Navigating VAT and customs challenges in supply and installation contracts

Helping businesses avoid costly mistakes when importing and assembling goods.

Since the UK’s departure from the EU customs union on 31 December 2020, businesses involved in cross-border supply contracts have faced a new set of VAT and customs hurdles. These challenges are particularly acute when goods are shipped in parts and assembled or installed after import. The rules are difficult to navigate, and many businesses are still making mistakes. It is important that all businesses stay compliant to avoid unexpected costs.

All goods over a small value moving between the UK and EU are subject to customs checks and declarations, and there is greater complexity for businesses importing goods that require assembly or installation when they arrive in the EU.

Some of the key customs issues include:

• Having an establishment if import declarant – Both the UK and EU require the import declarant to be established wherever goods are imported into (or indeed exported from) that territory.  This means that businesses importing their own goods into the UK, or vice versa from the UK into the EU, need to consider how this requirement will be met, whether via an agent capable of acting in its own name, or by setting up an establishment. Obtaining an ‘EORI’ identification number and VAT registration are not the only requirements. Businesses may be tempted to overcome this issue by shipping on Delivered at Place (DAP) Incoterms, but doing so can this give rise to serious issues with the customer’s ability to claim import VAT, especially where a supply and installation contract is concerned.
• Rule of origin – the origin of components determines their eligibility for preferential tariffs. Goods shipped from the UK to the EU may not qualify for a zero tariff if they are not manufactured in the UK. Goods imported into the UK from the EU that are then re-exported to the EU may also not qualify for the preferential tariff unless, whilst in the UK, works to the goods mean that they constitute a different product.
• Commodity codes – correct classification of parts and finished goods is essential to determine duty rates.
• Reliefs – temporary import reliefs such as Inward Processing (IPR) can reduce costs but require strict compliance and documentation.

VAT Implications for installed or assembled goods – a reminder

The VAT position for supply and installation contracts changed at 31 December 2020, leaving businesses with only a limited simplification arrangement for this type of transaction in the UK and no easement for shipments to the EU.  The CAT issues with such contracts can be complex and include: • Import VAT – Typically, for goods arriving in the UK, this is charged at 20% of the value of the goods. Businesses that are registered for UK VAT can use postponed VAT accounting to declare and recover VAT via their VAT return. UK suppliers shipping to the EU will also incur VAT at the appropriate rate according to the country of import and duty, depending on their origin and classification. 

• Incoterms and ownership – this is very important because suppliers may decide to ship on DAP terms with a view to avoiding the need to register for VAT where the goods are supplied to, and not to be responsible for the import VAT and duty. But in addition to there being a need for a supplier to register for VAT where goods are installed, there is also an issue in that the customer may not be entitled to recover the import VAT it pays, unless it becomes the effective owner of the goods at the point of import. If ownership transfers after installation, the customer may be unable to recover the VAT – a point that HMRC or an EU tax authority may challenge.
• Supply and installation contracts – the place of supply for VAT purposes depends on where installation occurs. When required as part of the supply of goods, installation services in the UK are subject to UK VAT after their import, even if the installation element might seem insignificant.  This is unless the whole supply is a one-off, in which case a simplified arrangement can be adopted. Equally, supplies made into the EU are subject to VAT in those countries.  The EU simplification to avoid these issues evaporated post Brexit.
• Installed goods with additional parts and maintenance contracts –Businesses must determine whether these supplies also form part of the supply and installation contract or are separate and attract a potentially different treatment.

Practical tips for businesses

To avoid errors that could lead to serious cashflow issues, penalties for late registration and, potentially, customers not being willing or obliged to pay VAT on prior supplies, businesses should: 

• Ensure goods are correctly classified and customs clearance conditions will be met.  
• Ensure VAT registration where goods are installed and that eligibility for import VAT recovery has been understood and potential issues resolved.
• Make decisions around shipping/incoterms depending on ownership transfer.

International trade between the UK and EU still demands careful planning. Businesses supplying and installing goods across borders must review their VAT and customs position particularly where DAP terms are used and ownership does not pass at import or is unclear. VAT registration obligations and VAT recovery rights can be easily overlooked. 

If your business is supplying and installing goods into the UK or EU, review your position. Speak to our team to ensure your contracts, VAT recovery, and registration obligations are fully compliant.