The rollout of freeports across the UK is designed to drive trade following the UK departure from the EU, offering a raft of tax breaks for investors.
There is no arguing that it will take some time for the UK, and indeed the world, to recover from the Covid-19 pandemic. Couple this with Brexit, and the Chancellor Rishi Sunak had quite a task on his hands to deliver a Budget to both help families and businesses through this crisis and stimulate economic growth.
Did he achieve this goal? I will leave that to the economists and forecasters to thrash out among themselves. What I will say, is that at the end of his statement, after the Chancellor had announced a rise in corporation tax, he pulled his economic rabbit out of his hat: freeports. Is this programme really the ‘flagship government programme’ promised by HM Treasury? Can it really deliver on its aims to increase the attractiveness of the UK as an international trading nation post-Brexit and boost the UK economy?
The idea of freeports is not new. In fact, they were pledged in the Conservative Party 2019 manifesto. What the Chancellor did announce in his Budget was that the programme is going ahead. He also announced the eight locations in England for them: East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City region, Plymouth, Solent, Thames, and Teesside.
The choice of locations is reflective of the government’s ‘levelling up’ agenda together with the welcome inclusion of Thames to bring post-Brexit benefits to the London area as well. It is hoped that these areas will be able to benefit in the post-Brexit era, with government freedom to provide tax and other incentives free of state aid concerns.
Operating status
The basic concept of freeports is that they operate as custom zones within a jurisdiction’s land border, but they have different customs rules to the rest of the jurisdiction. These altered customs rules should allow businesses operating in a freeport to benefit from tariff benefits and simplified customs procedures.
In other words, the government intends that freeport trading should be both cheaper and simpler to effect in certain circumstances. They are usually located at ports, hence the name, and other common features of freeports, which may differ from the usual country legislation, include tax, planning and regulatory policies.
In fact, Sunak went as far as to state that these freeports would operate as special economic zones and would have different rules applied to them which would make it ‘easier and cheaper to do business’. He confirmed that they would indeed come with simpler planning; cheaper customs in the way of favourable tariffs, VAT or duties; and lower taxes.
He went on to explain that these tax breaks would encourage construction, private investment, and job creation. Specifically, stamp duty land tax (SDLT) relief on property acquisitions (until 2026), 100% first year capital allowances on plant and machinery expenditure (until 2026), a specific structures and buildings allowance of 10% per annum over 10 years of the cost of buildings or refurbishing buildings brought into use for non-residential purposes by 2026 coupled with a five-year 100% business rates relief for new or relocated business and a cut in employer’s national insurance contributions from 13.8% to 0% for up to nine years are strong economic incentives for businesses to relocate to or start up in freeports.
What are the risks?
The location of freeports, too, is spread across the country. Let us not shy away from the fact that this programme is not the glitzy and shiny fix-all that one might be forgiven for believing at first glance. There are very serious potential risks involved too.
Very legitimate concerns exist around freeport security and the potential for tax evasion and abuse. Indeed, the government did cite these concerns during the 2020 consultation process. It pointed out the potential for tax abuse as the reason why a specific research and development (R&D) tax incentive was not proposed in the later response. The proposed tax breaks are limited in time – some for five years, others for 10.
There will also no doubt be concern from businesses who may be worried about who will be given the contracts to actually operate these freeports. What level of oversight will freeport operators be subject to by the government?
Cautious optimism around freeports should be encouraged, after all they may offer a viable way for the UK to develop an internationally competitive economy and trading status outside of the EU, but we should not lose sight of the risks. Until the details of these freeports, how they operate, what incentives to external investment they bring, we perhaps shouldn’t be quite as jubilant as the Chancellor would have us.