In a recent case, The First-tier Tribunal decision in TSI Instruments v HMRC Ltd (2025) has clarified that import VAT recovery on goods you do not own is irrecoverable without using customs special procedures. For manufacturers, engineering firms and service providers handling customer-owned goods, the implications are significant.
Our VAT and indirect tax team explain what the case confirmed and how this will affect businesses.
Overview of import VAT recovery rules
Leaders in finance and operations have long believed that import VAT paid by their business can be reclaimed. The decision made in the recent case of TSI Instruments Ltd vs HMRC (2025) UKFTT 1278 (TC) clarifies that this is not always true, and the implications are serious. If a business owner imports goods that they do not own and recover the import VAT, they could be sitting on a multimillion-pound VAT exposure. The only way to legitimately suspend that VAT liability is through the use of customs special procedures such as Inward Processing (IP).
Years of uncertainty have ended through this case, and HMRC now has Tribunal-backed authority to deny import VAT recovery in these circumstances.
TSI Instruments v HMRC Ltd (2025) – Tribunal decision on import VAT recovery
TSI Instruments Ltd UK (TSI), a UK subsidiary of a US group, repaired and calibrated specialist instruments, meaning customers from around the world sent equipment to the UK for service and repair. The goods remained the customers’ property throughout the process.
TSI acted as the importer and paid import VAT on entry, claiming it as input tax. HMRC then challenged this position, arguing that TSI was not entitled to import VAT recovery because it did not own the goods. The Tribunal agreed and found that the VAT recovery depends on a ‘direct and immediate link’ between the import VAT and the business’ taxable supplies.
As TSI did not own the goods, and the value of those goods was not reflected in its repair charges, the link did not exist.
Who is affected by import VAT recovery restrictions?
HMRC’s assessment left TSI facing a disallowance of just under £8.5 million in unrecoverable import VAT, an unfortunate reminder of the financial scale of these errors. Being the importer is not enough: if you do not own the goods and their value does not form part of your taxable output, the import VAT recovery is blocked. Any import VAT incorrectly recovered could be subject to interest and penalties.
The ruling will capture any business that imports or re-imports good they do not own. This includes, but isn’t limited to:
- The transfer of goods between companies (i.e. non-UK parent co and UK subsidiary)
- Manufacturers and engineering firms performing repairs or refurbishments on customer-owned goods
- Warranty returns programmes, where products are sent back across borders for assessment or repair
- Service or maintenance contracts that involve the movement of assets between sites or jurisdictions
- Original equipment manufacturers (OEMs) managing diagnostic or testing equipment under after-sales support
- Businesses using toll manufacturing contracts where they don’t own the goods they are processing
Despite being standard practice for many UK-based manufacturers, few realise the potential exposure if the movements are not covered by a special procedure.
What is Inward Processing and why does it matter?
Inward Processing is designed for this scenario; however, it must be properly authorised and actively managed. It allows goods to be imported for repair or processing and re-exported without incurring import VAT or customs duty.
If used correctly, IP suspends the liability from the moment of import and then discharges it when the repaired or processed goods are re-exported. Without it, import VAT is payable upfront and therefore cannot be reclaimed if the importer does not own the goods.
A clear understanding of ownership, the flow of goods and the data necessary to support declarations is required when applying for IPR, meaning it can be complex. Many businesses are under the assumption that their freight forwarders handle it automatically, but they do not.
Actions businesses should take to ensure important VAT recovery compliance
- Produce map flows: Identify all cross-border movements where goods are not owned by your business, including warranty, repair, service returns or toll manufacturing.
- Check procedures: Confirm whether Inward Processing or another procedure, such as temporary admission or outward processing, is being used correctly and all authorisations are valid and up to date.
- Review VAT recovery: If import VAT has been reclaimed in error, it is better to correct it proactively rather than wait for HMRC’s next audit cycle. The TSI ruling gives HMRC clear, legal backing to recover historic VAT. An unprompted disclosure provides for a potential reduction in penalties to 0%, in comparison to up to 100% in some circumstances.
Get in touch for expert support on import VAT recovery
Understanding which procedure applies and evidencing compliance is complex, and requires understanding of how customs valuation, ownership and accounting interact. Our VAT and indirect tax team can help guide you through the process and prevent potentially costly mistakes. Get in touch with us to see how we can assist you and your business.
