This article will walk you through 3 examples of how VAT due on Imports may work for you and your business.
A purchase invoice for Goods is received for £1,000 and it is liable for £210 Vat Import duty. There is no requirement for the Supplier to include details of the Vat liability on the invoice – this is all handled by commodity codes on the customs declaration paperwork on a CHIEF compliant system.
It may be possible to recover the Vat liability, subject to normal Vat Rules. You will receive notification of a £210 Vat liability (£200 on the original invoice and £10 on other costs, including duty).
In all cases, you will enter a purchase invoice, using Vat code 0 (Rate 0%), resulting in the following accounting entries:
Dr Expenditure £1,000 This hits box 7 on the Vat Return
Dr Vat Recovery (Inputs) £0 This hits box 1 & 4 on the Vat Return (although no effect!)
Cr Purchase Control £1,000 To be paid to supplier.
Please Note: The Vat due is on the TOTAL imported cost, not just the invoice amount. Therefore, you will not know the Vat due at point of invoice entry – this will come from the Chief system. If you enter an estimated Vat value, you may need to adjust this later should the Chief report say something different. Also, the chief report will summarise many imports from different suppliers and you will more likely enter a single transaction for all imports from different suppliers.
Sometime after entering the purchase invoice, you receive notification of a £210 Vat Import liability. There are then 3 potential ways to proceed.
It is envisaged that the majority of customers will be able to reclaim the Vat paid on imports example 2 (immediate) and example 3 (postponed) will be applicable in this case.
If you are unable to reclaim Vat paid on imports (eg they are not for business use), only example 1 applies. It is not possible to postpone Vat where you are unable to subsequently reclaim it.
1) If you are unable to reclaim the Vat, you cannot postpone the Vat, and the liability becomes immediately payable. It does not appear on your Vat Return. Create this liability in your accounts as a non-Vat journal.
Dr Expenditure £210 Increase costs
Cr Import Vat creditor £210 (not the Vat Control Account)
2) If you are able to reclaim the Vat, and are not postponing Vat, then the liability becomes immediately payable. It does not appear on your Vat Return. Create this liability in your accounts as a non-Vat journal.
Create the Vat recovery by entering a Vat Debit Journal (or a purchase invoice) using Vat code 1. This will result in you having physically paid the Vat to HMRC immediately and recovered the same value on your next Vat Return (sometime later), resulting in a temporary deficit in cashflow.
Dr Expenditure £210 Increase costs
Cr Import Vat creditor £210 (not the Vat Control Account)
Cr Expenditure (contra a/c) £210 Reduce costs
Dr Vat Reclaim (Inputs) £210 This hits box 4 on the Vat Return
Dr Expenditure £0 No effect
3) If you are able to reclaim the Vat and are electing to postpone the payment of Vat on Imports, enter a Vat Credit Journal using newly created Vat code IMPV for the Vat liability. This creates the liability on the Vat Return.
Dr Expenditure (contra a/c) £210 Increase costs
Cr Vat Due (Outputs) £210 This hits box 1 & 4 on the Vat Return
Cr Expenditure £0 No effect
You must now enter a Vat Debit Journal (or a purchase invoice) using Vat code 8 for the Vat recovery.
Cr Expenditure (contra a/c) £210 Decrease costs
Dr Vat Due (Inputs) £210 No effect on the Vat Return
Dr Expenditure £0 No effect
This means that the Import Vat liability is only payable on your next Vat Return, where you will also be recovering the same Vat. The effect on cashflow is zero.
It is assumed that it is not a requirement to postpone box 7 of the Vat return else that will require a number of additional entries.