• Freeports: VAT and Customs benefits

Freeports: VAT and Customs benefits

11 August 2021

The Finance Act 2021 announcement does not contain a large amount of detail on how the VAT and Customs benefits of Freeports are to be applied. Nonetheless, these are likely to be very beneficial indeed.

A Freeport is designated as outside the UK for the purposes of VAT and duty. This allows for duty free movement into the Freeport and the ability to transfer ownership in goods VAT-free while the goods remain in the location. The normal VAT and duty rules will only apply once the goods leave the designated area.

How does VAT and Customs duty work with imports?

Normally, import VAT and duty are payable at the point the goods enter the UK. How much duty is payable depends on the type of product that is imported and whether it qualifies for any special arrangements. It is worth noting that Customs duties can apply each time a product crosses a border so in some supply chains duty can be charged multiple times. There are Customs reliefs that can help many situations, but the benefits generally come with detailed compliance obligations and often need to be arranged in advance.

Conceptually, goods held within the Freeport will be in duty and VAT suspension so will not trigger a VAT or duty charge.

What are the Customs benefits of a Freeport?

There many benefits that could accrue for a business operating in a Freeport but the main Customs benefits are:

  • Duty deferral while goods remain on site
    Goods that are moved into the Customs area of a Freeport will effectively be suspended from import VAT and Duty, in much the same way as entry to a Customs Warehouse. These will only become payable when goods leave the Freeport into free circulation.
  • Duty inversion
    It is understood that in some cases if the finished goods exiting the Freeport attract a lower tariff than the duty rate applied to their component parts then a drawback may be possible.
  • Customs duty exemption
    Goods that are imported into a Freeport, processed into finished goods and subsequently re-exported will not trigger the requirement to pay VAT or duty.

The UK Freeport model requires a primary customs site designated in or near a seaport, airport or rail port within which the customs benefits will apply. Additional Freeport subzones may also be permitted to enable multiple sites to benefit from the Freeports customs model. Where there are multiple Customs areas, it is expected that businesses will be able to move component parts between sites without triggering a VAT or duty charge.

Could these Freeports Customs benefits be obtained elsewhere?

The short answer is yes. Most of the Customs benefits of working in a Freeport can be obtained by using a combination of Customs reliefs and indeed many businesses do operate these.

An obvious example that many business use is Customs Warehousing. This is a regime that allows for suspension of VAT and duty on goods that are held within that regime. Taxes are only paid when goods are released from that control and into free circulation. Goods can also change ownership whilst in a Customs Warehouse without paying VAT or duty. The rules do not, however, allow for any significant processing or manufacturing to take place whilst the goods are in VAT/Duty suspension.

Other reliefs are available to help, such as Inward Processing Relief (IPR), which allows a business to suspend the VAT and duty on components that are imported for manufacturing processes. If they are re-exported then the VAT and Duty will not arise and if they are released into free circulation VAT and Duty will apply at that point, creating both absolute and/or cashflow savings.

Many businesses need to use both of these as well as some other reliefs to create a fair VAT/Duty position. All of these reliefs are complex in operation and have significant compliance obligations. From the documents released so far, it seems that in a Freeport many of these obligations, such as security and data interfaces, will fall on the Freeport operator.

It is hoped that although the benefits are similar, the operation in a Freeport area will be much simpler and carry a lower risk of non-compliance for businesses.

What are the obligations on businesses?

There will inevitably be much more detailed rules that become apparent as the Freeports legislation and rules evolve. We will continue to monitor developments and update this overview of the Customs benefits.

Visit our Freeports hub for more information