Possession is Nine-Tenths of the Law

Every so often, a tribunal judgment arrives that reminds us how the endless seas of trade and customs regulations are in fact built on little islands of ownership, compliance and paperwork that are all interlinked. The latest comes in the case of TSI Instruments Ltd v HMRC, a matter of import VAT, business use, the right to reclaim and the simple question: “Who owns what, anyway?” 

TSI Instruments Ltd (a UK subsidiary of a US parent) operates a business servicing, repairing, and calibrating scientific equipment owned by its customers. That last sentence alone should have been enough to have a customs compliance manager question the decision to account for the import VAT, yet here we are. The goods in question landed in the UK, were imported by TSI, the VAT paid, and TSI attempted to claim the import VAT as input tax in its returns. Unfortunately for them, HMRC did not agree with this claim. And rightly so, there have been numerous instances over the years that cover in detail the issue of reclaiming import VAT on goods that are not owned by the importer of record. HMRC successfully argued that because TSI didn’t own the goods, the reclaim wasn’t allowed. Any customs agent worth their salt could have seen this coming and pointed TSI in the direction of the various forms of temporary admission. For one reason or another TSI did not go down this route, leading to a £8.5 million mistake.  

At the heart of this lies the connection between the requirements of the domestic UK VAT law and retained EU law. The directive allows deduction of import-VAT where “the goods … are used for the purposes of the taxed transactions of a taxable person.” 

The important bit at the centre of this case; when you don’t own the goods, do you still “use” them for your business in the required way? And does the cost on which the import VAT is calculated need to feed into your charged output? The tribunal agreed with HMRC, both elements matter.  

The decision reaffirmed that two tests must be passed in order to reclaim the VAT: 

1. The goods must be used for the taxable supplies of the claimant. 
2. The value or cost of the goods (on which the import VAT was levied) must be incorporated into the price of the output transaction (or the goods must be at the disposal of the owner) so that the “direct and immediate link” test is satisfied.

TSI fell foul in both instances as they were neither the owner of the goods nor did the value of the goods feed into the price of a service output, such as a repair or calibration. UK customs is aware of the need for such movements across borders, as they offer special procedures such as temporary admission and inward processing relief. If TSI had made use of this facilitation, then they would never have had to pass the two tests. However, for one reason or another they did not and in attempting to reclaim the VAT they failed the tests. 

This case might be as a black and white as they come yet unfortunately the outcome serve as a much-needed reminder for service providers, and customs agents who are making similar declarations. An added caution for agents acting in an indirect representative capacity, you may also find yourself on the hook if there was an underpayment involved. I would not be shocked if we hear of another tribunal ruling in 12 months, where another importer has tried to reclaim import VAT they were not entitled to. So let this be a lesson firms in a similar position to TSI, paying import VAT and being named as the importer of record does not automatically entitle you to reclaim it. There are customs special procedures on offer here that would have been appropriate and saved a very costly mistake.