Finance and operations leaders have long assumed that if their business pays import VAT, they can reclaim it. The recent First-tier Tribunal decision in TSI Instruments Ltd v HMRC [2025] UKFTT 1278 (TC) confirms that’s not always true and the implications are serious. 

If your company imports goods that you don’t own for repair, refurbishment, or any type of processing, you could be sitting on a multimillion-pound VAT exposure. The only route to legitimately suspend that VAT liability is through the use of customs special procedures such as Inward Processing (IP). 

This case brings an end to years of uncertainty and confirms what we have been telling businesses for years. HMRC now has Tribunal-backed authority to deny VAT recovery in these circumstances, and assessments are already landing. 

What the case confirmed 

TSI Instruments Ltd, a UK subsidiary of a US group, repaired and calibrated specialist instruments. Customers worldwide sent equipment to the UK for service and repair. The goods remained the customers’ property throughout. 

TSI acted as the importer, paying import VAT on entry and subsequently claiming it as input tax. HMRC challenged this position, arguing that TSI wasn’t entitled to import VAT recovery because it didn’t own the goods. 

The Tribunal agreed. It found that VAT recovery depends on a “direct and immediate link” between the import VAT and the business’s taxable supplies. Because TSI didn’t own the goods, and the value of those goods wasn’t reflected in its repair charges, the link didn’t exist. 

The outcome? HMRC’s assessment left TSI facing a disallowance of just under £8.5 million in unrecoverable import VAT, a striking reminder of the financial scale of these errors. In short, being the importer is not enough. If you don’t own the goods, and their value doesn’t form part of your taxable output, the import VAT is unrecoverable. 

Who this affects 

The ruling has implications far beyond one company. It captures any business that imports or re-imports goods they don’t own, including: 

• Manufacturers and engineering firms performing repairs or refurbishments on customer-owned goods. 
• Warranty return programmes, where products are sent back across borders for assessment or repair. 
• Service or maintenance contracts involving the movement of assets between sites or jurisdictions. 
• 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. 

For many UK-based manufacturers, this is standard practice. But few realise that every such movement creates potential exposure if it isn’t covered by a special procedure. 

Why Inward Processing (IP) matters 

Inward Processing is designed exactly for this scenario, but it must be properly authorised and actively managed. It allows goods to be imported for repair or processing and re-export without incurring import VAT or customs duty. 

Used correctly, IP suspends the liability from the moment of import and discharges it when the repaired or processed goods are re-exported. Without it, import VAT is payable upfront and, as TSI found, cannot be reclaimed if the importer doesn’t own the goods. 

Applying for IP can be complex, and it requires a clear understanding of ownership, the flow of goods, and the data necessary to support declarations. Many businesses assume their freight forwarders handle it automatically, but they don’t. 

Why this is more than a VAT issue 

The TSI case also underlines how customs and VAT are no longer just compliance functions; they’re financial and reputational risks that fall squarely under the CFO’s accountability. 

An unexpected VAT disallowance can span multiple years and erode profit. It also triggers deeper HMRC scrutiny, often extending into customs classification, origin, and valuation practices. 

In one recent case, a manufacturer under review for misapplied procedures faced HMRC attending board meetings until corrective measures were implemented. Customs is now a serious risk and should be raised up the agenda and discussed with as much scrutiny as other areas of tax. 

The action businesses should take now 

1. Map your flows
   Identify all cross-border movements where goods are not owned by your business; warranty, repair, service returns or toll manufacturing in particular. 
2. Check your procedures
   Confirm whether IP or another special procedure (such as temporary admission or outward processing) is being used correctly, and that authorisations are valid and up to date. 
3. Review VAT recovery
   If import VAT has been reclaimed in error, it’s better to correct proactively than wait for HMRC’s next audit cycle. The TSI decision gives them clear legal backing to recover historic VAT. 
4. Get expert support
   Determining which procedure applies and evidencing compliance isn’t straightforward. It requires understanding how customs valuation, ownership, and accounting interact, as well as how data flows through CDS and your ERP. An independent, specialist review can prevent costly mistakes. 

Using data and technology to stay ahead 

With HMRC’s systems now fully digital, the department can reconcile customs and VAT data far more efficiently. Businesses that rely on manual processes or fragmented broker data will struggle to spot issues early.  

Tools like CAT360 make it possible to extract and analyse CDS data across all declarations, identifying both risk exposure and reclaim potential in minutes. For companies unsure whether they’re using the correct procedures, this level of visibility is essential before an audit, not after one. 

The takeaway for finance leaders 

The TSI ruling is a watershed moment. It confirms that import VAT on goods you don’t own is not recoverable. This is not news for those of us who work within the industry, but something not widely known by traders. Businesses must now choose between risking HMRC action or adopting the correct special procedures to suspend liability. 

For CFOs and FDs, this isn’t just about compliance; it’s about protecting profit and preserving credibility. Customs activity now sits firmly within financial accountability, and HMRC is paying attention. 

An independent review is the quickest and safest way to ensure your business is protected and, when done properly, it often reveals opportunities to reduce costs and reclaim overpaid duties elsewhere. 

Customs shouldn’t be seen purely as a cost of doing business. When managed properly, it becomes a source of competitive advantage by freeing up cash, reducing risk, and strengthening governance. 

The Tribunal’s decision in TSI Instruments Ltd v HMRC makes one thing clear: the era of assumptions is over. Every business handling customer-owned goods must now check its position, validate its procedures, and ensure it is using the mechanisms, like Inward Processing, that the law provides. 

Is your business importing goods it doesn’t own?

Before HMRC’s next audit cycle, review your customs procedures and VAT recovery position. Independent assessment can prevent costly errors, and help identify legitimate reclaim opportunities.