Will freeports create investment or a free-for-all?

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The Government is rolling out freeports to drive trade following the UK’s departure from the EU. But will they deliver?

Words by Christian Doherty

As the dust settles on Brexit, the post-Covid landscape is beginning to take shape.

The Government is rolling out eight new freeports, with two more to follow, in a bid to drive investment into forgotten parts of the UK.

The ports are spread across the country and comprise the areas where the Government believes that investment and enterprise stimulation are most urgently required.

East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City region, Plymouth, the Solent, the Thames, and Teesside have been designated as sites. There are also plans to establish more in the coming years, with Scotland, Wales and Northern Ireland all earmarked for freeports.

Described by the Government as “the hubs of enterprise [that] will allow places to carry out business inside a country’s land border but where different customs rules apply”, in essence, each proposed freeport must be confined to a geographic radius of 45km and include:

  • At least one port;
  • One primary customs zone;
  • Up to three tax sites of a maximum of 600 hectares; and
  • As many secondary customs zones as required.

Back to the future?

To some, freeports represent a welcome return to low-tax, low-regulation, free enterprise policy that some felt was strangled by EU membership. To others, they’re a mirage – unregulated zones of tax avoidance that attract those looking for a tax break rather than new investment that creates jobs.

This time, however, the Government says freeports will form one part of the global UK strategy that will shape the country’s post-Brexit direction.

Having announced the policy, chancellor Rishi Sunak claimed that the ports “will have simpler planning to allow businesses to build, infrastructure funding to improve transport links, cheaper customs with favourable tariffs, VAT or duties and lower taxes – with tax breaks to encourage construction, private investment and job creation”.

Tim Morris is the chief executive at UK Major Ports Group (UKMPG), the trade body representing many of the UK’s largest port operators. So far UKMPG has been cautiously welcoming of the plans, but Morris explains this new iteration of freeports must be different from and more ambitious than those that came before. In his view, freeports have typically failed to deliver the promised benefits when they have focused narrowly on trade tariffs.

“In the UK experience, they narrowed into just being about good storage and cash flow management. Whereas what we have now is a toolbox that includes tax incentives, aspects around planning, as well as the more traditional customs easements – combined, they provide a more stable basis for success, similar to the successes we’ve seen elsewhere around the world.”

Morris accepts that many see the re-introduction of freeports as a retrograde step, but insists this iteration of freeports promises to be different. “The Government has come forward with a wider and more ambitious strategy, alongside a set of measures to stimulate a broader range of investment than what existed before.”

What’s in it for me?

Doubts remain.

“The issues have always centred on the tangible benefits,” says Brad Ashton, a customs and international trade partner at RSM UK. “In other words, what does a business get from locating in a freeport?”

Ashton points to the US’s Foreign Trade Zones (FTZs) as the model the UK appears to be following: “They are entirely inward-facing because they offer a duty-free manufacturing environment that allows something we call tariff inversion.”

That would allow goods imported into the freeport under normal rules to carry a tariff of X, but after production, the finished article would carry a lower tariff of Y. “While that is already available in some places, in a freeport, the benefits are wider in terms of tax reliefs like NICs and corporation tax,” Ashton explains.

So while that might prove attractive to some manufacturers looking to grab tax breaks on plant and machinery, “the biggest danger under that system is that we simply see jobs and investment being relocated from one area to another without creating any new activity,” Ashton warns.

And it’s that fear – that freeports just displace existing activity – that has drawn concern from many observers. Certainly Tom White at the Connected Places Catapult believes the focus must be on looking outward to attract investment.

“When we began talking about freeports and looking at European experiences, it was important to focus fundamentally on how we can use these special economic zones and the financial and economic incentives they have attached to them, to drive people to come to our country as innovators by establishing strong regional USPs,” he says.

“The investors’ thinking should be: ‘Why should I go to Liverpool rather than Singapore?’ It is not about getting more cargo over the borders, it is about attracting people and innovation to these regions.”

In White’s view, freeports must have a holistic investment focus to attract new business, rather than simply moving between regions to avoid creating a negatively competitive environment and a race to the bottom.

Taxing times

There are, however, dissenting voices that claim the ports as currently envisaged won’t deliver on Sunak’s promises.

“One of the main drivers was to offer a VAT-free zone for companies looking to relocate,” says Huw Witty, head of tax at accounting firm Ince.

“However, the rate of corporation tax is going up to 25% in March 2022, while Ireland is moving from 12.5% to 15%. So if you’re transporting something into the EU, are you likely to choose the UK where you’ll pay a higher rate of CT on the profits that you make? To my mind, that rate is a crucial issue. Second, I don’t think it’ll attract any new work from the EU, which is what the Government is hoping to do.”

The unavoidable shipping and processing costs involved in bringing goods to UK freeports, Witty believes, would almost certainly persuade most businesses to avoid the UK and its freeports altogether.

All of these criticisms must also be set alongside the growing belief among many around the world that the drive towards a more equitable global tax regime must continue.

With even US President Joe Biden endorsing the idea of a 15% minimum corporate tax rate, does a policy of using tax arbitrage levers like freeports to drive investment simply create a race to the bottom?

“I would say they’re not at odds with that agenda at all,” says UKMPG’s Tim Morris, who points out that – so far at least – no part of the freeports agenda involves corporate tax. “The tax incentives are very much around stimulating investment by using things like capital allowances. But in terms of taxing the profits from those activities, that’s not part of it. What we’ve asked for – and what has emerged so far – is a set of tax measures that focus on stimulating investment, and that for us feels like the appropriate thing to do, and is within the grain of people and businesses paying a fair and appropriate level of tax.” 

Key tax considerations

HMRC has released some of the direct tax incentives it anticipates will form the basis of the freeports offering.

Stamp Duty Land Tax (SDLT) relief

Businesses will be offered SDLT relief on land purchases within the freeport tax site where the property is to be used for qualifying commercial activity.

Capital allowances

These will take two main forms: Enhanced Structures and Buildings Allowance (SBA) for firms building or renovating structures in a freeport and Enhanced Capital Allowances (ECA) focusing on companies investing in eligible plant and machinery.

Employer National Insurance Contributions (NICs) rate relief

Employers operating within the site will pay 0% employer NICs on any new employee working within the site.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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