Flat Rate Scheme – reclaiming import VAT

Within the Revenue and Customs Brief 3 (2022), HMRC have updated its guidance on how businesses registered for the Flat Rate Scheme pay import VAT when using Postponed VAT Accounting (PVA).

PVA Background

PVA is a method of paying import VAT. Rather than paying import VAT when the goods enter the country, the import VAT is declared via box 1 (output tax) on the VAT return.

If the business will use the imported goods for making taxable supplies, the same amount of import VAT is reclaimed via box 4 (input tax). This creates a nil net effect and is beneficial for cash flow. Our factsheet provides further information regarding PVA.

Flat Rate Scheme and PVA

If your business is registered for the Flat Rate Scheme (FRS), you cannot reclaim input tax on purchases. The exception if is there is a single purchase of capital expenditure goods where the amount of the purchase, including VAT is £2,000 or more.

Therefore, the import VAT included in box 1 via PVA cannot be reclaimed in box 4.

Guidance since 1 January 2021

Since 1 January 2021, HMRC have asked businesses registered under the FRS to include the import VAT accounted for under PVA in the turnover that is subject to the FRS percentage.

For example, if a business operates a FRS percentage of 12% and the import VAT was £100, box 1 (output tax) of the VAT return would include import VAT of £12.

As the FRS restricts input tax recovery, the import VAT cannot be reclaimed as input tax and no figure is entered in box 4 (input tax).

Updated guidance from 1 June 2022

For VAT return periods starting on or after 1 June 2022, FRS businesses must adopt the following revised guidance.

The full amount of import VAT must be included in box 1 (output tax) of the VAT return. There is no change to the input tax restrictions and the import VAT still cannot be reclaimed in box 4 (input tax). In the above example of £12 VAT in Box 1 prior to 1 June 2022, this would represent a 733% increase in VAT payable by your business.

The change in guidance means businesses registered for FRS which import goods will clearly pay an increased amount of VAT to HMRC.

HMRC have confirmed no amendment is required to VAT returns which have operated the previous guidance since 1 January 2021.

Example Table

A business imports goods and the import VAT is £100. The business operates a flat rate percentage of 12%.

This table highlights the difference in VAT returns using the previous and new FRS guidance and if a business does not operate the FRS.

 Flat Rate Scheme VAT return Non-Flat Rate Scheme VAT return
VAT Return BoxSince 01/01/21From 01/06/22
1 (output tax)£12£100£100
4 (input tax)£0£0£100
Net VAT due to HMRC£12£100£0

Next Steps

If your business is registered for Flat Rate Scheme and imports goods, you should decide whether staying within the scheme is beneficial.

If you wish to leave the scheme, you must write to HMRC. We can of course help you to deal with the correspondence with HMRC.