The government announced the establishment of new freeports – an area that despite being located within a country’s borders, exists outside that country’s customs borders – in 2021 (see “What’s so free about freeports?”, 12 June 2021).
There are now eight freeports in England. The Teesside, Humber and Thames freeports began operations in November 2021, the Felixstowe & Harwich freeport followed in December 2021, and the Solent, Liverpool City Region and East Midlands freeports became operational in March 2022. The Plymouth & South Devon freeport is expected to begin operations before the end of the year.
We understand that the UK government is collaborating with the devolved administrations on the creation of freeports in Scotland, Wales and Northern Ireland, with two new freeports in Scotland and one in Wales planned to be operational in 2023.
Advantages of using a freeport
A freeport allows for goods and materials to be imported, processed and re‑exported without them being subject to a country’s local duties, taxes and regulations. Accordingly, they are useful locations for remote distribution hubs.
Freeports provide economic benefits to local economies since they support the need for ancillary businesses and provide employment. To encourage businesses to move to freeport areas, such businesses can benefit from reduced business rates and tax incentives.
What tax benefits are available?
The tax incentives (set out below) are intended to work together to encourage activity in “tax sites”, by encouraging the purchase of land (stamp duty land tax exemption), the development of the land and the acquisition of machinery and equipment (enhanced capital allowances) and the hiring of new employees (lower National Insurance contributions).
The tax incentives are only available within the designated tax site area, which is likely to be “underdeveloped” land but is not necessarily within the perimeter of the freeport itself (for instance, the Gateway 14 site in Stowmarket, which is designated as a tax site despite being outside the Felixstowe port area). The freeport tax site maps which detail the precise areas that benefit from the reliefs can found on the www.gov.uk website.
Prospective occupiers therefore need to understand whether a potential site falls within a freeport tax site and, if it does, be aware of the potential tax benefits that may be available.
Stamp duty land tax
There are two SDLT reliefs which effectively operate as either/or reliefs depending on how much of the land is situated within the boundaries of a tax site. The reliefs apply to non-residential land situated within the tax site, which is used by the purchaser (or a connected person) in the course of a commercial trade or profession, and comprise:
- either a full exemption where at least 90% of the chargeable consideration for the transaction is attributable to land within the tax site; or
- a partial exemption where at least 10% (but less than 90%) of the chargeable consideration is attributable to land within the tax site – in this case the SDLT charged is reduced by the proportion of the chargeable consideration attributable to tax site land.
In order to benefit from SDLT relief:
- at least 10% of the chargeable consideration must be attributable to land within the tax site (the consideration must be apportioned on a just and reasonable basis);
- the effective date of the transaction must be after the designation date for the tax site and on or before 30 September 2026; and
- the land must be used exclusively in a “qualifying manner”, which means in the course of a commercial trade or profession, which must be carried on by the purchaser (or a person connected with the purchaser). This can be either: (i) directly, (ii) as a result of development, or (iii) as a result of being exploited as a source of rents or other receipts (ie a property rental business). If there is any residential use, the transaction will not qualify for relief. It is important to note that SDLT relief is withdrawn (and tax can be clawed back) if the land is not used in a qualifying manner at any time within a three-year period from the effective date of the transaction.
Capital allowances
Capital expenditure in tax sites benefits from two enhancements under the capital allowances regime:
- an enhanced structures and buildings allowance of 10% (rather than 3%) for the acquisition, construction or renovation of structures and buildings for non-residential use. This allows for a tax deduction equal to 10% of the total cost of an investment, each year, for a period of 10 years; and
- 100% first-year allowance for capital expenditure on qualifying plant and machinery for use in a tax site.
These benefits apply to expenditure incurred between the date the tax site was designated and 30 September 2026 (inclusive). It is important to note that construction of buildings/structures must commence after the tax site is designated a tax site and the buildings/structures must then be brought into a qualifying use on or before 30 September 2026.
National Insurance contributions
While not a property tax saving, employers operating in a tax site are entitled to zero-rated employers’ NICs for three years for new employees, provided that the employees spend at least 60% of their working hours in the tax site and start their employment on or after 6 April 2022, but no later than 5 April 2026. This can be a significant advantage for new or expanding businesses that relocate to a freeport location.
Business rates relief
Business rates relief of up to 100% is available on business premises operated by newly formed businesses within a tax site and for businesses that relocate to a tax site. In addition, a partial relief is available for businesses already operating within a tax site, either to expand their business into new or additional premises, or to expand or redevelop their existing property. The business rates relief is available until 30 September 2026, with the relief applying for five years from the point at which the business first receives relief – for instance, where a business first receives the relief on 30 September 2026, it will benefit from the relief until 29 September 2031.
What other advantages are available?
There are a number of other tax advantages from trading at freeport customs sites (these are not necessarily the same as the freeport tax sites and maps detailing the precise areas can be accessed online) but these are outside the scope of this article.
In addition, the government has provided greater flexibility to develop land by amending permitted development rights for ports (which includes freeport sites) to allow port owners to construct buildings “in connection with” the operation of the port, allowing services which are ancillary to the port to benefit from flexible planning rights.
What else do I need to consider?
The tax and other benefits of operating from or relocating to a freeport tax site are significant, and for businesses operating in logistics and ancillary services it could be a bit of a “no-brainer”.
The challenge is actually spotting that a potential site is within a freeport area at all. It is tempting to focus on the “port” bit of the description and assume that freeports only exist where there is operational port land. A look at the online map will show that this is simply not the case.
While some ports have been successful in their applications for freeport status, the geographical boundary of a freeport area can extend to land located some distance away from the sea – there are few who would think that the East Midlands is next to the sea.
Given the current constraints on the public purse, you should not assume that HMRC will point out that you are entitled to a tax relief that you have failed to claim. Therefore, checking the position “on the ground” with your professional advisers remains crucial.
Robbie Watson is an associate in Birketts’ corporate tax team
