HM Revenue & Customs (HMRC) has recently issued guidance on some of the legal and practical aspects of operating a freeport site in the U.K., and provided details of how to apply to do so. What have been less well publicized are the potential benefits to U.K. businesses of operating within a freeport and also consideration of whether these benefits can be achieved through other means.
Background to Freeports in the U.K.
Before exploring the potential benefits of freeports to U.K. businesses, it is necessary to understand the role of a freeport area in the context of international trade.
Freeports, free trade zones and special economic zones have been in operation across the globe for many years and are intended to provide fiscal stimulus, principally for manufacturing and export businesses. Following the inclusion of freeports in the Conservative Party election manifesto in 2019, Chancellor Rishi Sunak announced in his Spring budget the introduction of freeports in eight areas—East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool, Plymouth, Solent, Thames, and Teesside.
These regions have been selected as they require investment to stimulate regeneration and are a part of the U.K. government’s “Leveling Up” strategy. It is intended that a further four areas will be identified in England, as well as in Scotland, Wales and Northern Ireland. The first of these areas is planned to become operational in late 2021, and applications are invited by HMRC from businesses interested in locating their operations to these areas.
While it is proposed that the freeport areas will be up to 45km across, it appears that there will be no physical control point for access to and from the freeport area.
Individual businesses within the freeport area will need to operate adequate physical site security as part of the implementation of controls on the receipt of imported materials. They must also keep accurate records to prove that dispatches are either exported out of the U.K., are transferred to another customs-approved operation, or are declared for release in the U.K., with duty and import value-added tax (VAT) paid.
Applicants will need approval for AEO-S (Authorized Economic Operator–Security and Safety) authorization, which will add additional time and invite scrutiny by HMRC as part of the approval process.
To date, there has been little detail provided by HMRC about the specific benefits that business will obtain through the U.K. freeports initiative.
Across the globe, freeports have generally helped to stimulate manufacturing activity and exports by removing the customs burdens associated with the storage and use of imported materials. There is no requirement to declare imports into a freeport area or to pay customs charges—the customs requirements only arise when goods are moved out of the freeport area—whether for domestic consumption, or for export.
In countries where duty costs are particularly high, operating in a freeport area can remove significant costs from operations. Elsewhere, there can be savings in administrative costs; however, it must be remembered that customs declarations and related charges—duty and import VAT—will be required for all goods which leave the Freeport area for use in the U.K.
It is thought that operation in a freeport area may be particularly helpful for the automotive industry, where reliance on just-in-time supplies of materials has suffered following Brexit. Suppliers can store components and materials within the duty-free confines of a freeport area ready for fulfillment to carmakers, who themselves may see benefit in operating under a freeport regime.
Duty inversion is one of the benefits available in a freeport area. This allows for imported components and materials to be used in the manufacture of a product with a lower duty rate, so that when the finished product is released into the domestic market, charges are based on the lower rate of duty.
This can be especially beneficial in countries where materials and components are subject to higher duty rates than the product manufactured using those materials, but there are very few instances in the U.K. where finished goods have lower duty rates than their component parts.
However, the U.K. customs tariff generally applies higher rates of customs duty to products at a more developed stage of manufacture, for example, clothing, footwear, cars and consumer electronics, so it seems likely that the benefit of duty inversion in the U.K. will be limited.
Other Means of Achieving These Benefits
It is worth noting that in the U.K. the likely customs-related benefits of a freeport area are mostly already available elsewhere, through existing duty suspension (customs warehousing) or relief approvals. A freeport area may offer some simplifications not available under conventional customs warehousing or inward processing, but these have not yet been defined.
The basic features of freeport customs benefits are still closely aligned to those available through existing regimes outside freeport areas. HMRC will be keen to ensure that a business has robust controls which prevent the entry of goods to the U.K. economy without the relevant charges being paid.
In the U.K., customs duty rates are relatively low—in most cases less than 5% of the value of the imported goods, and even zero for many goods. The fact of operating in a freeport area does not, therefore, deliver game-changing duty savings beyond a handful of industry sectors.
Whilst it is widely understood and accepted that the selected U.K. areas require investment and regeneration, very few businesses are likely to be incentivized to relocate there by the potential savings in customs duty alone.
It is true that import VAT need not be paid in a freeport area, and at the U.K.’s current VAT rate of 20% the option of stripping import VAT from a business activity may seem an attractive benefit. However, since Brexit, the U.K. has allowed VAT-registered businesses to postpone their import VAT anyway, so it is not physically paid before it can be recovered on a VAT return.
Additional Incentives on Offer
The Chancellor has, therefore, offered a range of other incentives for businesses operating in a freeport, including:
- stamp duty land tax relief until Sept. 30, 2026;
- business rates relief until Sept. 30, 2026, for new businesses and certain existing businesses where they expand;
- enhanced 10% rate of structures and buildings allowance, providing the building or structure is brought into use before Sept. 30, 2026;
- enhanced capital allowance of 100% for investment in plant and machinery, up to Sept. 30, 2026.
Although these tax-related incentives have a limited lifespan, they may be significant for businesses looking to start up or expand into one of the freeport areas. As they are tax-related incentives, however, they may be vulnerable to change in accordance with the tax policies of the government of the day.
Following the U.K.’s withdrawal from the EU, the government has entered into many free trade agreements (FTAs), most significantly with the EU. The terms of these FTAs allow for tariff free, i.e. 0% customs duty, on goods traded between the FTA parties, but only where those goods “originate” in the exporting country.
Complex rules of origin determine whether goods are eligible or not, including the extent to which “non-originating” materials may be used in a manufacturing process. Manufacturing activity in a freeport area may well be sufficient to confer U.K. origin status, but the FTAs have a further requirement, which presents a different challenge.
The U.K.’s comprehensive Trade Agreement with the EU includes a “level playing field” requirement. This requires that preferential status can only apply where goods have been manufactured without the benefit of state aid or subsidy to the exporting party. This measure is intended to ensure that imported goods cannot compete unfairly against domestic production of similar goods.
At present, it is unclear whether the U.K.’s haste to conclude Brexit and sign multiple trade agreements may hamper the attractiveness of freeports for businesses seeking to manufacture for export markets. There is certainly a possibility that goods manufactured in a freeport area, by a business gaining significant tax incentives, may in fact be ineligible for the tariff-free preference which drives their export strategies.
There are concerns voiced by the European Parliament and others that freeport areas attract criminal activity, in particular money laundering, smuggling and tax evasion, facilitated by the relaxation of controls. It is likely that goods manufactured in a freeport area could be subject to greater scrutiny when they are imported into other countries, which could hamper U.K. exports.
By incentivizing businesses to locate their activities in a freeport area, the U.K. Treasury may suffer loss of revenue, particularly where existing operations are relocated. The overall intention to regenerate deprived areas is a laudable sentiment, but the use of a customs simplification as the vehicle for leveling up the U.K. economy runs a high risk of introducing export barriers for businesses operating in a freeport area.
Questions for Businesses to Consider
For many businesses, there are attractive incentives on offer to relocate or establish a manufacturing operation in one of the U.K.’s new freeport areas. There will be ongoing customs compliance obligations to fulfill, and export markets might become more challenging, so any businesses hoping to prosper in a freeport area should consider all the opportunities and pitfalls, particularly including the following:
- Is the business eligible for any or all of the tax incentives?
- Is the business accredited for AEO-S?
- Can the business comply with customs requirements?
- Is there logistical/geographical advantage in locating in a freeport area?
- Will exported goods be eligible for preference in other countries?
- Will expertise need to be relocated?
There are, of course, many other relevant questions, as well as a developing landscape of information which can be navigated with specialist advice on customs, tax, property and employment professionals.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ian Worth is a Customs Director at Crowe UK, with over 40 years’ experience of customs matters, gained from roles in customs consultancy, brokerage and in-house positions.
The author may be contacted at: firstname.lastname@example.org