BackgroundThe Freeports will be a form of ‘customs free zone’, areas within the UK’s customs territory with different customs and tax rules. Such zones aim to promote trade and business by lowering duty, tax and paperwork costs. The initiative is not a new one: the UK previously had a number of such zones (e.g. in Liverpool and Southampton) but these were closed in 2012 due in part to the perceived heightened risk of fraud, tax evasion and money laundering.
However, outside the EU, the UK now has more flexibility over the rules it chooses to apply within the zones, notably in the tax incentives it will be able to offer. But it will still be subject to World Trade Organisation commitments and any rules the UK chooses to introduce will need to be justified or they could be challenged in UK courts or, potentially in extreme circumstances, the EU or other third countries could respond by introducing tariffs on some UK goods deemed to be damaging their trade or investment.
Freeports are seen as a ‘levelling up’ policy tool - similar to Enterprise Zones - to create hubs for development, jobs, innovation and international investment in certain regions, albeit arguably at the risk of diverting economic activity from elsewhere.
There will be eight freeports in England: East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames, and Teesside. The government aims to establish at least one freeport in each of Wales, Scotland and Northern Ireland in due course (although Northern Ireland is required to follow EU subsidy rules so is unlikely to be able to adopt the same model as the rest of the UK).
Freeports will not have uniform rules within their area (up to 27 miles across) but will contain a number of separate tax sites, customs sites and joint tax and customs sites. It is only within these specific sites within the wider Freeport area that businesses will be able to benefit from the tax and customs reliefs, and wider government support.
ApplicationsIf a business wants to move goods into or out of a Freeport customs site, it will be able to apply to use the Freeport customs special procedure. This is a single authorisation, combined with easier declaration requirements, to import non-controlled goods for processing or storage in the customs site before they are either exported from or they are sold in the UK.
Applications require an EORI number, details of the business, PAYE Scheme Reference and the Unique Taxpayer Reference. Applications for storage or processing activity also require details of the goods to be imported, including commodity codes, description, quantities, values and - if the goods will be processed - what processing will be done. The government will be issuing updated guidance on how to apply when applications open on 8 October.
Alternatively, businesses can choose to use existing customs special procedures for which they are already authorised to conduct such operations. They can also import excise goods for storage and then export or for sale in the UK, or sell, produce or process excise goods if they have the relevant excise approval. The usual conditions of existing authorisations will continue to apply but businesses will need to comply with the Freeport record keeping rules and they will also need to inform HMRC of any changes to their authorisation, for example if the customs site is going to be a new processing or storage location.
Customs dutiesVAT and duties on imports into Freeport customs sites will be suspended, unless and until the goods enter free circulation on the UK market. Raw materials and components that are imported into a Freeport, processed into finished goods in the Freeport and are then re-exported will pay no UK tariffs or VAT. Alternatively, such finished goods may benefit from a lower tariff rate if they are sold on the UK market – an advantage known as ‘tariff inversion’.
US Foreign Trade Zones, for example, particularly benefit some automotive and pharmaceutical businesses due to the relatively high US tariffs on some components. The advantages of such tariff inversion in the UK are less obvious since about half of all types of goods are already duty-free and the average tariff for all industrial goods is only 2.5%. The UK also has free trade agreements with some 100 countries, including the EU (the UK’s largest trading partner), enabling a large proportion of trade to be duty free.
However, businesses should consider if they are in a sector - such as the manufacture of dairy, starch and animal feeds - that could benefit from tariff inversion if they are trading with partners in countries without a free trade agreement with the UK, such as the US.
Declaring goodsFreeports will benefit from simplified customs declarations, requiring a reduced amount of data and no requirement to submit a supplementary declaration. Traders will need to complete a declaration in their own commercial records with information about the goods and to provide information to the Freeport operator’s records management system, so that a central record of all goods in the site can be maintained.
However, the requirements for Entry and Exit Summary Declarations before arrival and export will apply in Freeports as they do elsewhere. Goods moved into free circulation or other customs special procedures will also need to be declared as such. Certain requirements will also apply to moving goods between different Freeports and between customs sites within a single Freeport.
TaxIn addition to customs simplifications, there will be a number of tax incentives for businesses operating in a Freeport:
- VAT: traders may be able to apply a zero rate of VAT on supplies within the customs site of either goods declared to the Freeport customs special procedure or services carried out on goods declared to the Freeport customs special procedure. Traders cannot zero rate goods or services sold to a business outside of a Freeport customs site. If using an existing customs special procedure, the usual VAT rules for that procedure will apply;
- Stamp Duty Land Tax Relief:, from the date a freeport is designated until 30 September 2026, on land purchases within Freeport tax sites where the property is to be used for a qualifying commercial activity;
- Enhanced Capital Allowances: from 1 October 2021 until 30 September 2026, for companies in Freeports investing in qualifying new plant and machinery assets;
- Enhanced Structures and Buildings Allowance: providing tax relief for firms constructing or renovating structures and buildings for non-residential use within Freeport tax sites;
- Employment tax incentives and NICs rate relief: enabling employers operating in a Freeport tax site to pay 0% employer NICs on the salaries of any new employee working there, for up to three years per employee on earnings up to a £25,000 per annum. An employee will be deemed to be working in a Freeport tax site if they spend 60% or more of their working hours in that site. The relief is intended to be available for up to 9 years from April 2022, subject to a review no earlier than April 2026;
- Business Rates Relief: up to 100% relief on certain business premises within Freeport tax sites, from 1 October 2021 and applying for 5 years from the point at which the beneficiary first receives relief before 30 September 2026; and
- Local Retention of Business Rates: councils in which Freeport tax sites are located will retain the business rates growth for that area above an agreed baseline, following the example of Enterprise Zones. This will be guaranteed for 25 years.
PlanningThe planning process in Freeports is intended to be streamlined to aid brownfield site development and increased regulatory flexibility.
Investment incentivesThere will be a £175 million seed capital fund to provide matched/part matched public funding for investment in regeneration of sites and qualifying infrastructure.
Controlled goodsControlled goods (e.g. excise goods, controlled drugs, toxic chemicals, military goods) may be moved into, or stored in, a Freeport customs site if a trader’s existing authorisation allows them to do so; otherwise, an application for authorisation must be obtained from HMRC.
Export ControlsExports of military and dual-use goods from Freeports will require export licensing and full export declarations in the normal way.
Businesses importing such items that are considering siting themselves in a Freeport should be aware that a number of countries (in common with the UK) exclude exports of such items from their open or general export licences if the consignee or end-user is located in a customs free zone. This reflects the generally higher risks associated with such zones, for example that the goods might be diverted and misused. This could make it more difficult for overseas suppliers to obtain licences to send the items to UK businesses located in Freeports.
ConclusionsThe Freeports potentially represent one of the UK’s most ambitious regional initiatives in recent years. Businesses should consider how their operations might benefit from the tax, customs and other incentives available.
Fieldfisher's UK trade team can help you understand the potential opportunities and risks of Freeports for your business, whether importing, manufacturing or storing goods for export or for sale in the UK.
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