Freeports: VAT and Customs benefits

Freeports: VAT and Customs benefits

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 of goods VAT-free while the goods remain in the freeport. Normal VAT and duty rules 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 you pay depends on the type of product that you are importing 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.

Goods held within the Freeport are in duty and VAT suspension, so do not trigger a VAT or duty charge.

What are the Customs benefits of a Freeport?

There are many benefits 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 are effectively 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
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 do 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 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, businesses can 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 many businesses do operate these instead.

An obvious example that many businesses use is Customs Warehousing. This is a regime that allows for the 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. These reliefs are complex in operation and have significant compliance obligations. Therefore, your business must make sure to embed optimised indirect tax compliance processes when setting up within a Freeport.

How can we help? 

For help and advice on all VAT and Customs matters please get in touch with Matthew Clark.