Freeports: the tax benefits

This article was first published on 28 September 2022 with minor amends added 19 January 2023 and 23 March 2023.

With a growing number of Freeports across the UK, Birketts’ Robbie Watson outlines the advantages of Freeports and their tax benefits in a piece originally commissioned by Estates Gazette’.

The Government announced the establishment of new freeports in the March 2021 Budget.  A freeport is an area that despite being located within a country’s borders, exists outside that country’s custom borders.

There are now 8 freeports in England. The Teesside, Humber and Thames freeports began operations in November 2021, the Felixstowe & Harwich freeport followed in December 2021, the Solent, Liverpool City Region and East Midlands freeports became operational in March 2022 and the Plymouth & South Devon freeport became operational in July 2022 and was further expanded in October 2022.

We understand that the UK government is collaborating with the devolved administrations on the creation of new freeports in Scotland, Wales and Northern Ireland, with two new freeports in Scotland (Cromarty Firth and the Forth) and two in Wales (Celtic and Anglesey) planned to be operational in 2023.

Advantages of using a freeport

A freeport allows for goods and materials to be imported, processed and re-exported without the goods being subjected to a country’s local duties, taxes and regulations. Accordingly, they are useful locations for remote distribution hubs.

Freeports provide economic benefits to local economies since they support the need for ancillary businesses and provide employment.

To encourage businesses to move to freeport areas, such businesses can benefit from reduced business rates and also enjoy various tax benefits which are considered below.

What tax benefits are available?

The tax incentives (set out below) are intended to work together to encourage activity in tax sites, by encouraging the purchase of land (Stamp Duty Land Tax exemption), developing the land and acquiring machinery and equipment (enhanced capital allowances) and hiring new employees (lower National Insurance contributions).

The tax incentives are only available within the designated “tax site” area, which is likely to be ‘underdeveloped’ land but is not necessarily within the perimeter of the freeport itself (for instance the Gateway 14 site in Stowmarket which is designated as a tax site despite being outside of the Felixstowe port area). The freeport tax site maps which detail the precise areas that benefit from the reliefs can be accessed here.

Prospective occupiers therefore need to understand whether a potential site falls within a freeport tax site and, if it does, be aware of the potential tax benefits that may be available.

Stamp duty land tax (SDLT)

There are two SDLT reliefs which effectively operate as either/or reliefs depending on how much of the land is situated within the boundaries of a tax site. The reliefs apply to non-residential land situated within the tax site, which is used by the purchaser (or a connected person) in the course of a commercial trade or profession and comprise:  

• either a full exemption where at least 90% of the chargeable consideration for the transaction is attributable to land within the tax site; or
• a partial exemption where at least 10% (but less than 90%) of the chargeable consideration is attributable to land within the tax site, in this case the SDLT charged is reduced by the proportion of the chargeable consideration attributable to tax site land.

In order to benefit from SDLT relief:

• at least 10% of the chargeable consideration must be attributable to land within the tax site (the consideration must be apportioned on a just and reasonable basis);

• the effective date of the transaction must be after the designation date for the tax site and on or before 30 September 2026; and

• the land must be used exclusively in a ‘qualifying manner’, which means in the course of a commercial trade or profession, which must be carried on by the purchaser (or a person connected with the purchaser). This can be either: (i) directly, (ii) as a result of development, or (iii) as a result of being exploited as a source of rents or other receipts (i.e. a property rental business). If there is any residential use the transaction will not qualify for relief. It is important to note that SDLT relief is withdrawn (and tax can be clawed back) if the land is not used in a qualifying manner at any time within a three year period from the effective date of the transaction.

Capital allowances

Capital expenditure in tax sites benefits from two enhancements under the capital allowances regime:

• an enhanced structures and buildings allowance of 10% (rather than 3%) for the acquisition, construction or renovation of structures and buildings for non-residential use. This allows for a tax deduction equal to 10% of the total cost of an investment, each year, for a period of ten years; and
• 100% first year allowance for capital expenditure on qualifying plant and machinery for use in a tax site.

These benefits apply to expenditure incurred between the date the tax site was designated and 30 September 2026 (inclusive).  It is important to note that construction of buildings/structures must commence after the tax site is designated a tax site and the buildings/structures then brought into a qualifying use on or before 30 September 2026.

National Insurance contributions (NICs)

Whilst not a property tax saving, employers operating in a tax site are entitled to zero-rated employers’ NICs for three years for new employees, provided that the employees spend at least 60% of their working hours in the tax site and start their employment on or after 6 April 2022, but no later than 5 April 2026. This can be a significant advantage for new or expanding businesses that relocate to a freeport location.

Business Rates Relief

Business rates relief of up to 100% is available on business premises operated by newly formed businesses within a tax site and for businesses that relocate to a tax site. In addition, a partial relief is available for businesses already operating within a tax site to either expand their business into new or additional premises, or expand or redevelop their existing property. The business rates relief is available until 30 September 2026, with the relief applying for five years from the point at which the business first receives relief, for instance, where a business first receives the relief on 30 September 2026 they will benefit from the relief until 29 September 2031.

What other advantages are available?

Custom site benefits

There are a number of other tax advantages from trading at freeport customs sites (these are not necessarily the same as the freeport tax sites and maps detailing the precise areas can be accessed here), these include:

• import VAT can be suspended on goods brought into the freeport;

• goods that are imported into a freeport and then processed into finished goods and re-exported can benefit from a duty exemption;

• while goods remain on the site they can benefit from duty deferral;

• where the goods leaving the freeport attract a lower tariff than their component parts they can benefit from a duty inversion (with any duty chargeable being calculated on the basis of the goods as they stood before being processed, rather than on the basis of the final processed goods); and

• simplified import procedures.

Planning and development

In addition, the government has provided greater flexibility to develop land by amending permitted development rights for ports (which includes freeport sites) to allow port owners to construct buildings “in connection with” the operation of the port, allowing services which are ancillary to the port to benefit from flexible planning rights.

What else do I need to consider?

The tax and other benefits of operating from or relocating to a freeport tax site are significant, and for businesses operating in logistics and ancillary services could be a bit of a ‘no-brainer’. 

The challenge is actually spotting that a potential site is within a freeport area at all. It is tempting to focus on the ‘port’ bit of the description and assume that freeports only exist where there is operational port land. A look at the online map will show that this is simply is not the case.  While some ports have been successful in their applications for freeport status, the geographical boundary of a freeport area can extend to land located some distance away from the sea. Leaving aside extreme climate modelling, there are few who would think that the East Midlands is next to the sea…

Given the current constraints on the public purse, you should not assume that HMRC will point out that you are entitled to a tax relief that you have failed to claim.  Therefore, checking the position ‘on the ground’ with your professional advisers remains crucial.

Interaction with Investment Zones

The Government announced at its “mini-Budget” on 23 September 2022 the creation of “Investment Zones”, which will benefit from time-limited tax incentives of a similar nature to those discussed above in relation to Freeports (i.e. SDLT, capital allowances, NICs and Business Rates relief). This demonstrated a clear intention from the Government to expand the number of areas that will benefit from such tax incentives.

The Government confirmed in September 2022 it was in discussions with 38 interested English local authorities regarding the location of these Investment Zones and also intends to work with the devolved administrations in Scotland, Wales and Northern Ireland to deliver such sites. We understand that further details will be announced by the Department for Levelling Up, Housing and Communities in due course.

We would note that one advantage of expanding or relocating to a Freeport is that, if your business is looking to relocate now, the tax benefits are available now, rather than having to wait for the Government to finish the tendering process for the new Investment Zones. For further information, please contact Robbie Watson in Birketts’ Corporate Tax Team.