Insights

The hidden VAT trap in post-Brexit imports: Why non-ownership of goods could cost your business thousands

Name: MHA
Price range: $

Andrew Thurston · Posted on: June 17th 2025 · read

A significant VAT risk associated with importing goods for processing, repair or servicing continues to go unnoticed by many UK businesses until it is too late. The risk is well known to HMRC, and the financial impact can be devastating.

Five years after Brexit, many businesses are beginning to feel confident in their import processes and risks. However, a hidden risk lurks that many importers are not identifying until it’s too late. This article explains that risk, the significant financial impact, and the steps businesses should take now to assess their risk, and the options available to those impacted to protect their businesses.

There are two types of importers who, although they share similar supply chains, will have their own understanding of how import VAT applies to their business.

Businesses who have been importing goods from non-EU countries for contract manufacturing (tolling), repair or service should have awareness of Inward Processing (IP) and are likely to have moved away from IP where only import VAT is applicable under the assumption that import VAT was fully recoverable.

Share this article

Related tags

Industries

Manufacturing & Distribution

Services

Businesses who were exposed to customs processes due to Brexit, there is a lack of understanding of the import VAT risk or of IP. Again, the common misconception that import VAT is fully recoverable by the importer will have influenced how the goods are imported.

In both cases, there is a high likelihood that imports of goods, not subject to a purchase by the importer, will be declared to Free Circulation, better known as a permanent import.

Import VAT and ‘ownership’

In the dim and distant past, it was generally accepted that any business that imported goods for purposes of processing those goods had imported for the purposes of their business (i.e., the importation was a necessary economic activity to allow the business to provide its services).

However, with effect from 15 July 2019 HMRC revised its policy in this area, declaring that the entitlement to claim import VAT as input tax could only rest with the owner of the goods. The position taken was supported by case law both in the UK and EU.

As consequence, where a processor acted as importer of goods into the UK where it did not own those goods at the time of importation, it would have an obligation to pay import VAT, but it would have no entitlement to claim the import VAT paid as input tax.

The actual owner of the goods would also have no entitlement to claim the import VAT paid as input tax on the basis that it had no obligation to pay import VAT as it was not the importer.

Tax

VAT

"The result is that an additional absolute cost equal to 20% of the customs duty included value of the imported goods is precipitated. This can not only impact margins. It can turn a contract from being profitable on paper to significantly loss making in practice.

It’s an ongoing problem…"

Andrew Thurston, Customs Duty & Indirect Tax Consultant

MHA’s VAT and Customs Team continues to speak to businesses who are unaware of their exposure to the import VAT risk due to a lack of understanding of the ‘ownership’ rules.

The introduction of Postponed Import VAT Accounting has exacerbated the issue, as many businesses opt to use this simplification, meaning that the issue becomes less visible. It is generally not understood that the entitlement to use Postponed Import VAT Accounting also rests only with the owner of the goods. If you do not own the goods being imported, you cannot use Postponed Import VAT Accounting.

Case Study: Repairs R Us UK Ltd

Below is a fictional example of how quickly this issue can escalate and become a significant risk/cost which could pose a serious threat to the business.

Repairs R Us UK Ltd manufactures testing equipment which it sells to distributors and customers. It has been operating for over 20 years but mainly sells within the UK and Ireland territory with occasional sales to mainland Europe.
Prior to Brexit, the company’s business activities were contained within the EU customs territory and were only subject to UK and EU VAT rules.
Post Brexit this all changed and all cross-border movements were subject to customs declaration procedures.
All was going well for Repairs R US UK Ltd. It had navigated Brexit and maintained its sales base in Ireland using the DAP Incoterm and minimising its overseas VAT obligations.
Repairs and servicing continued and the company had confirmed, at Brexit, that its products did not attract any UK customs duty and any imports were declared to Free Circulation.
Between 2021 and 2024 the company received 120 products for service and a further 25 for repair. Total value of the imported items for the four-year period (to 31/12/24) was approximately £350,000. In all cases the imported products were re-exported back to the Irish customers.
All import VAT was accounted for under Postponed Import VAT Accounting and entered onto the applicable VAT Returns.

So, what is the issue?

Repairs R Us UK Ltd is not the owner of the imported goods. Transfer of title does not pass on import for repair/service.

There are two consequences associated with this.

Repairs R Us is not entitled to use Postponed Import VAT Accounting. As a result, import VAT should have been paid on import or under deferment and HMRC may assess for this plus potential penalties and interest.
Where an assessment for import VAT is raised, Repairs R Us will have no entitlement to claim the import VAT as input tax.

In the period, the company accounted for £70,000 of import VAT via Postponed VAT Accounting which was in itself incorrect, and the import VAT accounted for was not legally recoverable as input tax. The VAT claimed as input tax would be repayable to HMRC, either via an error correction notice or an assessment upon inspection by a VAT Compliance Officer.

Industries

Manufacturing & Distribution

The £70,000 was not included in any repair or servicing quotes and is now a cost to the business, impacting both cash flow and profitability in the current accounting period.

What was the correct process?

Inward processing is a UK customs special procedure which is specifically designed for minimising the customs duty and import VAT impact on goods imported for processing, repair or servicing.

Repairs R Us UK Ltd should have applied for a UK Inward Processing authorisation from HMRC which would have allowed the business to import the products without payment of any import taxes. Provided the Inward Processing was managed correctly, the company would not have been subject to any ‘sticking VAT’.

For businesses receiving goods into the UK, that are not subject to a purchase agreement, inward processing must be a serious commercial consideration.

MHA have assisted many UK businesses with reviewing the impact of import VAT cost in the supply chain and have ex-HMRC advisors who understand the complexities and HMRC expectations to efficiently manage any Inward Processing application requirement.

Are you at risk?

If your company is importing goods under any of the following reasons, and it is not using inward processing, we strongly recommend you contact our Customs Team to discuss this matter as it may be incurring a hidden VAT debt.

Repair
Service
Contract Processing (tolling manufacturer)
Recalibration services
Inspection
Reworking

Protect your business

To help mitigate the impact of the import VAT risk, MHA have assisted clients with obtaining a retroactive Inward Processing authorisation. HMRC can allow a retroaction of up to 12 months.

Tax

Customs and Excise Duty

If your business has good HMRC compliance, and it has not previously held an Inward Processing authorisation, retroaction worth considering.

Please contact us if you are considering applying for Inward Processing approval, or would like to know more about the potential benefits of Inward Processing for your business.