Flat Rate Scheme and Postponed VAT Accounting

Flat Rate Scheme and Postponed VAT Accounting – updated guidance from 1 June 2022

Postponed Vat Accounting (PVA) was introduced on 1 January 2021, brought in after Brexit with a view to removing the negative cash flow impact on businesses that found themselves hit with UK Import VAT bills.

Businesses choosing to use Postponed VAT Accounting from 1 January 2021 can declare and recover UK Import VAT through a UK VAT return rather than paying UK Import VAT immediately upon entry of the goods into the UK, and reclaiming this UK Import VAT at a later date.

Whilst creating a significant cash flow benefit for many businesses, for those businesses registered under the Flat Rate Scheme came added confusion. Initially these businesses were asked to include the imports accounted for under PVA in the turnover subject to the Flat Rate Percentage – this was included in Box 1 of the VAT return, implying that that the imported goods constituted a supply under the Flat Rate Scheme.

HMRC have since reviewed and updated this guidance.

From 1 June 2022 all businesses on the Flat Rate Scheme that use PVA will no longer be asked to include the imports accounted for under PVA within the turnover subject to the Flat Rate Percentage. The correct treatment under the updated legislation will be to exclude the imports accounted for under PVA from the Flat Rate Scheme calculation, but then add the full value of the UK Import VAT directly into Box 1 of the VAT return following the Flat Rate calculation.

Any amounts that may have been due to HMRC during the period 1 January 2021 to 31 May 2022 (if the correct treatment had been applied prior to 1 June 2022) will not be collected by HMRC and no adjustments to previous VAT returns will be necessary. If any businesses have overpaid VAT due this change in guidance this can be reclaimed under the normal rules.