Postponed VAT Accounting: What Is It and How Does It Work?
Learn more about postponed VAT accounting, which lets eligible businesses declare and immediately recover import VAT.
For those who sell and import internationally, VAT (Value Added Tax) can pose extra challenges and complications. One such challenge is managing the cash flow impact of paying VAT on imported goods. To address this issue, many countries have introduced a mechanism called postponed VAT accounting (PVA). In this post, we take a closer look at postponed VAT accounting, how it works, and its benefits.
What is postponed VAT accounting?
Postponed VAT accounting allows sellers to account for and recover import VAT on their VAT return, rather than paying it upfront at the time of importation. Traditionally, when goods are imported into a country, VAT is payable immediately or shortly after the goods arrive.
This can result in a significant cash flow burden for businesses, especially those with regular import activities. However, with postponed VAT accounting, companies can defer the payment of import VAT and more effectively manage their cash flow.
The United Kingdom and Norway both have postponed VAT accounting mechanisms, as do the majority of countries within the European Union. France is the latest EU country to offer an import VAT scheme, having only introduced this option in 2022.
How does postponed VAT accounting work?
Under postponed VAT accounting, instead of paying the import VAT at the time of importation, eligible businesses can now account for it as a reverse charge on their VAT return. The process of postponed VAT accounting will vary from country to country, but generally involves the following steps:
The business imports goods from a non-EU country into an EU Member State, or from a non-UK country into the UK. The goods are subject to import VAT and potentially customs duties.
Postponed VAT accounting declaration
At the time of importation, the business makes a declaration to the customs authorities using the appropriate customs declaration form. This declaration indicates the intention to account for the import VAT through postponed VAT accounting.
Again, the particular process for declaring the postponed import VAT will depend on the country, but it’s essentially the same as the reverse charge mechanism. When the VAT return is due, the business includes the import VAT as both output VAT and input VAT on the return. You’ll find the relevant deferred VAT payments on your monthly postponed VAT accounting statement.
Here's an example of how postponed VAT accounting would work in practice in the UK:
- You import a shipment of electronic goods worth £10,000 from a non-UK country into the UK.
- You complete the necessary customs declaration, providing all the required information about the goods, their value, and the applicable import duties and VAT.
- Instead of paying the UK import VAT of, let's say, £2,000 upfront, you choose to account for it through PVA.
- When submitting your regular VAT return, you include the UK import VAT as a reverse charge in Box 1 (VAT due on sales and other outputs) and Box 4 (VAT reclaimed on purchases and other inputs).
- The UK import VAT amount is added to your UK VAT liability for the period, which you will need to settle when making your regular VAT payment.
Benefits of Postponed VAT Accounting
Postponed VAT accounting offers several benefits to sellers who import goods internationally into the EU and/or UK:
Improved cash flow
By deferring the payment of import VAT, businesses can better manage their cash flow. This can be particularly beneficial for companies that rely heavily on imported goods.
Postponed VAT accounting reduces the administrative burden associated with VAT on imports. Businesses no longer need to make separate VAT payments for each import - instead, they can account for import VAT on their regular VAT return.
Postponed VAT Accounting can make businesses more competitive in the international market. It eliminates the need for immediate VAT payment on imports, which can be a significant advantage for companies operating on tight budgets or with limited access to working capital.
Improved supply chain efficiency
By streamlining the VAT payment process, postponed VAT accounting can help facilitate smoother supply chain operations. It reduces delays and administrative complications, enabling businesses to receive their imported goods faster and more efficiently.
Postponed VAT accounting is a valuable mechanism for businesses engaged in international trade, allowing them to manage their cash flow effectively and simplify the VAT payment process. By deferring the payment of import VAT and including it on their VAT return, eligible sellers can streamline their operations, improve competitiveness, and enhance their overall financial performance.
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