In the 2021 Spring Budget, Chancellor Rishi Sunak announced the location of eight Freeports/Free Zones in England following a competitive bidding procedure launched in Autumn 2020. The successful bidders were:
- Felixstowe and Harwich
- Humber region
- East Midlands Airport.
The announcement explained that "Freeports will contain areas where businesses will benefit from more generous tax reliefs, customs benefits and wider government support, bringing investment, trade and jobs to regenerate regions across the country that need it most".
Press coverage and social media commentary was generally positive. However, there is a risk that those positive responses stem from a misunderstanding of the detailed proposals, and that a degree of expectation-management will be required to ensure that businesses take appropriate steps depending on whether they are within or outside the relevant parts of a designated Freeport/Free Zone.
Tax sites and customs sites
While a Freeport/Free Zone could be an area with an outer boundary of up to 45km diameter, it is essential to understand that not every piece of land or business within that large area will qualify for incentives, reliefs and benefits. They are limited both in terms of geography and time.
The relevant parts of the Freeport/Free Zone are designated and specifically authorised as:
- Tax sites
- Customs sites.
The Freeports will contain areas where businesses will benefit from more generous tax reliefs, customs benefits and wider government support, bringing investment, trade and jobs to regenerate regions across the country that need it most.
The government will legislate for powers to create ‘tax sites’ in Freeports in Great Britain; it will bring forward legislation to apply in Northern Ireland at a later date. Tax sites within Freeports will need to be approved and confirmed by the government. Businesses in these tax sites will be able to benefit from a number of tax reliefs:
- Anenhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings within Freeport tax sites in Great Britain, once designated. This means firms’ investments will be fully relieved after 10 years compared with the standard 33 ¹/³ years at the 3% rate available nationwide. This will be made available for corporation tax and income tax purposes. To qualify, the structure or building must be brought into use on or before 30 September 2026
- An enhanced capital allowance of 100% for companies investing in plant and machinery for use in Freeport tax sites in Great Britain, once designated. This will apply to both main and special rate assets, allowing firms to reduce their taxable profits by the full cost of the qualifying investment in the year it is made, and will remain available until 30 September 2026
- Full relief from Stamp Duty Land Tax on the purchase of land or property within Freeport tax sites in England, once designated. Land or property must be purchased and used for a qualifying commercial purpose. The relief will be available until 30 September 2026
- Full Business Rates relief in Freeport tax sites in England, once designated. Relief will be available to all new businesses, and certain existing businesses where they expand, until 30 September 2026. Relief will apply for five years from the point at which each beneficiary first receives relief
- Subject to Parliamentary process and approval, the government also intends to make an employer National Insurance contributions relief available for eligible employees in all Freeport tax sites from April 2022 or when a tax site is designated, if after this date. This would be available until at least April 2026 with the intention to extend for up to a further five years to April 2031, subject to a review of the relief.
Additional benefits outlined in the bidding prospects included, amongst other things:
- Local councils to retain local business rates – 25 years giving certainty to borrow and invest. The Teesside bid will have outlined how the funds will be reinvested
- Planning reforms – the regions will benefit from planning reforms including changes to permitted development rights, simpler, area-based planning – in particular Local Development Orders (LDOs)
- Access to innovation funding – The government is especially interested in private sector-led innovation ambitions that contribute to the decarbonisation agenda or Net Zero
- Freeport regulatory innovation – The government will commit funding to facilitate direct engagement between Freeports and relevant regulators through a Freeport Regulation Engagement Network (FREN). The government has expressed particular interest in innovations with respect to port operations, customs procedures or the testing of green technologies.
The above information reflects the early communications from the budget announcements on 3 March 2012 together with extracts from HM Treasury Freeports Bidding Prospectus. If you require further details of the range of benefits associated with the successful Freeport bid from the information that has already been published and details that will emerge over time please let us know.
Businesses operating within a designated (and secured) customs site will potentially benefit from:
- Customs deferral (delaying the point at which customs declarations must be made to provide either a cashflow benefit where finished goods are released into the UK market, or obviating the need for a customs declaration where finished goods are sent for export)
- "Tariff inversion" (a reduction in liability where the duty payable on finished goods is less than the duty payable on the separate components or raw materials making up the finished goods).
Where finished goods are sent for export, there would also be a benefit in relation to import VAT.
Customs sites are not relevant in relation to goods that are imported for immediate entry into the UK market. In those cases, customs declarations are required at the point of import, and import VAT becomes payable on a deferred accounting basis (meaning that the goods must be accounted for as part of the importing businesses next VAT return).
Customs sites are relevant in relation to goods or commodities that require further processing, manufacture or assembly once brought into the UK. In particular, customs sites will be relevant where activities go beyond the limited repackaging that is permitted under the customs "storage procedure". Consequently, businesses operating within a Freeport customs site are most likely to be manufacturers or processors (eg in the chemicals sector) seeking to achieve tariff inversion where finished goods are to be brought into the UK market, or whose finished products are intended for export.
Both the operator of a customs site and businesses operating within that site will require specific authorisation from HMRC. The customs site must be a secure area, separate from any existing temporary storage area. The customs site operator must be able to monitor the movement of goods into and out from the customs site, and also to monitor manufacturing and processing activities to ensure that they do not extend beyond the activities permitted by the regulations governing the customs site. Crucially, customs site operators will be jointly and severally liable, along with the businesses operating within the site, if there is any customs "leakage".
Joint tax and customs sites
Customs benefits are not available to businesses operating on a Freeport/Free Zone Tax Site unless that site is also an authorised Customs Site. Equally, the benefits available in relation to Tax Sites are not available to businesses operating on a Customs Site unless that site has dual authorisation.
Consequently, when advising clients on the attributes and advantages of a Freeport/Free Zone it will be essential to draw a clear distinction between parts of the Freeport/Free Zone that are:
- Tax Sites
- Customs Sites
- Jointly authorised as Tax and Customs sites
- Neither a Tax Site nor a Customs Site.
Winners and losers?
Much of the initial media coverage relating to the Freeports announcement gave the impression that benefits would apply directly to the entire geographical area falling within the outer boundary of a successful bid. The specific designation of Tax Sites and Customs Sites within that outer boundary mean that much of that initial commentary will prove to be overly optimistic. However, that does not mean that businesses outside those areas (or even outside the Freeport/Free Zone) are wholly excluded from the benefits and are "losers" in the process.
Key points for "excluded" businesses include:
- The principal customs benefits (deferral and tariff inversion) can be obtained by manufacturers operating outside a Freeport Customs Site by means of specific applications for reliefs and special procedures such as "inward processing relief" and "outward processing relief". Businesses that have attained certification as Authorised Economic Operators (AEO) might also qualify through that certification (though it would be necessary to check how far the UK post-Brexit AEO regime replicates the previous structure of "AEO-S" (security) and "AEO-C" (customs) to determine which benefits apply). In essence, the main difference between a business operating within a Freeport/Free Zone Customs Site and those operating elsewhere is that Customs Sites automatically carry those benefits, while businesses operating elsewhere must make separate applications for them
- While specific tax reliefs and benefits are focused on Tax Sites, they are intended to promote inward investment, job creation and innovation, bringing a wide range of ancillary benefits to the surrounding area. Tax Sites are primarily intended to bring in new businesses, and to drive growth and economic diversity
- In addition to specifically designating Tax Sites and Customs Sites, bidders for Freeport/Free Zone status were required to identify opportunities for public-private collaboration and co-investment, and also to identify opportunities for education and skills development (for example, through apprenticeships and vocational courses).
What happens next?
Announcement of the successful bids marked the beginning of a process, not the end. Bidders are now required to develop their Outline Business Case and implementation plans. That process is expected to take approximately six months. Also during that period, bidders are required to articulate, agree with government and formalise their Governance procedures. This stage is particularly important given that Freeports/Free Zones will be conduits for public funds, and will therefore be accountable (via the Ministry of Housing, Communities and Local Government) for public funds. Freeport governing bodies will also be required to cooperate with Border Force, HMRC and the National Crime Agency to ensure that Freeports do not become an enabler of unlawful activity, such as smuggling, money laundering, terrorist financing or human trafficking. Those aspects of Freeport/Free Zone operation were flagged, but not detailed, in the Autumn 2020 Bidding Prospectus. They remain to be addressed in detail, and it is possible that some bidders, or some prospective Tax Site or Customs Site operators, might either fail to achieve the necessary standards or might decide to withdraw from the process as the extent of responsibility and potential liabilities becomes apparent.
The Spring Budget announcement of successful bidders was a significant step for the UK Freeport agenda. However, they are not yet a "done deal", and bidders face significant challenges before the promise becomes a reality.