There is no arguing that it will take some time for the UK, and indeed the world, to recover from the Covid-19 pandemic.  Couple this with Brexit, and Rishi Sunak had quite a task on his hands to deliver a Budget to both help families and businesses through this crisis and stimulate economic growth.  Did he achieve this goal?  I will leave that to the economists and forecasters to thrash out amongst themselves.  What I will say, is that at the end of his statement, after the Chancellor had announced a rise in corporation tax, he pulled his economic rabbit out of his hat: freeports.  Is this programme really the 'flagship government programme' promised by HM Treasury?  Can it really deliver on its aims to increase the attractiveness of the UK as an international trading nation post-Brexit and boost the UK economy? 

The idea of freeports is not new.  In fact, they were pledged in the Tory Party 2019 manifesto.  What the Chancellor did announce in his Budget was that the programme is going ahead.  He also announced the eight locations in England for them: East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City region, Plymouth, Solent, Thames, and Teesside. The choice of locations is reflective of the Government's 'levelling up' agenda together with the welcome inclusion of Thames to bring post-Brexit benefits to the London area as well. It is hoped that these areas will be able to benefit in the post-Brexit era, with Government freedom to provide tax and other incentives free of state aid concerns. The Government will also have the power to designate further freeports as required.

The basic concept of freeports is that they operate as custom zones within a jurisdiction's land border, but they have different customs rules to the rest of the jurisdiction. These altered customs rules should allow businesses operating in a freeport to benefit from tariff benefits and simplified customs procedures.   In other words, the Government intends that freeport trading should be both cheaper and simpler to effect in certain circumstances. They are usually located at ports, hence the name, and other common features of freeports, which may differ from the usual country legislation, include tax, planning and regulatory policies.   

In fact, Sunak went as far as to state that these freeports would operate as special economic zones and would have different rules applied to them which would make it "easier and cheaper to do business".  He confirmed that they would indeed come with simpler planning; cheaper customs in the way of favourable tariffs, VAT or duties; and lower taxes.  He went on to explain that these tax breaks would encourage construction, private investment, and job creation.

Specifically, businesses operating in these freeports will benefit from the following tax incentives:

  • enhanced 10% per annum over ten years of Structures and Buildings Allowance for buildings or refurbished buildings brought into use for non-residential purposes by 2026;
  • enhanced first year capital allowance of 100% for companies investing in plant and machinery (until 2026);
  • exemption from SDLT on property acquisitions (until 2026);
  • a five year 100% business rates relief to new or relocated businesses in freeports; and
  • cut in employer's national insurance contributions from 13.8% to 0% for up to nine years.

These reliefs are strong economic incentives for businesses to relocate to or start up in freeports.

The location of freeports, too, is spread but let us not shy away from the fact that this programme is not the glitzy and shiny fix-all that one might be forgiven in believing at first glance.  There are very serious potential risks involved too. 

Very legitimate concerns exist around freeport security and the potential for tax evasion and abuse. Indeed, the Government did cite these concerns during the 2020 consultation process.  It pointed out the potential for tax abuse as the reason why a specific research and development tax incentive was not proposed in the later Response. The proposed tax breaks are limited in time - some for five years others for ten.

There will also no doubt be concern from businesses who may be worried by who will be given the contracts to actually operate these freeports.  What level of oversight will freeport operators be subject to by the Government?

Whilst cautious optimism around freeports should be encouraged, after all they may offer a viable way for the UK to develop an internationally competitive economy and trading status outside of the EU, we should not lose sight of the risks.  Until the details of these freeports, how they operate, what  types of external investment the freeports will attract, we perhaps shouldn't be quite as jubilant as the Chancellor would have us.

Originally published by Accountancy Daily website.

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