Claire Petricca-Riding, Edward Davies and Olivia Robertson explain the tax incentives and customs benefits of freeports.
When thinking about the economic advantages of freeports, you cannot help but sing along to the popular 1990 indie song I’m Free by the Soup Dragons. The question is, though, are the eight freeport sites that have been granted such status by the government really free to do what they want, any old time? Or are they not so free after all?
What are freeports?
The defining feature of a freeport is the ability to bring goods and materials into a country without the goods having “arrived” in that country for the purposes of most local duties, taxes and regulations. The goods can be processed or combined with other materials at the freeport and then transferred to another country. They will then be subject to the laws of the destination country as regards import duties, taxes and local regulations.
A freeport can be useful as a remote distribution hub. For example, goods arrive from the manufacturer and are stored until needed. They can then be processed or repackaged as necessary to meet the requirements and regulations of the destination country. They can provide economic benefits to the local economy since they support the need for ancillary businesses such as hotels, restaurants and shops.
There is a secondary benefit which, from a commercial perspective, may be more important than the first. Governments often give planning and tax incentives to businesses setting up in the freeport area. Caution needs to be exercised with these benefits as they can be seen (by other countries) as unfair subsidies and inconsistent with free trade arrangements. This should be considered on a case-by-case basis.
There has also been much debate as to whether the new freeports will actually increase investment or just move it around the country. However, many commentators – particularly in the run-up to the recent election in Hartlepool – have said that such movement would be a part of the government’s “levelling up” strategy.
Within the freeports there should be at least one customs site and a tax site. It is within these sites that businesses can benefit from the tax incentives, within the tax sites, or the customs benefits, within the customs sites. A tax site can include all or part of the customs site, but it doesn’t have to. Tax reliefs will only apply in customs sites that are also located within a tax site.
Tax sites and related incentives
The tax incentives are as follows:
An enhanced rate of structures and buildings allowance
The intention is to offer an enhanced structures and buildings allowance rate, which will provide enhanced tax relief for firms constructing or renovating structures and buildings for non-residential use within the tax sites. It is to encourage construction of new buildings, especially within the tax sites. It also allows firms to reduce their taxable profits by 10% of the cost of investment every year for 10 years.
An enhanced capital allowance
This will provide enhanced tax relief for companies investing in qualifying new plant and machinery. Its purpose is to incentivise companies to invest in such items in the tax sites, as assets eligible for relief must be for use primarily within those defined areas. The aim is to get companies spending while being able to reduce their taxable profits.
Stamp duty land tax relief
SDLT relief will be available on land purchases within the tax sites in England where that property is to be used in a qualifying manner (see the Finance Bill). The purpose of the relief is to incentivise investment in land and buildings in the tax sites. The relief does not apply to residential property.
Clawback of this relief is intended to apply where land is not used in a qualifying manner within a control period, which is usually three years, or earlier if the land is sold.
Business rates relief
This could see up to 100% relief from business rates on certain business premises within the tax sites. This is especially the case for newly formed businesses and those relocating into the freeport area.
Local retention of business rates
It is intended that the councils in which the tax sites are located will retain the business rates growth for that area above an agreed baseline. This is to be guaranteed for 25 years, which is to give councils certainty to borrow in order to invest in regeneration and infrastructure that will support further growth.
Employer’s national insurance contributions relief
This could enable employers operating in a tax site to pay 0% employer’s national insurance contributions on the salary of any new employee working in a tax site. Employees will be deemed to be working in the tax site if they spend at least 60% of their working hours in that site. This 0% rate would be applicable for up to three years per employee on earnings up to a threshold of £25,000 per year.
The government is to ensure that it has the power to prevent access to the relief for those employers found to be abusing the relief by manipulating their employment practices – for example, by dismissing staff specifically to benefit from the relief.
Customs sites and related benefits
A key element of traditional freeports are the customs benefits. However, it has been said that freeports focused solely on customs benefits would be unlikely to be successful in the UK. Freeports are effectively outside a country’s customs borders, and there are five specific customs benefits proposed for businesses trading at the freeport customs sites:
- Duty deferral while the goods remain on the site;
- Duty inversion if the finished goods leaving the freeport attract a lower tariff than their component parts;
- Duty exemption on goods that are imported into a freeport and then processed into finished goods and then re-exported, subject to the UK’s trade agreements;
- Suspension of import VAT on goods entering the freeport; and
- Simplified import procedures.
Planning and development
As well as the tax and customs benefits, the government amended the Town and Country Planning (General Permitted Development) (England) Order 2015 to allow for greater flexibility in development port areas, which is to include the freeport sites. This was to bring the powers afforded to ports in line with airports, thus creating a level playing field – hence the levelling up due to the inclusion of East Midlands Airport within the freeport sites.
This amendment to the GPDO means that port owners, as well as their respective agent of development, will be able to construct buildings “in connection with” the operation of the port. This is seen as a major enhancement to the fairly restrictive permitted development rights for the ports. This could mean that shops, hotels, restaurants and any other service which is ancillary to the port can obtain the benefit of flexible planning rights. There is an additional measure in that such rights would include an exemption for development below 4m in height and under 200 cubic metres capacity “or where it is urgently required for the running of the port”.
One important consideration, however, is the new requirement to obtain prior approval before any development.
Local development orders
Owing to the strategic nature of freeport operations, there is likely to be an increased use of local development orders. LDOs enable local authorities to set an agenda and criteria for specified types of development. So, an LDO is permitted development for specific types of development in defined locations, and they are set at a local level.
LDOs have been a great tool in the past, enabling enterprise zones to have simplified planning mechanisms that have incentivised development in those specific areas. LDOs provide certainty to businesses and developers that development, which is required, will be provided for.
Furthermore, they are a great tool in encouraging investment into specific boroughs, creating jobs, growth and communities. They are zonal in nature, which follows on from the 2020 planning white paper and is what many practitioners expect to see in the Planning Bill when it appears before parliament this year.
A word of caution, however: LDOs are the gift of the council and require a formal adoption process. Many local authorities are underfunded and short-staffed. Given the potential impact of the planning reforms likely to be implemented, there may well be little appetite for bringing forward LDOs.
One important note is that the simplified planning frameworks set out above do not overcome the requirement to obtain either an environmental impact assessment or a marine consent.
The regeneration game
The aim of freeports is to lead to the regeneration of areas and communities, and encourage hubs of research and development, logistics and manufacturing. If freeports are successful and meet the aims set out above, this could shape the way we plan residential development, shops and leisure activities.
This regeneration covers all areas, from increased productivity and better internet connectivity to the delivery of more affordable and sustainable homes close to areas of employment. This could be a game-changing moment that will be felt for generations to come.
Claire Petricca-Riding is a partner and head of planning and environment, Edward Davies is a construction and engineering partner and Olivia Robertson is a tax solicitor at Irwin Mitchell
