Part 1 - Freeports

The UK Freeports regime was described as a “cornerstone of the Government’s plan to level up opportunity across the country” in its launch consultation of February 2020, taking inspiration from aspects of Freeport regimes across the world. A range of incentives are available for businesses investing in Freeports in the UK, with varying qualifying criteria and potential benefits.

However the full effects of the new regime are yet to be seen, with staggered implementation across the UK and complex interactions with other tax reliefs. This Deloitte Insights piece outlines the qualifying criteria and incentives associated with the Freeports tax and customs reliefs, as well as key considerations in respect of how the reliefs could impact businesses’ investment decisions.

It also discusses the potential future direction of travel for Freeports in the UK, in light of the announcement of new Investment Zones.

Background

UK Freeports are geographically-defined areas containing designated secure tax and customs sites. They are intended to be hotbeds of innovation, to attract trade and investment, and to intensify the economic activity of port areas. At the March 2021 UK Spring Budget, it was announced that the eight Freeport sites in England are:

On 13 January 2023, it was announced that Inverness and Cromarty Firth Green Freeport and Forth Green Freeport had been jointly selected by the Scottish and UK governments to become the first ‘Green Freeports’. Applicants had been required to demonstrate how they would contribute towards net zero emissions by 2045 and create new green jobs, as well as supporting high quality employment opportunities. The bids aimed to create up to 75,000 new jobs with activities focussing on contributing towards net zero ambitions, such as renewable energy including offshore wind. Both Green Freeports are expected to become operational in late 2023.

In May 2022 the UK and Welsh Governments issued press releases announcing agreement on the establishment of Freeports in Wales. Both governments will jointly co-design the process and make the final decision for Freeport site selection; the bidding process for the new Freeport in Wales closed on 24 November 2022 with an aim for it to be operational in summer 2023.

Work continues on plans for a Freeport in Northern Ireland.

Tax incentives

1.       100% first year capital allowance (“FYA”) for expenditure on plant and machinery

Measure: 100% in-year capital allowances relief for expenditure incurred by a company on new plant and machinery (including integral features) in a Freeport tax site. Applies to expenditure incurred on or before 30 September 2026.

A key consideration: The super-deduction regime currently offers a 130% first year allowance for main pool plant and machinery expenditure, and the special rate first year allowance offers a 50% first year allowance for special rate pool plant and machinery expenditure. At the time of writing, these regimes are due to cease on 31 March 2023, with no further announcements made to date regarding whether they will be replaced by another enhanced relief regime.

Businesses should monitor any announcements in the forthcoming Spring Budget 2023 on 15 March 2023 in relation to the outcome of the government’s consultation on potential reforms to the UK’s capital allowances regime from April 2023 to determine how to optimise capital allowances relief on their investments.

At the Growth Plan 2022, it was announced that the Annual Investment Allowance (a 100% first year deduction for most plant and machinery expenditure) will permanently remain at £1,000,000 per group per annum. Therefore businesses should map out their anticipated investment expenditure by year in order to identify the marginal benefit (if any) provided by the Freeport capital allowances regime.

Example: Qualifying plant and machinery expenditure of £5,000,000, comprising £3,500,000 of main pool plant and machinery expenditure and £1,500,000 of special rate pool expenditure, with Annual Investment Allowance of £1,000,000 claimed against special rate pool expenditure where appropriate:

* Potential reforms to capital allowances regime from April 2023 may alter the tax deduction available.

2.       Enhanced Structures and Buildings Allowances (“SBAs”)

Measure: 10% straight-line deduction per annum (expenditure deductible over 10 years) rather than normal 3% straight-line deduction per annum (expenditure deductible over 33.3 years). Applies to expenditure on the construction or renovation of non-residential buildings in a Freeport tax site incurred on or before 30 September 2026.

A key consideration: If the building or structure is partly situated in a Freeport tax site, the expenditure must be apportioned on a just and reasonable basis to determine the enhanced SBA.

Example: Qualifying SBA expenditure of £1,000,000:

3.       Stamp Duty Land Tax (“SDLT”) relief

England and Northern Ireland only – similar provisions proposed in respect of Freeports in Scotland (Land and Buildings Transaction Tax relief) and Wales (Land Transaction Tax relief)

Measure: 100% relief from SDLT for purchases of land or buildings where at least 90% of the chargeable consideration is attributable to land for non-residential purposes in a Freeport tax site. Applies to transactions on or before 30 September 2026. HMRC guidance clarifies that this relief also applies to the purchase of the lease for land or buildings, and on any rental payments for the lease.

A key consideration: Where between 10% and 90% of the chargeable consideration is attributable to land for non-residential purposes situated in a Freeport tax site, the relief is apportioned. No relief is available where less than 10% of chargeable consideration is attributable to such land.

Example: Qualifying consideration of £5,000,000 incurred on non-residential freehold property:

4.       National Insurance Contributions (“NICs”)

Measure: The threshold above which secondary Class 1 (employer) NICs are payable is raised from £9,100 (for 2022/23) to £25,000. The relief applies in respect of employees who are reasonably expected to spend 60% or more of their employed time in a single freeport tax site in which the employer has business premises. Applies for up to three years per employee, in respect of new employees that are hired between 6 April 2022 and 6 April 2026.

A key consideration: This only applies to new employees who were not employed by the employer, or by a person connected with the employer, at any time within the period of two years ending with the day on which the employment begins. Therefore it does not, for example, apply to existing employees who have been relocated to work within the Freeport tax site.

Example: In respect of new employees earning in excess of £25,000, this relief equates to a saving of around £2,200 per year i.e. over £6,500 across the three-year eligibility period.

5.       Business Rates relief

Measure: Full relief from business rates for businesses moving into a Freeport tax site for the first time, and for certain existing businesses where they expand into a new property in a Freeport tax site. Applies for five years from the point at which relief is first given, for businesses occupying a property before 30 September 2026.

A key consideration: Local authorities have discretion to apply additional tests for Freeport business rates relief in order to avoid or not incentivise displacement of business activity from the surrounding area into the Freeport. These tests would need to be carefully examined to establish the availability of the relief.

Example: If a business moved into an office premises in a Freeport tax site with a rateable value of £100,000 the £nil business rates potentially payable in the Freeport tax site compares to £51,200 for an equivalent building outside a Freeport tax site, leading to total potential savings (in this example) of up to £256,000 across the five-year period of this relief.

6.       Customs and VAT

Measure: Businesses operating in Freeport customs sites can be authorised to use simplified customs arrangements, including reduced documentation, delayed payment of tariffs, and customs duty inversion. For VAT purposes, businesses can zero-rate certain supplies of goods that are declared to the Freeport customs special procedure and that are sold between authorised Freeport businesses within a customs site. Businesses can also zero-rate certain supplies of services performed by authorised persons in relation to goods that are declared to the Freeport customs special procedure.

A key consideration: Many of the customs and VAT incentives are already available via other mechanisms such as customs warehouses, inward processing, and Customs Freight Simplified Procedures. Under the new UK Global Tariff there are very few intermediate inputs with high tariffs for which duty inversion would bring significant benefits. Business will also need to consider associated duty rates and Freeport-related clauses under Free Trade Agreements (FTAs) to determine the optimal mechanism to apply.

7.       Other incentives

Measure: There will be a streamlining of planning processes and the Department for Business and Trade will work with Freeport operators to establish a trade and investment support approach.

A key consideration: The trade and investment support could lead to economies of scale and efficiencies for businesses. For example, clustering of businesses within specific industries could create a vibrant market for businesses and services across the associated supply chain and encourage further investment.

Annual Programme Report

The first Annual Update Report from the Freeports monitoring and evaluation programme was published by the Department for Levelling Up, Housing and Communities on 16 December 2022. This includes assessment of the early impacts of Freeports in relation to contributing to global trade and investment, delivering on innovation and net zero objectives, and promoting regeneration and ‘levelling up’. A further exercise under the Freeport monitoring and evaluation programme will be undertaken in early 2023 to re-assess the Freeports’ original estimates of direct and indirect job creation.

Significance of Freeports and link into broader government policy

The Freeports programme has a clear link to ‘levelling up’ and the concept of building clusters of investment and innovation outside the South East, with Freeports already established from Teesside to Plymouth. A key mechanism to further these policy goals, as well as potentially link in with other government aims such as encouraging investment in decarbonisation or net zero technologies, is the Investment Zones programme.

At the ‘Growth Plan 2022’ mini-Budget on 23 September 2022, the government announced that it was in discussions with 38 local authorities to introduce Investment Zones across the UK, with the stated aim of driving growth and unlocking housing. Investment Zone sites would benefit from tax incentives, planning liberalisation, and wider support for the local economy.

At the Autumn Statement on 17 November 2022, it was announced that the government would “refocus” the Investment Zones programme, catalysing a “limited number” of high potential clusters. Ahead of the 15 March 2023 Spring Budget, Jeremy Hunt announced that new investment zones “will all be centred on a university, because we want them to become clusters for high-growth industries”. This links into the recently-published ‘UK Science and Technology Framework’, in which the new Department for Science, Innovation & Technology stresses the importance of the UK’s universities for innovation in the UK.

Further details, including potential sites for such zones and the associated tax reliefs, are expected to be unveiled at the Spring Budget and aligned with the Chancellors’ “Four Es” of Enterprise, Education, Employment, and Everywhere to leverage the existing strengths that the UK has in the further education and research sectors.

The government previously suggested that Freeports and Investment Zones will complement each other, and the geographic siting of Investment Zones may be designed to avoid the displacement of investment that would have otherwise gone to Freeports. A key challenge for the design and implementation of Investment Zones is whether their enhanced tax relief will redirect economic activity away from Freeports, reducing the ability for Freeports to fulfil the policy objectives of becoming hotbeds of trade and investment. This will be a particular risk in relation to businesses who do not derive much value from the customs and VAT relief which it was announced would be available in Freeports but not Investment Zones.

The Freeports and Investment Zones programmes should both be understood in the wider context of measures to support UK investment and innovation. In particular, at the Autumn Statement 2022 the government announced reforms to the rates of R&D tax relief available to improve the competitiveness of the large company R&D tax relief regime. A consultation into the design of a single, simplified R&D tax relief regime for all claimants was also held recently, ahead of planned implementation from 1 April 2024. Furthermore, announcements are hotly anticipated at the Spring Budget 2023 in relation to what (if anything) will replace the capital allowances super-deduction regime after its cessation from 1 April 2023 to incentivise business capital investment. Overall, UK investment and innovation incentives are an increasingly complex picture, with a range of interacting tax incentives available for different types, and locations, of investment, along with separate grant and subsidy regimes.

Concluding thoughts

Businesses whose investment plans align with the qualifying criteria for Freeports tax relief could access a number of valuable reliefs that offer a significant quantum of upfront savings (SDLT relief and capital allowances FYAs) in addition to ongoing savings (NICs, business rates, and customs/VAT relief).

However, given the tax incentives only apply to operations within a specified Freeport tax (or customs) site, the availability and location of suitable land or premises could be a critical factor which limits access to the relief.

The implementation of the super-deduction, which is in force until 31 March 2023 and which offers preferential capital allowances deductions for certain capital expenditure, may also have contributed to what appears to be a slow take-up of Freeports, with limited activity ‘on the ground’ despite sites now being fully operational.

The establishment of Freeport ecologies consisting of businesses in similar industries could lead to thriving hotbeds of trade and activity. However, there is a risk that critical masses of business do not develop in Freeports or take some time to do so; if so, the April/September 2026 cut-off dates for the tax reliefs may further limit access to the reliefs. In particular, capital expenditure-intensive businesses may be keen to wait until the outcome of the government’s review of the capital allowances regime and announcement of any new reliefs after the super-deduction regime is due to cease on 31 March 2023 to understand how best to optimise tax relief on their investment before committing to a Freeport tax site investment. The policy design and tax relief mechanisms of the Investment Zones programme are likely to be key considerations for businesses when planning investments and could impact the comparative attractiveness of Freeports.

What should I be doing now?

Further announcements in relation to the Investment Zones programme, potentially including sites and confirmation of the associated tax relief, are expected at the Spring Budget on 15 March 2023. Legislation will be required to give effect to the planned tax incentives.

Businesses should closely monitor the ongoing implementation of Freeports and the development of Investment Zones, including the announcement of proposed sites, so that they can be considered as a potential option when planning investments. The actual benefit of Freeports and Investment Zones will depend on the investment and profit profile of the business (for example, whether accelerated capital allowances would provide an immediate cash tax saving or not) and should be balanced against non-tax factors, such as the need for specific labour market skills.

For help in understanding more about the Freeport and Investment Zone regimes, or in assessing how they could be of benefit to your business, please contact our specialists using the details below.

You can also track the ever-evolving UK tax policy landscape by accessing our UK Tax Policy Map.