Freeports and investment zones are ‘special’ areas created by the UK government to boost investment. Once approved, an area can benefit from a range of generous incentives, including stamp duty land tax relief (and its equivalent in the devolved administrations), business rates relief, lower employer national insurance (NI) contributions and enhanced capital allowances. There can also be more generous planning conditions and, specifically in freeports, simplified customs procedures in the designated custom zone part of the site.

In this article, we examine the rules more closely and focus on the potential enhanced capital allowances available; specifically, the 100% first-year allowances (FYAs) for plant and machinery (P&M), and the 10% enhanced structures and buildings allowances (SBAs). We will also set out and compare the different results for a project within a ‘special tax site’ compared to the same project outside and reliant on full expensing, the annual investment allowance (AIA) or basic writing down allowances.

As you will see, the benefits can be considerable but there is a catch: the expenditure must be on assets for use within the tightly controlled ‘special tax site’ boundaries. Some of the reliefs are targeted at companies with limited ‘qualifying activities’ and others are not. There are time limits, general exclusions and, of course, anti-avoidance provisions to prevent abuse.

Enhanced capital allowances for freeports and investment zones

Freeports were introduced in the Finance Act 2021, which inserted new sections into the Capital Allowances Act 2001 (CAA 2001): s45O-R for expenditure on P&M and s270BNA-C for structures and buildings allowances. Each ‘freeport tax site’ was designated with its own statutory instrument to confirm the exact area and the type of tax incentive available. The original freeports required expenditure to be incurred on or before 30 September 2026.

Investment zones are newer, having been announced in the mini budget of September 2022, put on hold in Autumn 2022 and then revived in the 2023 Spring Budget. The first zones are expected to be operational in the 2024/25 financial year. As the final package of incentives and boundaries are still being negotiated with each local region, not every area has an agreed ‘tax site’ and further details can be found from the Department for Levelling Up, Housing and Communities on status.

From a tax perspective, investment zones (which were introduced in Finance (No.2) Act 2023) provide the same 100% FYAs and 10% SBAs as in freeports. Therefore, the existing CAA 2001 clauses were amended to add ‘investment zones’ and substitute ‘special tax sites’ for ‘freeport tax sites’. New sunset provisions were also announced in the Spring Budget 2024 to extend the original five-year window to 10 years. The updated sunset dates are:

• 30 September 2031 for special tax sites in respect of English freeports; and
• 30 September 2034 for special tax sites in respect of Scottish green freeports and Welsh freeports.

Qualifying conditions

To qualify there are five core additional conditions on top of the existing FYA and SBA rules, as summarised in the table below.

The FYA restriction to companies (Condition E) is consistent with other FYAs such as full expensing; however, the limitation of ‘qualifying activities’ (Condition C) results in a different claim position from other allowances, as shown below.

This means the 100% FYAs for P&M in a special tax site are aimed at ‘trading’ companies (ie, businesses that sell goods or services to customers for reward) and certain types of undertakings (eg, transport), so businesses such as commercial property landlords will be ineligible. 

Significantly, the 10% SBAs are not limited in the same way: they are available to individuals as well as companies, and a wider range of activities qualifies. This has the potential to open up some interesting opportunities to spread the overall cost of the investment between parties in a more commercial and tax-efficient way (eg, Prop Co and Op Co) subject to the specific anti-avoidance (s270IB, CAA 2001) and wider tax law.

FYAs in special tax sites remain subject to the same ‘general exclusions’ (see HMRC's guidance at CA23113) and ‘connected party’ (CA28300) restrictions as other types of FYAs, such as full expensing. 

There are currently 12 freeport sites in the UK and the latest maps can be found here. The government has currently committed to establishing 13 investment zones across the UK and the latest maps for these can be found here.

Note: as part of the technical consultation on full expensing the government is considering the extension of FYAs to leased assets and the results of the working group are expected in the summer. 

How do the allowances work?

The main capital allowances benefit in ‘special tax site’ status is one of timing, and results from the enhanced SBAs and the inclusion of both ‘main rate’ and ‘special rate’ pool assets in the 100% FYA computation. In simple terms, the tax relief comes through more quickly for a special tax site compared to the other options. This is illustrated by the example below. 

Since the level and proportion of P&M and SBAs can vary significantly between assets (eg, a hi-tech factory may have a 60%/39% ratio of P&M to SBAs whereas a warehouse could have a comparable ratio of 10%/89%) modelling and careful planning will be essential as will consideration of all the applicable anti-avoidance to prevent abuse. It is very rare for any project to have 100% qualifying expenditure.

What should advisers be aware of?

Any discussion on inward investment or new business location is likely to feature the availability of FYAs and special tax site status, so advisers should be aware of the core rules and potential benefits. However, one of the most significant features of both the freeport and investment zone sites is the bidding process the respective areas had to go through and the volume of information now available, which in some cases involved the co-operation and creation of new bodies to drive investment and provide a focal point. 

Most of these organisations now have dedicated websites that contain a range of details about the local areas with investment strategies and promotion literature – they contain a lot of pertinent information which will have wider relevance for anyone seeking to better understand what is happening in the areas involved and links to the relevant sites can be found below.

Bryan Crawford, Director, Furasta Consulting