Freeports have existed for centuries; the medieval Cinque Ports of southern England were granted freedoms from port tolls and given special privileges, the most prized being the right to carry the canopy over the King at the Coronation. ‘Free ports’ came to be known as places where merchants could do business with minimal interference from state authorities.
Whilst companies these days are likely to be more interested in raising their profit margins than a royal canopy, freeports still have a key role to play in encouraging economic activity. With a particular focus on businesses that import, process and re-export goods, companies operating within freeports can benefit from deferring the payment of taxes until their products are moved elsewhere (or can avoid them altogether if they bring in goods to store or manufacture on site before exporting them again).
In the UK, freeports form a crucial part of the government’s plans for “levelling-up”, aiming to bring employment and investment to deprived areas and encourage innovation. In the Spring 2021 Budget, the Chancellor announced the identity of eight freeport sites in England. Last week, following on from the previously published maps of the areas, HMRC introduced regulations to officially designate areas within Harwich, Gateway 14 (Mid-Suffolk) and Felixstowe (East Suffolk) as ‘Freeport East’ tax sites.
The regulations relating to the designated tax sites within Freeport East take effect from 30 December 2021. This date is important because it features in the conditions that need to be met to obtain the various tax reliefs available:
- Stamp Duty Land Tax (“SDLT”) relief will be available for transactions between 30 December 2021 and 31 March 2026. If 90% or more of the chargeable consideration for the transaction relates to qualifying freeport land, the transaction is entirely exempt from SDLT. In order to qualify for relief, the property must intended to be used in the course of a commercial trade or profession (or exploited in the course of a commercial trade or profession as a source of rents). The land or property will not be used in a qualifying manner if it is used for residential purposes. In addition, for buildings within a Freeport site that are leased out, the SDLT relief also extends to the granting of a lease.
- An enhanced 10% Structures and Buildings Allowance (“SBA”) rate applies to relevant expenditure up to 30 September 2026. The rate of SBA is usually 3% and so this measure accelerates the deductions available and means that full relief can be obtained over 10 years as opposed to 33.3 years. To obtain the enhanced SBA, the official freeport tax site designation must be in place when construction of the building begins.
- Enhanced 100% capital allowances are also available up to September 2026 for plant and machinery that is primarily for use in a designated freeport tax site (although until 31 March 2023, corporate taxpayers operating in Freeport areas may prefer to claim the 130% ‘super-deduction’ for expenditure on plant and machinery announced in the Spring Budget).
- Employers will be permitted to pay 0% employer National Insurance contributions on the salaries of any new employee working in a freeport tax site. This 0% rate will be applicable for up to three years per employee on earnings up to £25,000 per annum.
Once Freeport East is also designated as a Freezone (also known as a Freeport Customs Site), it will also benefit from a more favourable customs regime. Following the example set with the Teeside Freeport, it is anticipated that the start date for the Freeport East Freezone will correspond with the date from which the Freeport East tax site has been designated (30 December 2021).
Once the Freezone has been established, manufacturing companies who import items will be able to avoid higher tariffs on certain goods and either reduce or defer administration requirements. These companies can then work on the goods within the freeport zone and add value before importing them into UK or re-exporting them at a different tariff rate. Duty benefits will include:
- Duty deferral for goods that enter a freeport customs site while the goods remain on site.
- Duty exemption on goods that are imported into a freeport, processed into finished goods and subsequently re-exported.
- Duty inversion if the finished goods that exit a freeport attract a lower tariff than their component parts.
- Businesses will also be able to suspend import VAT on goods entering a freeport.
The government’s objectives go even further than tax reliefs and duty exemptions however; Freeports should benefit from a simplified and fast-track planning regime, expansion of permitted development rights, business rates relief of up to 100% and simplified customs procedures.