Inward processing lets an authorised business import goods from outside the UK, process or repair them, and re export them without paying customs duty or import VAT on the imported goods. The duty is suspended, not waived: if the processed goods stay in the UK instead, duty and import VAT become payable, and the procedure must be closed with a bill of discharge within 30 days after the end of the discharge period.
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What does inward processing do?
Inward processing is one of the special customs procedures provided for in Schedule 2 to the Taxation (Cross border Trade) Act 2018, with the detail in the Customs (Special Procedures and Outward Processing) (EU Exit) Regulations 2018. HMRC’s guidance summarises the effect: an authorised business does not pay customs duty and import VAT on goods it imports from outside the UK and then re exports. Excise duty can also be delayed, but becomes payable if the goods are released into free circulation.
The relief suits manufacturers who buy components or raw materials abroad and sell finished goods abroad, repairers who return goods to overseas owners, and contract processors working to an overseas customer’s specification. If some output is sold in the UK, duty is paid on that portion only, and may be lower where the duty rate on the processed product is lower than on the imported goods.
Who can apply?
According to HMRC’s guidance, an applicant must be established in the UK, hold an EORI number, not have a poor compliance history, and check whether it needs a guarantee or an import licence. A business that is not established in the UK can be considered only for non commercial imports, and needs a full authorisation.
Some applications face an examination of economic conditions, so that relief is not given where it would disadvantage UK producers. The application identifies an economic code describing the activity, for example code 1 for processing goods that are not sensitive, code 2 for repairs, and code 3 for processing to the specifications of a person established outside the UK.
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Which type of authorisation do you need?
| Type | Key points from HMRC’s guidance |
|---|---|
| Full authorisation | For regular use; allows simplified declarations; apply at least one month before importing; a guarantee may be needed for the suspended duty and VAT |
| Retrospective authorisation | Only in exceptional circumstances and not if one was granted in the previous 3 years; can go back up to 12 months, or 3 months for sensitive goods; lack of knowledge alone is not reasonable grounds |
| Authorisation by declaration | Made on the import declaration; up to 10 times in a rolling year for goods valued up to £500,000 per import; security usually required; not available with simplified declarations, anti dumping duty or excise goods, among other exclusions |
| Northern Ireland and EU | A single authorisation for processing across sites in Northern Ireland and the EU, using an EORI number starting XI |
What information goes into the application?
HMRC asks for the commodity codes of the goods (at least 4 digits, or 8 digits for equivalence goods), the process to be carried out, how long it takes, the quantities and values of imports and products over the period of the authorisation, and where goods will enter and leave the procedure. That period can be up to 3 years for sensitive goods and up to 5 years for other goods.
Two items cause most of the work:
- Rate of yield. This is the quantity of processed products obtained from a quantity of imported goods. HMRC’s examples are 1:1 for a simple repair and 3:1 where 300 metres of cloth make 100 garments. Each process has its own rate. Main processed products are what you are making; secondary processed products are genuine by products, not waste or scrap.
- Valuation method. You choose whether any duty on goods released into the UK will be based on the value of the goods at import or on the value of the final product. HMRC may sometimes direct the method.
Production accessories that are used up in processing, such as reaction accelerators or goods that protect products during processing, can also be relieved. Fuels, energy and lubricants generally cannot, except for testing.
How do you discharge the procedure?
When processing is finished the goods must leave the procedure. HMRC lists four main routes: re export, declaring the goods to another customs procedure, transfer to another inward processing authorisation holder, or destruction, which is usually only possible under customs supervision. There are also special cases treated as re export, such as stores for ships leaving the UK, sales to embassies and sales to visiting armed forces.
The authorisation letter sets the discharge period, based on the period estimated in the application, or 6 months where authorisation was by declaration. A bill of discharge must reach the supervising office no later than 30 days after the end of that period. It reconciles the imports, the rate of yield, and how each quantity was disposed of, and claims relief on the suspended charges.
On a transfer to another holder, the receiving business makes a customs declaration using CPC 51 51 000 and gives the transferor a copy of the acceptance. HMRC’s guidance states that liability for the suspended duty and VAT stays with the transferor until customs accept that declaration.
What happens if the goods stay in the UK?
Goods released into free circulation from inward processing bear customs duty and import VAT. The duty is calculated on the valuation basis agreed in the authorisation, which can be changed by asking the supervising office. For how a VAT registered importer can declare import VAT on its VAT return instead of paying it at the border, see postponed VAT accounting.
What records must you keep?
HMRC requires records of goods under the procedure to be kept for 4 years, or 5 years for Freeport customs special procedure authorisations. They must show the authorisation number, the declarations placing goods under and discharging the procedure, descriptions and quantities, the location and movements of goods, their customs status, any usual forms of handling, the rate of yield or how it is calculated, any use of equivalence, and any transfers of rights and obligations. If the yield is worked out in a separate spreadsheet, the main records must point to it.
A worked example
Illustration only. A UK manufacturer holds a full authorisation and imports components worth £200,000 from outside the UK. Assume a duty rate of 4%, so £8,000 of duty is suspended, together with import VAT. The components are made into finished units at a rate of yield of 1:1.
- 80% of the units are exported to customers outside the UK. No duty or import VAT is due on the components used in them.
- 20% are sold to UK customers and released to free circulation. Duty is paid on that share, £1,600 on the import value basis, and import VAT is accounted for.
- The bill of discharge for the period shows the import, the yield, the 80% re exported and the 20% released, and is sent within 30 days of the period end.
Without the authorisation the manufacturer would have paid £8,000 at import and had no simple way to recover the £6,400 relating to exports.
What are the common mistakes?
- Importing before the authorisation is in place and relying on a retrospective authorisation, which HMRC grants only in exceptional cases.
- Missing the 30 day deadline for the bill of discharge, which puts the suspended duty at risk.
- Using an indirect customs representative, which HMRC does not allow for inward processing; see direct and indirect representation.
- Rates of yield that do not match what happens on the factory floor, so the reconciliation fails.
- Overlooking origin. HMRC confirms that the UK and EU agreement allows duty drawback schemes such as inward processing alongside preference, but finished goods still need to meet the rules of origin to enter the EU duty free.
The VAT treatment of the outbound sale is covered in zero rating exports of goods.
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Related Accountapedia entries
- Customs special procedures explained
- Outward processing relief
- End use relief for customs duty
- How customs warehousing works
- Temporary admission and ATA carnets
- Plastic Packaging Tax
Sources
- legislation.gov.uk: Act 2018 c. 22, schedule 2
- legislation.gov.uk: SI 2018/1249
- GOV.UK: Apply to delay or pay less duty on goods you import to process or repa
- GOV.UK: Get an economic code to apply for inward processing
- GOV.UK: Moving processed or repaired goods into free circulation or re exporti
- GOV.UK: Check when you can account for import vat on your vat return
- GOV.UK: Check what you need to consider before getting someone to deal with cu
- GOV.UK: Introduction to rules of origin and claiming duties when trading betwe
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.