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Do you ever feel stuck waiting for a VAT refund after paying import charges? Postponed VAT accounting could be just the solution you’re looking for. The process allows businesses to delay paying tax on imports until your tax return is due.
In this article, we will answer the question ‘What is postponed VAT accounting?’, discuss the benefits of using it and provide three Postponed VAT accounting example scenarios.
What is postponed VAT accounting?
Postponed VAT accounting is the process which allows businesses to delay paying Value Added Tax (VAT) on imported goods. The process, which was introduced on 1st Jan 2021, means businesses can improve cashflow by deferring import VAT.
In essence, instead of the seller charging VAT on their sales invoice and collecting the VAT payment directly from the buyer, the buyer accounts for both the input VAT (VAT on purchases) and output VAT (VAT on sales) directly on their VAT return. This streamlines the process significantly.
How does postponed VAT accounting work?
Let’s start off by proving the postponed VAT accounting meaning. Traditionally, all businesses that import goods would pay VAT at the point of importation then reclaim it at a later date. However, postponed VAT accounting separates the VAT payment from the import itself. This means that the VAT is paid when the VAT return is filed instead, removing the need for an upfront payment.
Use of PVA is optional but to do so, you need to be a VAT-registered business. It is important to be aware that there will be changes in the way you fill in your VAT Returns for postponed VAT – but there are plenty of helpful resources online which can guide you through the process. Below is some information regarding Postponed VAT accounting HMRC has provided:
Check when you can account for import VAT on your VAT Return - GOV.UK (www.gov.uk)
Get your postponed import VAT statement - GOV.UK (www.gov.uk)
What are the benefits of postponed VAT accounting?
There are a number of benefits that small businesses can gain from using postponed VAT accounting. Let’s explore three of them in a bit more detail.
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Improved cashflow
For small businesses, or those who have not long started out, cashflow being tied up at the border can be difficult. Deferring the payment can mean that they are given more breathing room financially.
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Reduced administrative worry
PVA statements are easily able to access and download online, meaning that the administrative burden is significantly reduced. The process also eliminates the need for separate VAT payments at import. Simplifying the process will offer a saving on both time and resources.
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Avoids goods being held at customs
By removing the requirement to pay VAT upfront, goods are not held up in customs until the VAT payment is settled. This faster clearance can speed up delivery which can be beneficial for supply chain.
Three examples of postponed VAT accounting
Understanding how the process works can be explained using postponed VAT accounting examples. While it is not possible to provide real-life examples, below are three hypothetical situations to help illustrate how PVA works.
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Example 1:
Company A is a wholesaler importing clothing and accessories. They order £1000 worth of product per month and the standard VAT rate in the UK is 20%, meaning that using traditional VAT methods, they would pay £200 on receiving the product. However, if they utilise PVA they will record this amount on their VAT return instead, providing them with a cashflow of £200.
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Example 2:
Company B is a bakery which imports seasonal ingredients for their fruit pies during summer months, costing £250. Under traditional methods, they would pay £50 upon receiving the ingredients, but using PVA they can defer the payment which frees up this amount for the busy summer months.
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Example 3:
Company C is a construction company that imports flooring for a renovation project at a cost of £4000. If using traditional VAT methods, they would pay £800 at the border before using the materials. By using postponed VAT accounting, they will defer this payment of £800 until the VAT is due. This means they can potentially spend the £800 on other immediate costs such as labour.
Please note, these are all simplified examples which don’t account for other VAT considerations such as sales VAT.
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