Import VAT and toll operators

Update: The tribunal in TSI Instruments Ltd has essentially reached the same decision. See our Insights article, "Import VAT paid otherwise than by the owner of imported goods".

The FTT has held that import VAT incurred by a business importing goods owned by a third party with a view to carrying out processing on those goods was not input VAT of that business: Piramal Healthcare UK Ltd v HMRC [2023] UKFTT 891. In order for VAT on goods to give rise to input VAT of a business, the goods must be cost component of that business' onward supplies. This was equally the case with import VAT on imported goods.

However, the principle of equal treatment meant that the taxpayer should have been given a transitional period to adopt the correct approach consistent with that given to other affected taxpayers by Revenue & Customs Brief 02/19.

Background

Piramal was a pharmaceutical company that carried on business as a toll operator by effecting a number of processes or trials on imported goods for their owners. The imported goods always remained owned by the customer, however, and Piramal did not make onwards supplies of those goods. It only provided taxable services to the owners of those goods.

Where goods were imported into the UK for Piramal to carry out its services, it was its practice to act as importer of the goods and pay import VAT on the value of the goods imported. Piramal would then recover the import VAT through its VAT return. In January 2018, HMRC had confirmed via webchat that this was the correct approach. However, in April 2018 Piramal was subject to a VAT inspection during which this treatment was questioned. In June 2018, the VAT officer informed Piramal that they were seeking further advice on the correct approach and in August 2018 wrote to say that import VAT was not available to be credited as input VAT. That decision was upheld in October 2018 following a formal independent review of the decision and HMRC subsequently issued assessments to recover VAT. These assessments only covered input VAT incurred on imports after the October 2018 decision, however.

In April 2019, HMRC issued R&C Brief 02/19 explaining that they had become aware of incorrect treatment of import VAT by non-owners of goods and explained that the correct procedure would be for the customer to be the importer and pay import VAT and then reclaim it. However, HMRC accepted that their earlier guidance had not been clear and so stated that they would not pursue recovery where the deduction of import VAT had taken place before 15 July 2019 (effectively allowing a three month transitional period).

Piramal appealed on two grounds. Firstly, it contended that the import VAT was recoverable as input VAT buy it. Secondly, it argued that HMRC's decision to disallow its import VAT recovery from October 2018 offended the EU principle of equal treatment as other taxpayers in the same position had been given until July 2019.

Did Piramal incur input VAT?

The FTT had held that the import VAT was not Piramal's input VAT to recover. The FTT considered a long line of case law and concluded that VAT paid by a person can only be its input VAT if the goods or services are a cost component in relation to supplies made by the person incurring the VAT. In this case, the goods remained the property of the customer throughout and, whilst Piramal performed services on the goods, the goods themselves did not form a cost component of its supplies of services. The FTT concluded that "import VAT is only available as an input tax credit if the goods in respect of which the import VAT has been paid are a cost component in a supply which is made by the taxpayer".

The FTT pointed in particular to the reasoned order of the ECJ in Financne Riaditel'stvo (Case C-621/19) that a taxpayer did not have a right to deduct import VAT where it did not dispose of the goods as owner and they are not incorporated into the price of its output transactions. In that case, the taxpayer incurred import VAT on the import of goods belonging to third parties into the Slovak Republic. The goods were repackaged and were then exported. The customer was invoiced by the taxpayer for the repackaging services. The FTT noted that the fact that the ECJ dealt with the case by way of reasoned order indicates that it considered the law in this area to be settled.

The FTT also noted that the general overheads, whilst not linked to particular output transactions, can nonetheless form a cost component of a person's taxable supplies. However, this did not change the analysis. It is simply the case that the cost component test is met in relation to general overheads if all the supplies made by the taxpayer are taxable. It was not the case, as argued by the taxpayer, that the cost component test does not need to be considered if all a person's supplies are taxable.

The taxpayer also pointed to the fact that it was clearly the understanding of the government and C&E in 1985 that input tax credit could be obtained by a taxpayer in relation to goods belonging to a third party. The FTT congratulated the counsel on behalf of Piramal for tracking down guidance from 1985 to this effect. However, that could not change the correct analysis in 2023.

Did HMRC breach the principle of equal treatment?

The FTT noted that the principle of equal treatment requires that similar situations are not treated differently unless that differentiation is objectively justified. However, Piramal and the other taxpayers to whom the 2019 R&C Brief was directed were not in the same position. Piramal had undergone a VAT inspection following which it had been informed of HMRC's view that the import VAT was not deductible. Therefore, it was not contrary to the principle of equal treatment not to extend the 2019 R&C Brief to Piramal.

However, the FTT noted that the R&C Brief gave other affected taxpayers operating in the same way as Piramal a three month transitional period to allow them to adjust their practices and adopt the correct VAT treatment. In order to comply with the principle of equal treatment, it was necessary that HMRC also give Piramal a three month transitional period. The relevant comparison to determine whether taxpayers are in a similar situation was to look at the point at which the taxpayer became aware that HMRC did not consider the import VAT to be deductible. In this case, the FTT considered that the three month period should run from the date in August 2018 when HMRC initially wrote to Piramal informing it that HMRC considered that it could not deduct the input VAT. It would not be appropriate to apply the transitional period from the earlier date when Piramal became aware that HMRC were considering the correct treatment. As such, Piramal should be entitled to deduct import VAT incurred before November 2018.

Comment

The decision confirms the approach that HMRC had adopted in its 2019 R&C Brief. However, the position regarding the correct recovery of import VAT was not always as clear cut and the provision of a transitional period by HMRC for businesses to correct their practices was a welcome easement.

The decision is also helpful in stressing that the principle of equal treatment must be applied broadly and included providing an equivalent transitional period to a business, even though it was not in exactly the same position as those businesses the subject of the R&C Brief. However, it should be noted EU general principles are part of the concept of retained EU law brought in by the EU (Withdrawal) Act 2018 (EUWA). Broadly speaking, general principles of EU law do not provide a separate right of action following EU exit, they are simply to be taken into account when interpreting retained EU law (EUWA Schedule 1 para 3). However, as an exception to this rule, this restriction does not apply in relation to any proceedings begun within three years from the end of the transition period (11pm on 31 December 2020) where the challenge relates to anything which happened before the end of the transition period (para 39(5)). It seems that the challenge to the VAT treatment in this case based on a general principle of EU law fell within this particular transitional rule. These provisions will be repealed by the Retained EU Law (Revocation and Reform) Act 2023 (albeit not in relation to anything occurring before the end of 2023) so that it appears that such actions will no longer be possible in the future. For more details see our article REULA 2023 and VAT and excise law.