It’s hard to predict the UK economic and social landscape in 2021 given continued uncertainty over Brexit and the coronavirus pandemic. But one thing likely to change is the physical landscape of Great Britain’s coastline after the government set out plans last month to create up to 10 Freeports, with the first set to open next year.
In a response to a consultation held earlier this year the government revealed that a bidding process for Freeports in England – likely to attract consortiums of regional ports, airports, local authorities and businesses – would begin before the end of 2020. It is also hoped that at least one Freeport will be built in Scotland, Wales and Northern Ireland.
Boosting the economy
The government believes that Freeports, with their different tax, customs and planning rules (see panel), will help ‘turbo-charge’ the UK economy post-pandemic by creating national hubs for trade, innovation and commerce. High-value manufacturers either currently residing in port zones or looking to relocate from the UK or abroad are most likely to benefit.
‘They can bring in goods or materials and manufacture them on site without paying duty if they then go back out to export,’ says Sean Turner, VAT specialist at Menzies. ‘That will help with administration and cashflow, although VAT and customs declarations would still be required to provide an audit trail of goods movements. I can see aerospace and automotive firms taking advantage.’
‘All the necessary regulations and procedures to take advantage of Freeports and avoid potential pitfalls will have one clear beneficiary – accountants’
What are Freeports?
Freeports are zones inside a country but outside the customs territory. They have simplified customs procedures where businesses can import goods tariff-free into the Freeport before ‘processing them into a final good and then either pay a tariff on goods sold into the domestic market or export the final goods without paying UK tariffs’.
Businesses would be incentivised to set up in, or relocate to, Freeports through tax reliefs. This could range from business rates relief, non-residential stamp duty land tax relief on commercial land and property transactions, employer national insurance contributions, and enhanced capital allowances for structures and buildings.
It is also envisaged that planning processes will be streamlined to aid brownfield development.
Ports likely to bid include Teesport owner PD Ports, which hopes a Freeport will add £2bn of gross value added to the local economy both for businesses located in the zone and the local supply chain.
However, there appears to be limited awareness of what Freeports are among UK firms. ‘Our clients remain focused on Brexit,’ says Dominic Witham, partner at Hakim Fry. ‘Freeports will be of use to them, but we haven’t looked under the skin of it yet.’
What he and others might find is that along with the benefits come potential challenges. The main concern is that while some businesses might prosper under a Freeports model, others could be disadvantaged because there may be a redistribution of jobs and economic activity towards the zones.
‘If Freeports do create business and government gives out subsidies, then it will be at the expense of other places,’ says Peter Holmes, fellow of the UK Trade Policy Observatory.
The government is aware of this possibility, stating in its consultation response that it may look at developing ‘virtual Freeports’. This could mean, for example, a Freeport zonal corridor stretching from a port to a manufacturing hub many miles inland.
Holmes also questions another hoped-for benefit of Freeports, that of duty inversion. This is where if the duty on a finished product is lower than on its component parts, a company could benefit by importing components free of duty, manufacturing the final product in the Freeport and then paying the duty at the rate of the finished product when it enters the UK’s domestic market.
‘With tariffs on UK inputs often lower than those on finished goods, there is limited scope for tariff inversion,’ Holmes argues. ‘Indeed, the only area in the UK that will truly benefit from inversion is dog food whose inputs have high tariffs of up to 55.7%.’
Another meaty concern is that Freeports could encourage tax evasion and money laundering. A European Commission report last July stated that Freeports ‘allow counterfeiters to land consignments, adapt or otherwise tamper with loads or associated paperwork, and then re-export products without customs intervention’.
Holmes says all the necessary regulations and procedures to take advantage of Freeports and avoid potential pitfalls will have one clear beneficiary – accountants. ‘It will generate a lot of work looking at new controls and procedures, and determining the origin of products made in Freeports and then exported,’ he says.
Turner urges accountants to begin by discussing how operational costs and cashflow, as well as administrative procedures, could be affected by Freeports.
As an example, he says clients such as logistics firms could look at whether they are ready to ‘flex their operational footprint to take advantage of these new transport hubs’ or redesign processes and invest in innovation, such as bespoke software-based solutions, and claim R&D tax relief.
This year has been one of restrictions, but 2021 could be the year of feeling free in more ways than one.