Implementation of VAT rules in free zones
Published 27 October 2021
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Who is likely to be affected
This measure will affect VAT registered businesses authorised to operate in the customs site (free zone) of a Freeport.
General description of the measure
This measure will enable the operation of free zones in Great Britain by introducing an additional element to the VAT free zone model. This is a VAT exit charge for goods that have benefited from a zero-rated supply and where, after the goods leave the free zone procedure, there is no onward taxable supply of the goods within a time limit. It also makes consequential amendments to other legislation.
Policy objective
To maintain a level playing field by ensuring goods that benefit from a zero-rated supply in a free zone are subject to VAT if they are not sold on to a customer outside the free zone within a time limit, or if the rules relating to the free zone procedure are breached.
To amend historic free zone legislation which is incompatible with the new VAT rules for free zones, and to ensure the warehousing regime rules and the free zone rules are mutually exclusive.
Background to the measure
The government published a consultation in February 2020 on its plans to introduce free zones. It published a consultation response in October 2020.
A range of benefits will be available to businesses that are authorised to operate in a free zone. The main VAT benefit is that businesses selling goods within free zones will be able to zero rate their supplies, and services carried out on goods in those zones may also be zero rated subject to conditions. This provides a cash flow advantage to businesses.
This measure introduces an additional element to that VAT free zone model. It will ensure that where goods leave a free zone and there is no qualifying onward supply of the goods which meets the conditions, or where there is a breach of the rules of the free zone customs procedure, VAT will be due. It will prevent businesses, that might otherwise seek to locate in a free zone solely to avoid irrecoverable VAT, from gaining an unintended tax advantage and so helps maintain a level playing field for all.
Detailed proposal
Operative date
The measure will take effect shortly after the measure is announced at Autumn Budget 2021.
Current law
Current law is included in sections 17 and 18 of the Value Added Tax Act 1994.
Proposed revisions
Legislation will be introduced in Finance Bill 2021-22 to amend the Value Added Tax Act 1994:
- Section 17 will be amended so that provisions relating to previous free zone legislation no longer have effect.
- Section 18 will be amended to avoid any unintended application in customs warehouses of the new zero-rating provisions to be introduced in free zones.
- A new section 57A will be inserted to provide for a VAT exit charge where:
- a zero-rated supply of goods, or services relating to goods, is made under the new free zone zero-rating provisions, and then the goods are declared to free circulation. The exit charge will not apply if there is a subsequent zero-rated supply of the goods in the free zone, or if a taxable supply of the goods is made within three months of the goods having been declared to the free circulation procedure / imported; or
- a person receives a zero-rated free zone supply of goods and in respect of those goods there is a breach of the rules relating to the free zone customs procedure.
- New section 57A will allow the Commissioners for HMRC to make regulations to modify the effect or application of the exit charge in cases set out in the regulations.
Summary of impacts
Exchequer impact (£m)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| nil | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impact.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
There is expected to be no impact on individuals, households or families as this measure simply extends provisions that currently apply to new policy being introduced under Freeports. This measure ensures the correct tax is collected. There is expected to be no impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on the costs for businesses or civil society organisations as this measure simply extends provisions that currently apply to new policy being introduced under free zones. Businesses will have a one-off cost to familiarise themselves with the new exit charge rule as part of the wider changes being made to introduce Freeports. There are expected to be no continuing costs. Customer experience is expected to stay broadly the same as this measure does not alter how businesses and civil society organisations interact with HMRC. This measure ensures the correct tax is collected.
Operational impact (£m) (HMRC or other)
It is not anticipated that implementing this change will incur any additional costs/savings for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Anne Pattison, VAT Principles Team on Telephone:03000 543026 or email: anne.pattison@hmrc.gov.uk or Neil Hedger, VAT Principles Team on Telephone 03000 542832 or email neil.hedger@hmrc.gov.uk.