Background
TSI Instruments Ltd (TSI) is a UK subsidiary of a US company, primarily engaged in the service, repair, and calibration of scientific equipment manufactured by its group. Between 2019 and 2023, TSI imported goods into the UK for repair and servicing. The goods remained, at all times, the property of TSI's customers, never passing into TSI's ownership. TSI was named as the importer and bore the costs related to customs formalities and import VAT. These costs were relatively minor compared to the value of the goods and were not separately itemised in customer invoices. TSI reclaimed input tax in relation to the import VAT on its VAT returns.
HMRC challenged TSI’s practice in 2023, refusing the deduction of import VAT as input tax and issued VAT assessments for earlier periods, totalling just under £8.5 million. HMRC's position was that TSI could not claim an input tax credit for import VAT because it was not the owner of the goods. TSI appealed, arguing that there was no ownership requirement in the relevant legislation, and that as long as the goods were used for its taxable business and TSI had borne the import costs, the VAT should be deductible.
Decision of the Tribunal
The First-tier Tax Tribunal found against TSI. The Tribunal held that, under both EU law (Article 168 PVD) and UK law (sections 24–27 VATA), a deduction for import VAT as input tax is only available where the importer is the owner of the goods or where the value or cost of the goods is reflected in the price of the output transactions.
TSI did not own the goods they were importing to repair and/or service. The import VAT was calculated on the goods' market value, and this value was not reflected in the company’s repair service prices. As such, TSI was not entitled to the input tax credit and its appeal was dismissed.
Industry impact
Those who operate in industries which provide a centralised service (e.g. repair or servicing goods) should be mindful of the Tribunal’s decision. When dealing with VAT, it is always worth making sure it is clear what supplies are being made by/to whom, especially where the supply chain is not a straightforward component-in, finished product-out model.
Furthermore, for those using a model which involves importing goods where the importing entity is not the owner of the goods in question (because the third party end customer still owns them) it may be worth considering whether alternative models may be more appropriate e.g. arranging for the owner of the goods to be the importer of the goods (so that the owner can then claim an input tax credit) or registering for inward processing relief.
