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Importers alerted to VAT rule on overseas tooling costs

Importers are being advised by accountants Newby Castleman to be aware of a little-known tax rule on the cost of funding overseas machine tooling.

Many manufacturers in the UK look to invest in the future of their business in various ways, with some firms opting to fund upfront the cost of overseas tooling themselves, and as such ownership is retained although the tooling remains overseas, for example in China with the foreign supplier, where it is put to work producing new products for the UK company to import and sell. As part of the arrangement the UK company secures a lower price for the goods it is importing.

When the items arrive in the UK they are subject to import duty and VAT charges. However, by contributing to overseas tooling costs upfront, businesses can in effect lower the cost per item and as a result there is less duty and VAT to be paid, and therefore less money for the taxman.

However, there is a piece of legislation whereby HMRC can make an assessment on the amount of money a company uses to subsidise overseas tooling which effectively makes up the difference in reduced duty and VAT paid. 

Annalise Lovett, Partner at Newby Castleman, said,

“It is a fairly obscure rule that importers need to be aware of. A number of local clients have recently found themselves unexpectedly affected by this tax legislation.

“This little-known VAT rule is increasingly being enforced by HMRC, as it tries to ensure it receives a fair amount of duty and VAT on items coming into the country.”

Annalise concluded,

“The upfront costs involved in importing goods can be steep for companies, and whilst the assessments are generally fairly low at typically around £10,000, it is still an unwelcome cost. Firms which may be affected by this legislation should consider seeking advice from an accountant who can offer specialist VAT advice.”

Newby Castleman is one of the Midlands’ leading independent accountancy firms, with offices in Leicester and Loughborough. It offers a range of specialist financial services, business and tax advice for individuals and businesses. For further information, telephone the Leicester office on 0116 254 9262, the Loughborough office on 01509 263500 or visit the website at

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