Can Your Business Benefit from Freeports?

Posted August 28, 2021

With the UK well and truly out of the EU, the government aims to use some of its newfound legislative freedom to embrace the concept of freeports. Eight new zones will be opening up around the UK offering tax breaks and special customs rules, but can they offer any real benefits to your business?

What are freeports?

Chancellor Rishi Sunak has long been a fan of freeports. Back in 2016, as a backbench MP, he extolled their virtues claiming the UK should capitalise on its newfound post Brexit economic freedom to help kick-start local economies.

Boris Johnson has frequently mentioned them in speeches and regards them as a key pillar of the levelling up agenda.

It came as no surprise, then, when the 2021 budget came with a commitment for eight new freeport zones: East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames, and Teesside. Northern Ireland will set its own freeport policies although these will have to work in compliance with the Northern Ireland protocol.

Under the proposals, any goods entering these areas from overseas will not be subject to tax or duty until they leave and enter the UK.

The zones also offer various types of tax relief in order to encourage investment including:

Full stamp duty relief on property purchased within the zone.
Enhanced 100% capital allowances for companies investing in qualifying plants within the zone.
Any company constructing or renovating non residential structures will benefit from an enhanced 10% rate of structures and buildings allowance compared with the 3% rate on offer elsewhere.
Full business rates relief on certain properties within the zone.

These provisions are expected to last five years. It is still unclear about what will happen after 2026.

The government also hopes to introduce relief for employee national insurance contributions in all freeport sites, but this will be subject to parliamentary approval.

In general, then, these operate in similar ways to enterprise zones in which businesses can benefit from tax relief, simpler planning rules and more government support.

In general, businesses appear to welcome the proposals. Research by business advisory firm BDO suggests the policy would spark increased investment, especially from the leisure and tourism industries.

Businesses may benefit in various ways.

Managing cashflow: Anything arriving at freeports will not be subject to customs duty or VAT until it leaves. This allows firms to defer payment of these taxes by delaying entry into the full UK regulatory zone.
Avoiding customs charges: If a material has high customs costs, a business could import raw materials, process them and sell them in a duty-free outlet.
Improving profit margins: In some cases, the customs duty on raw materials may be higher than the finished product, such as textiles. A company could therefore set up a factory in the zone, process the raw materials before bringing the product into the UK. This would reduce their overall manufacturing costs allowing them to sell at a more competitive price.

Aside from this, these areas will see plenty of money coming into them. The government hopes to have these zones up and running by the end of 2021. After that, they will have access to a share of £175 funding to support their development. Assuming each site will receive an equal portion, each one is likely to receive around £22 million although larger awards will be considered in exceptional circumstances.

This, coupled with the friendly tax and regulatory environment, may encourage some businesses to move into the area. With activity picking up, businesses of all kinds could benefit. BDO’s research suggests the hospitality sector is particularly keen and sees opportunities in tourism and corporate hospitality.

Reasons to be cautious

For all the benefits, though, not everyone is convinced. BDO’s research found that 30% of businesses believed that freeports would be an ineffective policy and there are questions about our future relationship with the EU.

Europe is generally hostile to the concept of freeports regarding them as creating opportunities for fraud and money laundering. Under the withdrawal agreement, both sides have committed to observing international standards for the prevention of fraud.

The UK would counter that by claiming eligibility criteria provides protection against the use of freeports for money laundering. The proof of that will be in the pudding.

Other potential issues lie in provisions such as level playing field rules which target foreign subsidies granted to companies doing business in the EU. This could see businesses which benefit from support via freeports penalised when they import into Europe.

Critics will also claim that, while freeports are being created to spark economic development in certain areas, all they will do is divert activity from elsewhere. There is no new growth, as such, rather than a redistribution of activity.

Labour’s big complaint is that businesses will suffer by the government’s failure to remove duty exemption prohibitions from free trade agreements that the UK signed with other companies. As such companies would no longer enjoy reduced tariffs on exports if import duties hadn’t been paid.

In response the government reassured businesses that they can choose between a refund of import duties when re-exporting goods or being subject to preferential rates under any free trade agreement.

Freeports, therefore, have plenty of potential, but are unproven. Although Rishi Sunak seems convinced, they can prove the key to his economic program, businesses are a little uncertain. In some cases, the tax breaks can offer real value for businesses, but this will be a complicated calculation. Different businesses may benefit to different degrees. To assess the business case, it’s a good idea to consult with experts who can take you through all the tax implications and show you how these will impact on your business.