Richard Jones assesses the recently announced tax incentives available for freeports around the UK.
Freeports are hubs set up around the world as secure customs zones, usually located at seaports and airports. They allow business to be carried out inside a country’s land border, but where different customs rules apply. While the amended customs rules are the primary feature of freeports, countries around the world have adapted this basic model by including additional elements to turn them into special economic zones.
The UK government published a consultation on the introduction of such ‘souped-up’ freeports in the UK in February 2020.
A freeport bid can include multiple ports, multiple customs sites and up to three tax sites. Each of these needs to be contained within a freeport outer boundary. The furthest permitted distance between any two sites within the same freeport is 45km. The largest area a freeport outer boundary can cover is a circle of diameter 45km. Various tax incentives will apply to qualifying transactions and activities carried on in tax sites within that boundary.
Areas bidding for freeport status were encouraged to propose a single tax site within the 45km boundary, but could propose up to three tax sites. Where the bid proposed a single tax site, it could be no greater than 600 hectares. Where there were multiple tax sites in a bid, the guidance was that each should be between 20 and 200 hectares, but the government offered some flexibility, provided that the total area of all tax sites did not exceed 600 hectares.
Tax sites do not have to overlap with the primary customs site. As the purpose of offering tax incentives for tax sites is to stimulate economic activity, they should ideally be in areas within the freeport region with:
- below national average GDP per head currently or over the past five years; and
- above average national unemployment rates currently or over the past five years.
The sites should also be underdeveloped and be the optimal choice for the local area, representing ‘value for money’.
Successful freeport bidders must work with HM Treasury and HMRC to review and confirm the boundaries of their proposed tax sites prior to approval and commencement of the tax benefits described right (see also cl109, Finance Bill 2021 (FB 2021)).
Following the issue of a bidding prospectus on 16 November 2020, eight freeports were announced in England on Budget day and are listed in the box below. Subject to agreeing their governance arrangements and successfully completing their business cases, these freeports will begin operations from late 2021.
Discussions are continuing between the UK government and the devolved administrations to ensure the delivery of freeports in Scotland, Wales and Northern Ireland as soon as possible.
What are the tax benefits available in freeport tax sites?
The Chancellor announced the following tax benefits for businesses operating in designated tax sites within freeports:
An enhanced 10% rate of structures and buildings allowance (SBA) will be available for the cost of constructing or renovating non-residential structures and buildings within a freeport tax site. This is compared to the standard SBA rate of 3% and will be made available to both companies and unincorporated businesses. To qualify, the expenditure must be incurred and the structure or building must be brought into use on or before 30 September 2026 at a time when the area in which the building or structure is situated is a freeport tax site (see cl110 and Pt 2, Sch 21, FB 2021).
An enhanced capital allowance of 100% will be available to companies for investing in plant and machinery (P&M) for use in freeport tax sites. This will apply to both main and special rate assets and will remain available until 30 September 2026. The P&M must be unused and not second hand.
Where the P&M is intended to be used partly outside the freeport tax site and at least one of the main purposes of the company is to obtain a greater allowance on the non-freeport part of the expenditure than would otherwise be available, then that part is not eligible for the 100% allowance. The part outside the freeport tax site is to be determined on a just and reasonable basis.
If the P&M becomes of primary use other than in the freeport tax site within five years of being brought into use and the company or a connected person still owns the P&M, the 100% allowance is clawed back and the P&M is treated as having been entitled to whatever other allowances were available in respect of it (see cl110 and Pt 1, Sch 21, FB 2021).
It is worth remembering that the 130% super-deduction available for expenditure on qualifying main rate P&M is available until 31 March 2023 and will be the preferred claim in respect of assets to which both types of allowance apply. The super-deduction is not available on assets that would fall within the special rate pool or P&M for leasing and so the 100% allowance will be attractive for these types of asset.
Full relief from stamp duty land tax will be available on transactions where the chargeable consideration is at least 90% attributable to the purchase of land or property within freeport tax sites in England, once designated. Where the consideration is between 10% and 90% attributable to qualifying freeport land, the exemption is available on a proportionate basis.
Land or property must be used by the purchaser or a connected person in the course of a commercial trade or profession (including development or redevelopment) or a property rental business. The land cannot be used or developed as a dwelling or the garden or grounds of a dwelling or held as stock of a business without development or redevelopment.
The relief will be available on land transactions with an effective date on or before 30 September 2026.
Relief can be withdrawn within three years of the transaction if the land is no longer used exclusively in a qualifying manner and the purchaser or a connected person continues to hold the land. Allowance will be made where there is an unforeseen change in circumstances beyond the purchaser’s control or reasonable steps are taken to bring the land within qualifying use (see cl111 and Sch 22, FB 2021).
When freeports are introduced in Scotland, Wales and Northern Ireland, they may attract full relief from the equivalent land transaction tax (land and buildings transaction tax, land transaction tax and stamp duty land tax, respectively) applicable in each nation.
Full business rates relief will apply in freeport tax sites in England. It will be available to new businesses, and certain existing businesses where they expand, until 30 September 2026. Relief will apply for five years from the point at which each beneficiary first receives relief.
Employer National Insurance contributions relief is intended to be made available by the government for eligible employees in all freeport tax sites from April 2022 or when a tax site is designated if after this date. This would be available until at least April 2026, with the intention to extend for up to a further five years to April 2031.
It is difficult to determine the likely impact of these measures, but they represent a more generous and comprehensive set of reliefs than any previously made available to discrete geographical areas of the UK. Care will be needed to ensure that any transactions or economic activity are carried on within the freeport tax site concerned.
It is also worth noting that, at the time of writing, while benefiting from no customs duty on imports, businesses operating in the freeports will be obliged to pay tariffs when exporting finished goods to the 23 countries with which the UK has recently negotiated free trade agreements.
The first eight freeport sites are:
- East Midlands Airport
- Felixstowe and Harwich (also known as Freeport East)
- Liverpool City Region
These locations will now move to the next stage of freeports designation and remain subject to approval.
About the author
Richard Jones, Business Tax Manager, Tax Faculty