purchases): Enter the total value of the goods imported into the UK, excluding VAT.

For businesses using software to submit VAT returns, many software providers will include the relevant boxes for postponed VAT accounting, making it easier to ensure compliance.

Example of Postponed VAT Accounting

Let’s consider an example of how Postponed VAT Accounting works in practice.

Suppose your UK VAT-registered business imports goods worth £20,000 from a supplier in the US. The VAT rate for the goods is 20%. Ordinarily, you would need to pay £4,000 in VAT at the time of import.

However, with Postponed VAT Accounting, you don’t need to pay the £4,000 upfront. Instead, you account for the VAT on your VAT return as follows:

• In Box 1, you enter £4,000 (the VAT due on the goods).

• In Box 4, you also enter £4,000 (the VAT you are reclaiming).

• In Box 7, you enter £20,000 (the value of the imported goods).

Since the VAT due and the VAT reclaimed are the same, the net effect on your cash flow is zero, meaning you do not need to pay anything at the point of import or wait for a VAT reclaim.

Record Keeping and Reporting for Postponed VAT Accounting

To use Postponed VAT Accounting, businesses must keep accurate records of their imports and ensure that they account for import VAT on their VAT return. It’s essential to maintain the following records:

• Import declarations: These provide details of the goods imported, including the value and VAT amount due.

• Monthly postponed VAT statement: HMRC provides a postponed import VAT statement that summarises all the import VAT accounted for in a particular month. This statement is available online via the Customs Declaration Service (CDS). You will need to download this statement and keep it as part of your VAT records.

The postponed VAT statement will help businesses reconcile their VAT returns and ensure that they have accounted for the correct amounts of VAT.

When Not to Use Postponed VAT Accounting

Postponed VAT Accounting is generally beneficial for cash flow, but it may not be suitable for every business. Businesses that do not have a regular VAT return (for example, those on the flat-rate VAT scheme or annual accounting scheme) may need to consider whether using PVA is the best option, as these schemes have different VAT accounting rules.

Additionally, businesses that are not VAT-registered cannot use Postponed VAT Accounting and will need to pay import VAT upfront.

Conclusion

Postponed VAT Accounting is a valuable system that simplifies the VAT process for businesses importing goods into the UK. By allowing businesses to account for VAT through their VAT return, rather than paying it upfront, PVA helps improve cash flow, streamline the VAT process, and ensure businesses are not left out of pocket while waiting for VAT refunds.

If you are a VAT-registered business and import goods into the UK, understanding how Postponed VAT Accounting works and integrating it into your VAT processes will be essential to staying compliant with UK tax laws while maximizing the benefits for your business.

By keeping digital records, using compatible software, and ensuring proper reporting on your VAT return, you can make the most of Postponed VAT Accounting and avoid any potential issues with HMRC.