Freeports explained: what are they and what are their benefits?

How freeports work

Freeports are designated customs sites where normal taxation and tariff rules of the host country do not apply. Freeports are not a new concept and globally there are an estimated 3,500 freeports in operation. Whilst they are predominantly situated alongside existing maritime port infrastructure, they can also operate further inland around airports.

Freeports work by creating a physical ‘buffer zone’ between the land border and the duties border of a country for goods that are imported. Goods arriving at a freeport from overseas are exempt from tariffs, import VAT or excise duty (this is referred to as duty suspension) and are exempt until those goods leave the freeport and enter the UK’s domestic market.

This duty suspension could provide benefits to businesses if the duty on a finished product is lower than the component parts, as the business could import those components duty free. This would allow them to manufacture the final product within the freeport, and then pay the duty at the rate of the finished product when it enters the UK market (this is known as duty inversion).

In freeports, the duty exemption for re-exports also means that a company could import components duty free; manufacture the final product in the freeport; and then pay no tariffs on the components when the final product is re-exported overseas.

Businesses operating within a freeport site may also benefit from simplified planning processes and additional tax reliefs such as reduced VAT for the purchase of land and lower rates of employment tax (subject to parliamentary approval).

Where are England’s regional freeports?

In the 2021 March Budget, the Chancellor, Rishi Sunak, confirmed the locations of England’s eight regional freeports.

The eight regions selected to gain a freeport are:

• East Midlands Airport
• Felixstowe and Harwich
• Humber region
• Liverpool City Region
• Plymouth
• Solent
• Thames
• Teesside

The CBI welcomed this renewed focus on the role that shipping ports and airports play in shaping industrial policy and driving forward the levelling up agenda. The benefits of collaboration between manufacturing, logistics and other sectors are well understood and we are encouraged by the geographical spread of freeports across England. Businesses are optimistic about the benefits that freeports could provide for economic growth, building upon the UK’s position as a world leader in manufacturing and trade and helping to shape and export orientated, place-based recovery.

What to expect based on the Chancellor’s budget

The tax reliefs announced in the Chancellor’s Budget are largely expected to last for a period of five years and include:

• An enhanced 10% rate of structures and buildings allowance for constructing or renovating non-residential structures and buildings within freeport tax sites in Great Britain. This means that investments made within freeport sites will be relieved after just 10 years compared to the current 33 years for properties in other locations which only achieve a 3% rate.
  
  
• An enhanced capital allowance of 100% for company investment in plant and machinery for use in freeport tax sites in Great Britain.
  
  
• Full relief from stamp duty land tax on the purchase of land or property within freeport tax sites in England where it is purchased and used for a qualifying commercial purpose.
• Full business rates relief available to all new business and certain existing businesses that have expanded.

The Scottish government has announced plans to introduce a similar scheme to freeports labelled ‘green ports’. These would adapt the UK government’s freeport proposal, offering streamlined planning processes and a package of tax and customs reliefs. Discussions are ongoing with Wales and Northern Ireland about the introduction of freeports there.

Whilst welcoming this focus from government, the CBI remains committed to avoiding a scenario which displaces existing economic activity, investment and jobs from one place to another. We believe that to maximise the benefits of freeports, the following principles should underpin their delivery:

1. Freeports should drive regional productivity and innovation by using their location and placement to support the creation of skilled jobs, resilient supply chains and innovation opportunities such as ‘catapult quarters’ to spur R&D investment.
   
   
2. Freeports should enhance local and national connectivity by delivering much needed infrastructure investment into the regions and ensuring that local transport networks are fit for purposes. Freeports should also act as catalysts for port infrastructure regeneration both physical and digitally.
   
   
3. Freeports should lead to economic growth through regulatory reform by ensuring that the tax and customs benefits are given to as many ports as possible and in an inclusive way. Freeports should play an important role in stimulating new business growth and not displacing existing economic activity through business support, regulatory benefits and a simplification of customs processes.

The CBI is working to shape the delivery of freeports to ensure that benefits are delivering regional growth aspirations. To discuss freeports policy in more detail please contact the Regional Growth Team / Matthew Lowe.