25 Jul 2019

New Prime Minister Boris Johnson has highlighted free ports as a key element in his government's post-Brexit plans. The appointment of Rishi Sunak MP as Chief Secretary to the Treasury is a clear signal of intent to deliver on that promise. 

In 2016 Rishi Sunak, MP for Richmond, published The Free Ports Opportunity, arguing that free ports would provide a fast response to Brexit that would: 

  • increase manufacturing output
  • reinvigorate the North, and
  • promote trade.

However, delivery cannot be left to government alone. To work well, any free port or free zone must be based on detailed regulations, precisely tailored to the practical and economic realities of the areas that they serve. Consequently, any applicant for free port or free zone status must work closely with government to ensure not only that the case for designation is made, but also that the detailed understanding of local economic conditions informs and underpins the regulations made to support that designation.

The current law

Post-Brexit free zones and free ports have a legal basis in the Taxation (Cross Border Trade) Act 2018. In their basic form, the relevant provisions carry through powers from the Customs and Excise Management Act 1979, which allow the Treasury to designate "any area in the United Kingdom as a special area for customs purposes". 

As carried into the Taxation (Cross Border Trade) Act 2018, the effect of designation would be to allow goods within the zone to be treated as falling within the storage procedure for customs purposes, permitting a deferral of customs duties. However, the legislation also empowers HMRC to make regulations "as to what, or as to the extent to which, other activities may, or may not, be done in the premises or free zones (or elsewhere)" and also to "make any other provision that they consider appropriate for the purposes of import duty in relation to goods kept in free zones".

Working together, therefore, the Treasury and HMRC have the powers necessary to create free ports and free zones that go significantly beyond the basic customs deferral of the storage procedure, and that could deliver significant benefits such as tariff-inversion and administrative simplification for supply chains outlined in Rishi Sunak's report. The legislation provides ample scope for defining the activities permitted within a zone - for example, allowing manufacturing operations that go significantly beyond the limited forms of "processing" within the storage procedure. 

Physical or virtual zones?

Although most discussion to date has focused on the possibility of geographically-defined free zones or free ports, Taxation (Cross Border Trade) Act 2018 also allows HMRC to treat a customs declaration as validly made if it is made through "a system for recording information where the system is approved by HMRC and the information is made available to HMRC".

Where any such system is approved, HMRC may also disapply any other provision relating to customs declarations. This potentially allows the development and adoption of supply chain management systems, based on technologies such as blockchain and distributed ledger, that would permit the creation of "virtual" free zones. The capacity of blockchain and distributed ledger systems to demonstrate provenance and to track any transfer of custody or of value would allow goods to be treated as within a "zone" wherever they might physically be in the UK, as long as they remain verifiably within the system. 

Likely developments?

Initially, at least, the government's focus is likely to be on the designation and definition of "physical" free zones and free ports. 

Designation as a free port or free zone would not, in itself, deliver significant benefit. To work well, such zones would have to be specifically tailored to local economies, reflecting particular areas of specialism (such as chemical processing or automotive manufacturing in the North-East of England). It would also be essential to ensure that designation conferred sufficient benefit on the full range of supply chain participants, including small and medium sized enterprises that may not be "tier 1" suppliers, but who form the vital base for local economies.

Consequently, any bodies applying for free port or free zone status should act now to consider the feasibility and detail of its proposal. Applicants who go to the Treasury and HMRC with a clear and detailed understanding of their area's specific economic conditions and needs, and who engage with government to ensure that regulations accurately reflect those local factors, will significantly enhance their chances of success.