The vital information you need when it comes to taxation and importing goods from within the European Union.
Importing goods for sale is a trade almost as old as Europe itself. Increased specialisation of manufacturing has made importing of products almost de rigeur in some industries. But whether you’re importing for retail or importing materials for manufacture, it is important to be compliant with import legislation to avoid unnecessary penalties and delays. Having a full working knowledge of the legalities can help you not only avoid these negatives, but also to streamline your process and maximise efficiency.
DISTINCTION BETWEEN THE EU & THE EEA
If might seem pretty self-evident, but it is important to know whether the country you are doing business with is a member state of the European Union. There are countries within the European Economic Area (EEA) that are not members of the EU, which can occasionally cause confusion, and can make a massive difference in terms of import legislation. If in doubt, double check.
CROSS BORDER TREATMENT OF GOODS
Generally when bringing goods into the UK, a special tax called import duty must be paid. Jack Fletcher, VAT Policy Specialist for HMRC, explains how EU member states are exempt from this. “The position is different for supplies within the EU. As the EU operates as a single market, goods received from another Member State are not regarded as imports, instead they are referred to as ‘acquisitions’,” he explains.
“A VAT-registered business in the UK will not be charged VAT on goods purchased from another Member State provided that the UK business informs the supplier of its VAT number. Instead, the UK company must calculate the VAT due on the purchase and declare this in its VAT return as output tax (known as ‘acquisition tax’) and, subject to the normal rules, can also recover it as input tax. Therefore, any company that is entitled to reclaim input tax in full does not ultimately pay acquisition tax,” says Fletcher.
All businesses that are registered for VAT and are engaged in trade with other EU member states are required to provide details of these transactions to Intrastat. These details are used for statistical purposes. If you go above your threshold, currently set at £1.5 million for Arrivals and £250,000 for Dispatches, you must also complete a monthly Supplementary Declaration.
The HMRC website sets out very clear guidelines for importing goods – indeed, HMRC representatives revealed that under 1% of queries received by the VAT Written Enquiries Team concerned EU acquisitions.
UK TRADE TARIFF
In order to pay the appropriate VAT, you will need to have the correct commodity code for the items in question. You can find the correct code for your products by using the UK Trade Tariff, which has an online tool for this very purpose. The UK Trade Tariff is also useful because when you identify the correct commodity code, you will also get a list of the rules relating to that particular product.
It is your responsibility to ensure that the correct code is used, and remains so even if you go through a third party which is something that merits bearing in mind as the consequences of getting this wrong can be quite high. Importing goods with an incorrect commodity code can lead to your goods being seized by HMRC and delay their release from customs, which has the potential to slow down your business considerably.
Kevin Sams, HMRC Trade Statistics Specialist, and Fletcher warn that repeated breaches can lead to more serious consequences. “If a business continually provides incorrect commodity code data they could ultimately fall into penalty procedures, and this could lead to a fine. As the Intrastat Penalty regime is a criminal one, this could result in proceedings being held in a Magistrates Court.”
For the most part, goods can be moved freely within the EU, but there are certain categories of products that require specific licensing. These generally refer to items that have the ability to affect the health or safety of UK residents, such as medicines, firearms or any chemicals that could be used in the illegal manufacture of goods. The body responsible for issuing licences is the Import Licensing Branch of the Department for Business Innovation & Skills.
But what do you do if your products fall into a grey area? For example, the line between what constitutes ‘medicine’ and ‘herbal remedy’ can cause confusion. In this case, there is often help available. The Medicines and Healthcare Products Regulatory Agency (MHRA), which is responsible for medicines licensing, has a website that aims to address this.
When it comes to importing medicines from other EU member states, there are particular licences that you need to obtain. The type of licences that you need depends on whether the medicines are categorised as licensed or unlicensed, or if they are involved in parallel importing. Again, information on the particulars of this can be found at the MHRA website.
If your business is involved in the importing of any chemicals that can in any way be used in the manufacture of illegal drugs, you must observe pretty stringent licensing requirements and you will need to be vetted by the Home Office. Separate authorisation is needed for each chemical. The drug trade is constantly evolving, and even chemicals that are not currently used in the production of street drugs right now may have the potential to be. Therefore, if you are importing any kind of chemicals it is worth checking the guidelines on a regular basis. To be in breach of these guidelines is viewed extremely seriously and can result in a fine and/or a prison sentence of up to two years.
Obviously, if you are looking to import firearms or weaponry, there are very strict guidelines that you must adhere to. A list of the bodies responsible for issuing licensing criteria can be found on the HMRC website, or through the UK Trade Tariff.
EU SPECIAL TERRITORIES
Although importing from the EU usually incurs no import duty, you usually need to pay import tax if you are importing from one of the EU Special Territories. According to the HMRC website, the EU ‘Special Territories’ are The Aland Islands (Finland), The Canary Islands (Spain), The Channel Islands (UK), The French Overseas Departments of Guadeloupe, French Guiana, Martinique and Reunion and Mount Athos also known as Agion Oros (Greece). If you are importing from one of these areas, special care must be taken to ensure compliance.
GOODS THAT ARE IMPORTED TO THE UK FROM THE EU, BUT HAVE A NON-EU POINT OF ORIGIN
The guidelines for importing from another European country are fairly straightforward. But what if the product that you are importing has a non-EU country of origin – is the legislation still the same? For example, if a company is importing a product from Germany, but the product was originally imported into Germany from a territory outside of Europe, are there any extra steps that the business needs to take from a revenue perspective?
“It depends,” says Fletcher. “If the goods were imported into Germany by a business that carried out customs clearance and then supplied to the UK company, it will be the responsibility of the supplier to account for duty and import VAT in Germany. The supplier can then zero rate the sale to the UK company. If the UK company imports the goods itself into Germany and then transports them to the UK it will be responsible for declaring VAT and import duty. It may do this in Germany but there is a system known as ‘Community Transit’ that allows for payment to be suspended until the goods reach the UK,” he notes.
The situation is slightly different for goods that are in free circulation. Goods are said to be in free circulation if they originate from an EU country, or have already been imported with all customs charges paid, into an EU country. “If the goods are in ‘free circulation’ within Germany, then this will become an EU import (and an Intrastat declaration will be required). There will be no revenue implications,” says Fletcher. “However, if the goods are still subject to a Customs procedure, there could be VAT and Duty liable (and a CHIEF declaration will be needed) to clear the goods to ‘free circulation’ in the UK.”
MOST COMMON MISTAKES
We asked representatives from HMRC about some of the most common mistakes they see businesses making. “Not providing the EU supplier with their VAT number,” says Kevin Sams. “Without evidence that the UK customer is making a business purchase, the EU supplier will have to charge VAT at the rate applicable in its own Member State,” he says.
Not accounting for acquisition tax is another common error, Sams adds. “The UK business has to, in effect, charge itself VAT on purchases from other EU countries. For most businesses this is a simple “in/out” transaction – the VAT is declared as output tax and recovered as input tax. However, where a business is not entitled to recover all of its VAT because it makes exempt supplies (such as a bank or an insurance company), there will be a tax loss if it fails to account for the VAT properly.”
Some businesses also fail to include the value of EU purchases in their calculations of taxable turnover for VAT registration purposes. EU purchases should be included in the sales turnover when a business is deciding whether it is required to register for VAT. In terms of reporting requirements, the value of goods imported from EU Member States is required to be completed on a VAT return, and if above a certain value over the year, more detailed Intrastat declarations which specify the different types of products will also need to be submitted.
Given the large number of businesses involved in importing from the EU (over 140,000), there are a variety of issues present. These range from incorrectly including the value of services on the VAT declaration, not fully completing an Intrastat declaration (such as omitting the net mass of the goods where required), getting the declaration submitted by the legal deadline (21st day of each month); to issues of correctly identifying the commodity code for a particular product.
BEST PRACTICE ADVICE
Fletcher and Sams put forward a number of points for businesses seeking to follow best practice when importing from the EU. “We would recommend that any business purchasing goods makes sure they refer to Notice 725 The Single Market so that they understand the rules. But the key is to ensure that they provide their supplier with their UK VAT number, which will allow the supplier to zero-rate the sale and not charge VAT,” says Sams.
Fletcher points out that importing from the EU doesn’t have to be difficult, and that there are a number of different types of assistance available. “From a Intrastat point of view, importing from within the EU is a much simplified process in terms of declarations. There are a variety of things to help, ranging from a dedicated education team within the HMRC Trade Statistics unit to guide you in this process, as well as front line officers who can visit a business at their premises. However, as an initial instruction we would direct people to read Notice 60, and follow the published step-by-step guide,” he says. The guide is available to download from www.uktradeinfo.com.
WHEN IN DOUBT, CHECK
While most products can be imported from EU countries without restriction, it’s always worth checking with the relevant governmental body or department. For example, if you are looking to import food, checking the DEFRA website may give you an indication of any current issues or restrictions that you need to be aware of. There is a list of professional bodies connected to a range of sectors listed on the HMRC website.
- HMRC publishes easy to understand guidance for businesses trading with other EU member states in VAT Notice 725 The Single Market.
- For assistance regarding commodity codes, businesses can avail of an online ICN hosted on the dedicated HMRC trade website. Using this, companies can search for the commodity code of a product, as well as the Online Tariff hosted on the GOV.uk website.
- There is also a dedicated Tariff Classification telephone Helpline (03000 513777), open from 1pm to 5pm Monday to Friday.