When do you pay VAT without paying VAT? And what if you charged that VAT to yourself in the first place?
If those sound like trick questions, well they sort of are. But it’s the good kind of trick. A useful fiction that will help free up liquidity when shipping your goods into Europe.
It all has to do with France’s new rules for import VAT – and how you can account for the VAT you owe (and remain fully VAT compliant!) by both paying for it and not paying for it.
Here’s what I mean.
Shipping goods into France: the new rules
When you ship goods into a country, a special tax is often levied at the point of entry. This is import VAT, and it is an additional charge on top of any applicable customs duties or excise.
France is no exception. When importing goods into France from outside the EU, you are required to pay import VAT.
Previously, it was possible to apply for a special dispensation that would enable you to defer payment of import VAT. That is, instead of paying VAT when goods entered the country, you could account for the VAT at a later date.
However, France has made significant changes to its import VAT rules. Rather than offering import VAT deferment as a limited option, all import VAT will now be accounted for on your VAT returns rather than through customs at the point of entry.
Now for the first trick. The mechanism by which you account for import VAT on your regular VAT returns is known as a ‘reverse charge’. That’s confusing, because reverse charge VAT often refers to a special VAT relationship between two VAT registered businesses. Where the reverse charge mechanism applies, the customer, rather than the supplier, accounts for the VAT. It’s the reverse of the normal situation, in which the seller charges VAT, and the customer pays the VAT.
In this case, however, you are effectively reverse charging the import VAT to … well to yourself.
This is where things get even stranger. Under the new system, you account for French import VAT through your VAT returns. But here’s the thing, when you file your VAT returns you’re not only accounting for the VAT you owe. You also should be claiming any VAT that is owed to you.
Remember, a VAT registered entity is obliged to charge VAT on all applicable goods and services that it supplies. In accounting jargon, that is known as output VAT. But during the same time period, that business will pay VAT on the goods and services (input VAT) it acquires. And when filing its regular VAT return, the business is entitled to reclaim the sum of input VAT in excess of output VAT.
That all may sound complex, but the upshot is simple: a VAT registered entity can claim back any VAT it spends on business expenses in excess of the VAT it receives.
Now let’s consider what happens when you account for import VAT on your VAT return. You account for the VAT you owe and reclaim the VAT incurred at the same time. So you have ‘paid’ the import VAT owed without any actual money passing hands. It’s all a big illusion, except it’s also, in accounting terms, a very real occurrence that ensures you remain compliant with the relevant local VAT laws.
Cash in hand when you need it most
Now, the opportunity to reclaim input VAT is nothing new. But the critical difference is that in this case you don’t have to suffer the cash flow squeeze of paying import VAT at the border – literally transferring actual cash money from your bank account – and suffering a delay before that money can be reclaimed.
The ultimate outcome is the same: money out and money in are balanced. But the deferment translates into a considerable cash flow benefit.
The new French import VAT rules should be welcome news for British e-commerce businesses who sell to customers in the EU.
Take the following example. Suppose you’re shipping your goods to an Amazon warehouse, for onward sale to customers throughout Europe. Prior to Brexit, no import VAT would be due. However, now that the UK is no longer part of the EU, goods shipped from Great Britain into an EU Member State are subject to VAT and customs duties.
By taking advantage of deferred VAT you can ship your goods into France – a very convenient location when supplying EU markets – without the cash flow squeeze that comes with paying import VAT upfront.
Of course, complexities remain. You need to be VAT registered and comply with the obligations that come with it. And the import process itself is subject to rigorous administrative requirements. The good news: we take care of all that stuff for you.