The UK's new Freeports and tax

Following a period of consultation during 2020, the Government has published a Freeport Bidding Prospectus which it hopes will lead to the development of at least seven tax-incentivised Freeport areas within England. The Freeport concept is a significant part of the UK's post-Brexit landscape which the Government hopes will provide hubs for enhanced trade and promote investment and regeneration for economically deprived areas.

UK Freeports will offer a range of potential benefits including trade and investment support, planning simplification measures and access to seed capital. In addition, they will also benefit from favourable tax and customs benefits which are discussed below.

The devolved administrations in Northern Ireland, Scotland and Wales will be responsible for the creation of new Freeports in their own devolved areas.  

Background

In February 2020, the government published a consultation on the introduction of Freeports in the UK and this was followed in October by the government's response document. Together with the Bidding Prospectus, these documents set out a model for the introduction of Freeports in the UK.

The government's objectives in introducing these new Freeports are threefold:

• to establish Freeports as national hubs for global trade and investment across the UK: intensify the economic impact of ports by enhancing trade and investment and generating increased economic activity across the UK;
• to promote regeneration and job creation: create high-skilled jobs in ports and the areas around them, prioritising some of the most deprived communities to level up the UK economy; and
• to create hotbeds for innovation: create dynamic environments, capitalising on new ideas and fostering the conditions that will attract new businesses, investors and innovations.

The government aims to ensure that Freeports enhance trade and investment across the UK in the post-Brexit era, boosting growth and high-skilled jobs, and increasing innovation and productivity in port regions, particularly those situated in or near deprived areas, sending a strong signal that the UK is an attractive trade and investment location which is open for business.

What is a Freeport?

Freeports are used across the globe and are generally customs zones located at or near ports where business can be carried out inside a country's land border, but where different customs rules apply. They can reduce administrative burdens and tariff controls, provide relief from duties and import taxes, and ease tax and planning regulations.

Typically, goods brought into a Freeport do not attract a requirement to pay duties until they leave the Freeport and enter the domestic market -- and no duty at all is payable if they are re-exported. If raw materials are brought into a Freeport from overseas and processed into a final good before entering the domestic market, then duties will be paid on the final good. Freeports may also offer simplifications to the normal customs administrative processes on imported goods.

At its heart, therefore, much of the benefits of business in a Freeport are based on their tax incentives.

The new UK Freeport

The new UK Freeport model involves the creation of a geographically distinct area that will benefit from customs and tax benefits. This geographical area may encompass a number of different zones within the overall Freeport. The overall area must be contained within the "Freeport outer boundary" which must include one type of port -- sea, rail or air. In England, the maximum distance between any two points within the new Freeport outer boundary must not exceed 45km.  

Within the outer boundary, a UK Freeport will require a primary customs site designated in or near a port. This primary customs site will be the site which benefits from the customs advantages. A primary customs sites may be situated in inland locations, so long as an economic relationship can be clearly demonstrated between the site and the port. The government will consider primary customs sites of any size, so long as a clear economic case for the site can be made and strict security requirements enabling HMRC and Border Force to monitor the sites effectively can be met. If the economic case can be made, the government will also allow additional customs sites ("customs subzones") within the Freeport to enable multiple sites to benefit from the Freeports customs model.

The UK Freeport may also have one or more tax sites within its outer boundary, which will benefit from the various tax advantages outlined below. This should normally be a single contiguous site within the Freeport no larger than 600 hectares, but where an economic case can be made, may be up to three individual sites between 20-200 hectares each. It should be noted that there is no requirement for the customs and tax sites to overlap.

The tax site must be in an area that is undeveloped and should ideally be located in areas with below national average GDP per head and above average national unemployment. Bidders will be required to justify the location of their tax site(s) and in particular will need to explain how their choice of tax site locations minimise displacement of economic activity from wider local areas, especially other economically disadvantaged areas.

Customs benefits

Although the detail is yet to be finalised, in general businesses operating within Freeport customs sites will receive tariff benefits, including duty deferral while the goods remain on site and duty inversion if the finished goods exiting the Freeport attract a lower tariff than their component parts.

Subject to the UK's trade agreements, businesses may also be able to take advantage of customs duty exemption on goods that are imported into a Freeport, processed into finished goods and subsequently re-exported. They will also be able to suspend import VAT on goods entering the Freeport customs site. In addition, businesses operating in Freeports will be authorised to use simplified import procedures.

Tax benefits

Businesses operating within a Freeport tax site will benefit from a number of tax incentives (though much of the detail of these incentives is yet to be published). There are in particular five benefits which the government indicates will be made available to businesses on a time-limited basis.

SDLT: The government intends to offer SDLT relief on land purchases within Freeport tax sites in England where that property is to be used for qualifying commercial activity (as yet undefined). It is intended that this relief will apply from 1 April 2021 until 31 March 2026.

Enhanced Structures and Buildings Allowance (SBA): The government intends to offer an enhanced SBA rate, providing enhanced tax relief for firms constructing or renovating structures and buildings for non-residential use within Freeport tax sites. This accelerated relief is intended to allow firms to reduce their taxable profits by 10% of the cost of investment every year for ten years, compared with the standard 3% p.a. over 33 and a third years. This relief would be claimable where qualifying expenditure is incurred, all associated construction contracts are entered into and the asset in question is brought into qualifying use between 1 April 2021 and 30 September 2026.

Enhanced Capital Allowances (ECA): The new ECA the government intends to offer in Freeport tax sites will provide enhanced tax relief for companies investing in qualifying new plant and machinery assets. This accelerated relief is intended to allow firms to reduce their taxable profits by the full cost of the qualifying investment in the same tax period the cost was incurred. Firms investing in the Freeport tax site would be eligible to benefit from the relief where the qualifying investments are incurred on or after 1 October 2021 until 30 September 2026. Assets eligible for relief must be for use primarily within defined Freeport tax areas.

Employer National Insurance Contributions (NICs) Rate Relief: The government intends to enable employers operating in a Freeport tax site to pay 0% employer NICs on the salaries of any new employee working in the Freeport tax site. This 0% rate would be applicable for up to three years per employee on earnings up to £25,000 per annum. An employee will be deemed to be working in the Freeport tax site if they spend 60% or more of their working hours in that tax site.

The relief is intended to be available for up to 9 years from April 2022, though the government intends to review this relief partway through and decide if it is to continue until 2031. It will at minimum be available until 2026 however.

Business Rates Relief: The government intends to offer up to 100% relief from business rates on certain business premises within Freeport tax sites. This relief is intended to be available to new and certain existing businesses in Freeport tax sites in England from 1 October 2021 and would apply for 5 years from the point at which the business first receives relief. The point at which a business first receives relief must be by 30 September 2026.

Timing

The timeline set out in the Bidding Prospectus is broadly as follows:

• Bids will need to submitted by 12 noon on Friday 5 February 2021.
• Bids will be assessed during March 2021 to create a "longlist" of candidates.
• Ministers will select and announce the successful bids during spring 2021.
• During summer 2021, successful bidders will receive funding and work with government to approve tax and customs site boundaries etc