updated on 30 March 2021
QuestionWhat are freeports and how will they work in the UK post Brexit?
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:
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.
Tax sites and customs sites
While a Freeport 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 are designated and specifically authorised as:
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:
Additional benefits outlined in the bidding prospects included, among other things:
The above information reflects the early communications from the budget announcements on 3 March 2012 together with extracts from HM Treasury Freeports Bidding Prospectus.
Businesses operating within a designated (and secured) customs site will potentially benefit from:
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, it will be essential to draw a clear distinction between parts of the Freeport that are:
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:
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 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 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.
Peter Snaith and Malcolm Dowden are lawyers at Womble Bond Dickinson. Peter is a partner based in the firm’s Newcastle office. Malcolm is a legal director based in Southampton.