Why do you say Customs Duty and VAT in one breath?

Customs and VAT tend to be said in one breath, but they are in fact different taxes interacting within a system. And when it comes to yachts and aircraft not mastering both taxes can lead to costly pitfalls.

Persons handling imports and exports in the EU/UK do need to know customs legislation and the rules on import/export prohibitions. But the amount of VAT on import is way higher than that of customs duty. For example, the standard rate of import VAT in the EU ranges between 15% and 27%, compared to customs duties’ 0% for large yachts and 1.7% for aircraft. Inadequate knowledge of VAT can lead to the importer or exporter or his representative bearing a huge burden of VAT despite handling the customs aspects well.

VAT and customs rules diverge significantly from each other. One reason is that the primary purpose of customs duties is to protect producers from foreign competition through the levying of a tax on imported goods. That is why such a tax is not levied on goods made within the territory, and why customs duties are only levied once. Raising revenue for the Government is of secondary importance.

Besides, customs legislation serves other purposes, not least of which is security. The customs authorities are the gatekeeper for goods entering or leaving the territory, so legislation must ensure that prohibitions and restrictions are respected; that VAT and excise duties are levied on importation where applicable, and that proof for VAT and excise duty relief is provided where necessary.

By contrast, the purpose of VAT is solely to raise revenue for the Government. VAT applies not only on goods but also on services, irrespective of whether they are supplied from outside or within the territory. The scope of what is being taxed is thus much larger than customs duties.

Other divergencies between customs and VAT law include their territorial scope of application, the type of legislation, the time and place where incurred, who can be designated the debtor, the payment arrangements in place and whether the payer has a right of deduction.

What is common overall is that both customs duties and VAT are levied on imports from outside the EU. This for all imports, irrespective of whether they are made for commercial or private purposes. The import process thus provides the link and the meeting points between the VAT rules and the customs rules.

For the competent tax practitioner, the complete mastery of those aspects of the VAT rules which interact with the customs rules is critical to dealing with any importation of yachts and aircraft in the EU or the UK.