Greta Kemper is a senior VAT advisor in the tax advisory team at Martyn Fiddler Aviation. CTA and AIIT qualified, Greta has over thirty years’ experience ...Contact Greta Kemper
How does the principle of Free Circulation work?
Once an aircraft is in free circulation in a Customs territory, such as the EU or the UK, many people assume that "that's it, the aircraft may come and go in that territory as it pleases". For anyone who is not familiar with "free circulation" this is a term referring to an aircrafts status within that Customs territory. It means that the aircraft was either manufactured in - or was imported into - that territory, i.e. local VAT or any import Customs duties due were paid in full, including import VAT.
The truth, as ever, is not quite so simple. Normally when goods leave either the EU or the UK customs territories this is treated as an export for Customs and VAT purposes. Ordinarily goods are removed by freight transport or similar, but as aircraft are able to leave from and return to the territory under their own power - and do so frequently - it would be much harder to keep track of all these exports and re-imports. Consequently when a free circulation aircraft leaves either the EU or the UK this is simply treated as a "deemed export", i.e. it is acknowledged to be technically an export but export paperwork is not required each time the aircraft moves. As this tends to be a seamless process many readers will not normally be aware that an "export" has even occurred.
When the aircraft returns, this would normally require a re-import but obviously this is not practicable, and nor should it be necessary when all the normal customs procedures have already been followed once. There is therefore a Customs relief procedure in place known as Returned Goods Relief, or RGR, that allows for a seamless return to the territory with the retention of the aircraft's existing free circulation status. However RGR only applies under certain conditions.
There are ways that an aircraft may unintentionally lose its free circulation status while it is outside the relevant Customs territory under the RGR rules. For example if the aircraft is physically kept outside the territory for three years or more there is no longer a right to return under RGR, and effectively its free circulation status has been lost. The same may also happen if the aircraft is sold or the operator replaced while the aircraft is located outside the EU.
Please also note that there is some dispute about the use of RGR for aircraft imported pre-Brexit into the EU and about where the retained right to return exists, either the EU or the UK. If you have any questions about this we would strongly recommend that you take suitable tax advice in advance, taking into account your aircrafts individual circumstances, to avoid taking unnecessary risks. It is worth noting that we are starting to hear from aircraft owners that they are experiencing increased interest from particular EU member states in their aircrafts import status, post Brexit.
It is important to be fully aware of the aircraft's free circulation status when you are looking to buy or make changes to the operation of an aircraft, particularly if the aircraft spends time outside of the relevant territory. This is something we can check for you on each aircraft and advise the best way forward.
The information included in this article is considered true and correct at the date of publication; changes to rules and regulation made after the time of publication may impact on the accuracy of the information referenced or inferred to in this article. The information in the article may change without notice and Martyn Fiddler Aviation is in no way liable for the accuracy of any information printed or stored or in any way interpreted and used by the user. This article or the information contained in it is not provided or intended to be used as advice of any form.
If you have any doubts or would like to discuss any aspect of this article, please do not hesitate to contact one of our experts who will be happy to discuss your individual circumstance.