Opportunities in England's eight new freeports

The UK Spring Budget, delivered in March 2021, illustrated the reality of the UK's economic situation after “one of the largest, most comprehensive and sustained economic shocks [the UK] has ever faced”¹ as a result of the restrictions implemented during the COVID-19 pandemic. The Chancellor used the opportunity to outline the Government's plan to begin the work of building the “future economy” through an investment-led recovery plan. A key element of this plan is the introduction of eight new freeports in England. The three objectives of the freeport policy are to:

• establish freeports as national hubs for global trade and investment across the UK,
• to promote regeneration and job creation, and
• to create hotbeds for innovation.

The introduction of the freeports is part of the Government's wider plan for levelling up the whole of the UK.

What is a freeport?

A freeport is a defined geographic area located at a port (either an airport, rail port or maritime port) where some or all of the country's import duties, import taxes and customs are relaxed. Freeports may also offer further tax incentives to facilitate investment opportunities and more favourable regulatory regimes for foreign direct investment. The potential benefits therefore for businesses who establish operations in a freeport include tariff benefits, simplified customs procedures and tax reliefs.

Freeports and freezones around the world

Freeports and freezones are commonly seen around the world, with notable freezones in Hong Kong, China and the United Arab Emirates. Similar to freeports, freezones are defined geographic locations subject to a broad array of special regulatory requirements, tax breaks and government support. The difference is that a freeport is more targeted in its tax and customs relief. Whilst a freezone may encourage a wide range of businesses or regenerative objectives, a freeport is designed in such a way as to encourage businesses that typically import, process and then export goods.

The Chancellor announced that the policy could only be pursued now that the UK was outside of the European Union, however, freeports are permitted by the European Union, and indeed there are currently around 80 within the European Union. Instead, it is likely that the Government is taking advantage of greater flexibility to establish more attractive freeports for businesses.

England's eight new freeports

The eight new freeports are expected to be operational by late 2021 and will be located in East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool, Plymouth and South Devon, Solent, Teesside and Thames.

Each freeport will consist of a primary customs site within which the tariff and customs benefits will apply. Subzones within the freeports may also be established to enable sites to benefit from different reliefs, for example, it has been announced that each freeport will include a zone within which certain relevant tax reliefs will apply.

The extent to which the introduction of freeports will impact the overall size of the UK economy is uncertain, however the potential benefits for businesses are clear, especially shipping and logistics firms, or companies with import-export operations who establish operations in one of the eight new freeports. Those benefits will include:

Customs duty relief

Subject to the specific provisions of the UK’s trade agreements, for the period that imported goods remain within the freeport, they will benefit from duty deferral. The duty will only become payable when the goods are exported from the freeport, either domestically within the UK or internationally.

Additionally, businesses will be able to take advantage of customs duty exemption on goods that are imported into a freeport, processed into finished goods and subsequently exported.

In circumstances where the exported finished attract a lower tariff than the duty rate applied to their component parts a drawback or so-called duty inversion will be possible. This means that the company exporting the finished goods would pay only the lower of the duties.

Customs simplification

Simplified customs procedures and fewer customs checks will apply to goods which are imported into the freeport and not subsequently transferred into the UK’s domestic market, which the Government hopes will reduce the administrative costs for business. Streamlined efficient customs procedures would reduce the administrative costs for businesses. The Government is also proposing to trial new technology and approaches to customs to further streamlining business requirements in the future.

Tax relief

The designated tax relief zone within the freeport will benefit from:

• full relief from Stamp Duty Land Tax, subject to the land or property being used in a 'qualifying manner', with a 3-year clawback period;
• 10% enhanced rate of structures and buildings allowances (compared to the standard 3% rate) on construction or renovation of non-residential properties; and
• 100% enhanced capital allowances for expenditure on new plant and machinery for use in freeport tax sites.
• 0% employer National Insurance Contributions on the salaries of any new employee working in the freeport tax site.²
• 100% relief from business rates on certain business premises within freeport tax sites.

While operating in and from the freeports offer significant opportunities, there are compliance risks that businesses dealing with the freeports, and any financial institutions funding such activity, need to be aware of. For more information on the potential risks please read our “DLA Piper Trade Truths” article on the establishment of new freeports in England.

Financial Investors and M&A

Through the tax policy of freeports the Government is aiming to help stimulate economic growth by increasing investment. Investors may well view investment in the freeports as an attractive opportunity given the benefits outlined above. The benefits are further augmented by the traditionally strong long-term factors that support investment in infrastructure as an asset class (such as longer term contracts and returns, less volatility, its critical nature). Freeports could therefore become a key focus area for financial investors, including lenders, infrastructure funds and traditional private equity who have record levels of dry powder to invest.

Further, as a result of the nature of a freeport having a distinct geographic boundary, trade buyers may look to establish a footprint in freeports through M&A in order to take advantage of the tariff benefits, simplified customs procedures, and tax reliefs.

(For analysis and commentary on global M&A, including on key topics and questions such as “how do the trends differ between regions and countries?” and “the ongoing impact on the global M&A market of the COVID-19 pandemic” request a copy of our Global M&A Intelligence Report 2021 via your DLA Piper contact or through the link.)

Venture Capital and Start-ups

The Government is also keen to establish freeports as hotbeds for innovation and intends for freeports to be dynamic environments which enable innovators, start-ups, businesses and regulators to generate and test new ideas and technologies across a range of sectors. Tariff benefits, simplified customs procedures, and tax reliefs and potential for funding will allow innovators, start-ups and businesses to test new technology and challenge the existing landscape of ports.

(For entrepreneurs and founders of start-ups, even in the earliest of stages, please visit Accelerate for helpful resources and materials that clearly explain key legal and business issues every founder of a company should know.)

Impact on the Infrastructure, Construction and Transport Sector

The establishment of eight new freeports is intended to create high-skilled jobs in ports and the areas around them, prioritising some of our most deprived communities to level up the UK economy. Plymouth City Council's successful bid was underpinned by a claim that freeport status would create around 9,000 new jobs over the next 10 years. The influx of jobs into deprived areas needs to be supported by improved infrastructure in the region, with good quality housing, school and road infrastructure needed for the areas to fulfil their potential.

There remains a risk that any impact will be isolated to the geographic boundary of the freeports through attracting jobs and investment from other prosperous regions, however, there is also the opportunity to drive success in those areas around the freeports through improved infrastructure and technology.

Key Contacts

If you have any questions regarding the eight new England freeports and the opportunities for your business, please contact the authors Amar Maan, Partner or Thomas Morris, Associate, members of our UK Corporate team and UK Infrastructure, Construction & Transport sector group.

¹ Budget Speech 2021
² An employee is deemed working in the freeport tax site if they spend 60% or more of their working hours in that tax site.

This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.