Tribunal supports HMRC’s limitation of eligibility to recover VAT

16 December 2023

The First-tier Tribunal (FTT) has issued a decision in a dispute over entitlement to recover VAT paid when importing goods into the UK. This broadly supports HMRC’s recent policy that only the owner of the goods is entitled to recover this VAT as input tax.

The FTT has also determined that HMRC has a degree of entitlement to claw back VAT claimed in tax periods before its policy was confirmed in an official statement. 

The Piramal Healthcare (Piramal) case

Piramal provides services to overseas pharmaceutical industry clients of importing and distributing pharmaceutical products that are sent to the UK for testing, processing by third parties, or use in clinical trials. Piramal does not own the goods at any time – its role is to bring them into the UK and ensure they are distributed to the required locations - the products remain the property of the client throughout.

As part of its import procedures, Piramal had completed the customs entries for such goods at the time of import, naming itself as the importer, and paid the import VAT due to HMRC, which it subsequently recovered as input tax on its VAT return. However, following a VAT inspection in 2018, HMRC decided that Piramal was not entitled to recover this VAT and went on to raise assessments for VAT claimed on imports from August 2018. 

HMRC’s reasoning for disallowing the input tax was later described in Revenue and Customs Brief 2 (2019), which stated its view that a party that is not the owner of imported goods is not entitled to recover the import VAT due on them. The brief confirmed that the correct approach would be for the overseas customer to act as importer, pay the import VAT and then reclaim it (either as an overseas VAT claim or on a VAT return if the owner is registered for VAT in the UK). 

However, while the brief imposed this policy with effect from 15 July 2019, HMRC did not withdraw the assessments it had issued to Piramal for periods before that date, taking the view that Piramal had already been told by an HMRC officer during 2018 that it wasn’t entitled to claim this import VAT, so should have stopped recovering it at that point. 

Piramal appealed, first arguing that HMRC’s overall policy on ‘non-owners’ was not correct in law, and also that it had been wrong to impose this view on Piramal before the date on which it came into force for other businesses. 

However, the FTT found in favour of HMRC, finding that European Union case law had clearly established that VAT was only recoverable where the importer had the right to dispose of the goods as owner, or where those goods formed a cost component of another supply made by the importer.

The FTT also found that HMRC was entitled to assess Piramal before 15 July 2019 because it had directly notified Piramal of its policy in writing before that date.

Impact on other businesses

Subject to any further appeal, the decision confirms HMRC’s unpopular policy on VAT recovery by ‘non owners’ after 15 July 2019. 

Although a disappointing decision for affected businesses, most have already changed their import procedures according to the instructions in HMRC’s brief. However, some difficulties have subsequently arisen in the detailed interpretation of the rules. For example, HMRC has been known to accept that a business can recover import VAT if it did not own the goods at the precise time of import, provided it takes title to them shortly afterwards. However, it has also disallowed recovery of import VAT in cases where the goods were legally sold to a customer just before they were imported but the vendor remained responsible for clearing the goods through customs and paying the duty and VAT.

It is important for all businesses that import goods that they may not legally own to check their precise status at the time of import and take appropriate steps to protect their or their customers’ entitlement to recover the import VAT.

Managing HMRC policy changes 

More worryingly for all businesses, the decision also raises concerns about HMRC’s entitlement to assess VAT before the advertised effective date of a new or revised VAT policy. 

HMRC is now out of time to raise new assessments to disallow import VAT claims in periods before 15 July 2019.  However, the FTT has seemingly made a more general finding that HMRC is entitled to assess individual businesses in periods before the effective date it has set in a public statement announcing any change of VAT treatment or interpretation. According to the FTT’s decision, HMRC is only required to have notified its view of the VAT treatment to the business in writing and to have allowed an appropriate transition period for that business to implement the change, even if the effective date occurs earlier than the date quoted in HMRC’s public statement. 

As such, if HMRC has firmly indicated it believes a taxpayer’s VAT treatment is wrong, it will expect that treatment to be changed at that stage, even if it hasn’t yet raised an assessment and does not issue a public statement to that effect until sometime later. It is therefore important for businesses to take action to protect their VAT recovery position as soon as HMRC notifies its interpretation, and not wait for it to be publicly confirmed. 

For more information, please get in touch with Andy Beavers or your usual RSM contact.

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Andy Beavers
Partner, Tax
Avatar Gender neutral person
Andy Beavers
Partner, Tax