Heather Gordon is Legal Director at Martyn Fiddler Aviation. Heather joined the team in 2013 having previously practiced within a leading Isle of Man law ...Contact Heather Gordon
Returned Good Relief: common misunderstandings
We are often asked about ways in which the payment of VAT or customs duties can be reduced or mitigated when it comes to aircraft flying into the UK and/or EU27 territories. As a result of the UK’s departure from the European Union’s single market on 31 December 2020, we have had an increase in queries regarding the application of Returned Goods Relief (RGR).
In this article we will explore what RGR is, what it may be used for, and the difficulty of different interpretations of RGR applied by various countries. We will summarise the risks of getting RGR wrong and how to safeguard the aircraft and its owner from this risk.
What is Returned Goods Relief?
At its most simple, RGR allows for a physical item (a ‘good’) which has previously been imported into a territory to re-enter that territory without a repayment of tax (because this was accounted for at the time of its initial import).
Aircraft are prime examples of ‘goods’ which move in and around different jurisdictions and tax territories on a frequent basis.
Most aircraft owners will be unaware that when they leave the territory they were initially imported into, they are deemed to be exported. Similarly, when they re-enter the territory they are using RGR.
Please see our article on free circulation for more information on what happens at import.
Why am I hearing more about Returned Goods Relief at the moment?
Following the UK’s departure from the EU single market, aircraft owners who had previously imported their aircraft into the EU are now faced with the reality that the UK is now its own separate customs territory. The outcome of this separation is that any static goods either find themselves in one customs territory or another. When they move between the two there is now a requirement for those goods to be exported from one and imported into the other.
This same logic should apply to aircraft, and while they are able to depart and arrive without making formal declarations – their export and import being “deemed” to have taken place under customs rules for aircraft – they are still subject to those customs rules.
A consequence (and intention) of the Brexit process, therefore, is that aircraft should now also be considered as either imported into the UK or the remainder EU27 member states. For example, if an aircraft had been imported into the EU via the UK, that aircraft will be able to retain its UK ‘free circulation’ status but if it does make this determination it can no longer be considered to be in free circulation in the EU27 (and vice versa).
Due to the proximity of the UK to the EU and the inherent mobility of aircraft, an aircraft from one territory may have been located in the other territory on 31 December 2020. We have received many questions asking whether a tax consequence or benefit has inadvertently arisen by the location of the aircraft at the time, and what will happen on its return.
Please see our e-book for more information on import options from 1 January 2021.
So how does it work?
Subject to a few conditions (listed below) an aircraft can return to the territory of import and claim RGR.
What are the main conditions to qualify for Returned Goods Relief?
- The person who removed the aircraft must be the same person bringing it back. For example, if there has been a change of ownership while the aircraft was away, RGR will not be available.
- The aircraft will need its original import documents to demonstrate VAT and customs duties were correctly accounted for at the time of the original import.
- The aircraft must have been within the territory in the previous 3 years. This could be evidenced by a logbook entry for example.
- No work has been performed on the aircraft while outside of the customs territory, other than keeping the aircraft in good condition. For example, if the aircraft has undergone a significant upgrade or cabin re-fit while outside the territory which has resulted in an increase in the value of the aircraft, RGR will not be available for the increase in the value.
Can I use Returned Goods Relief to enter into another territory?
We have been asked whether RGR could be used to effectively re-import an aircraft into either the UK or EU27, notwithstanding the original import took place in the alternate jurisdiction. The justification for this being: if the aircraft was imported into the EU prior to the UK’s departure from the EU, could RGR be used to justify VAT free re-entry to the alternate jurisdiction rather than a new importation. This concept would be similar to ‘grandfathering’ but using a customs process.
A key problem with this approach is that the RGR process was never designed with a Brexit scenario in mind. The legislation does not contemplate the status of goods located in the UK as they are not technically exported from the EU, but perhaps have somehow been removed, as if exported. The new UK legislation contains some references that need updating and while the RGR legislation in the EU remains as before, there has been no statement from either the UK or the EU Governments as to whether this would be an acceptable or appropriate use of RGR rules. This is complicated due to the member states which make up the EU27: even if one member state of the EU27 approved this interpretation of RGR locally, the other 26 member states may not share this view. The EU Commission will probably remain silent on many practical points following Brexit until the various committee contemplated in the UK/EU Trade and Cooperation Agreement meet to consider the numerous issues that the separation of customs territories has created.
Without an explicit statement regarding the use of RGR in this way, it would seem very risky for an aircraft owner to try and use RGR to secure import status in the alternate customs jurisdiction rather than simply re-import the aircraft into either the UK or the EU27. The risk is exacerbated due to the deemed import and export of an aircraft on every arrival into and departure out of a territory.
Does the UK/EU Trade and Cooperation Agreement help?
The Trade and Cooperation Agreement between the UK and EU provides limited assistance in respect of aviation and has no mention of business aircraft. However, the agreement does state that aircraft used commercially for charter could be imported into the opposite territory without restrictions or the need to pay VAT and customs duty.
We can infer from this stated requirement to re-import commercial aircraft with specific exemptions that for all other aircraft a formal import is indeed needed and that for no commercial aircraft there is no specific easement for their entry into the alternate customs territory. This is a clear indication that RGR should not be used to somehow “grandfather” aircraft to both territories, otherwise this would have been explicitly mentioned in this section of the agreement.
How to mitigate my risk?
It is our experience that customs officers’ will request a copy of the import document on inspection of an aircraft. Unless an aircraft owner can demonstrate they are correctly using RGR or have specific paperwork from the territory allowing RGR (despite the original import not having taken place in the territory), this could result in an assessment for VAT, plus penalties and the detention of the aircraft while the tax situation is resolved.
We believe that relying on RGR without explicit guidance from either the UK or EU is a big risk and one that could result in large VAT liability (ranging between 17-27% of the value of the aircraft depending on EU member state). We would strongly advise taking tax advice to consider your situation and whether temporary admission or a full import would be appropriate in the circumstances.
RGR is automatically applied to goods returning to their original territory of import (subject to the conditions noted above). Outside of this application, an attempt to use RGR to gain import status in a territory where no formal import has taken place could pose a major risk without explicit confirmation at a Government level.
Getting specific advice on temporary admission or permanent import of your aircraft will reduce the risk of facing a large tax liability, and will provide peace of mind to all involved.
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.