Will the UK’s planned freeports deliver a post-Brexit boost?

It’s been nearly a decade since the United Kingdom gave up its freeports — commercial zones around airports or maritime hubs where no tariffs or duties are paid on goods until they leave the freeport limits. Now, it is looking to re-establish at least eight of these customs-free zones, but will they deliver the economic hit the UK is hoping for?

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When it comes to Brexit’s impact on trade, much of the news from a UK perspective is relentlessly negative.

There’s the collapse in exports from the UK to Ireland, ongoing disputes over the future of fisheries, even fears post-Brexit free trade deals could lead to ‘unhealthier British diets’.

But one Brexit dividend pushed by the UK government as an advance for British trade is the reintroduction of freeports — nearly a decade after the last of those operating in the UK closed.

Freeports are commercial zones around airports or seaports where goods can enter tariff free, with no duties or tariffs incurred until such time as goods enter the domestic market.

And if goods come in and go out again without leaving the freeport zone, they can be re-exported without being subject to import taxes, so raw materials or components can be imported more cheaply, manufactured into whole products and then exported.

Re-establishing freeports in the UK has been on the agenda of the Johnson Government for a while, and in March 2021, eight zones in England were confirmed as being the successful bidders for future freeport locations.

These include East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City Region, Plymouth, Solent, Thames and Teesside, chosen after a competitive process with more than 30 locations seeking to gain an advantage.

The areas hope to secure not only freeport status, but a boost in investment, reduction in taxes, higher property values, new jobs, and the relocation of businesses, particularly manufacturing, to areas that can be up to 45km (27 miles) across.

Baker Tilly Cyprus Director of Tax Strategy, Savvas Klitou, says the freeport strategy is designed to reduce the post-Brexit risk of losing manufacturers from the UK, an issue that had previously worried the manufacturer’s organisation MakeUK.

“The UK is trying to keep in the UK some of the businesses and assembly companies, especially car manufacturers, who are importing parts from all over the world and assembling them,” Mr Klitou says.

“A freeport is a good way to create a hub for innovation, especially in technology areas, as there are options for efficiencies.

“The main sectors that would benefit, other than car manufacturing, include anything along the lines of technology where products which have a lot of smaller parts that are made all over the world.

“When these are brought in to a UK freeport, the assembly can be done there and that means tariffs are avoided.  It would mean these companies are able to bring their products into the UK market more easily and efficiently, while at the same time they can also export without having to pay UK tariffs  on the assembly parts which have been imported.”

Freeports, and the umbrella term special economic zones, are not particularly new.

The US Congress reports there are about 5300 around the world, in 147 territories, employing an estimated 90 million people worldwide.

The US calls the areas foreign-trade zones, and estimates there are about 450,000 people employed in the 262 in North America.

Europe has 105, according to the UN Conference on Trade and Development, but emerging countries are where they are most commonly found: more than 2500 in China, 737 in Southeast Asia and nearly 500 in Latin American and Caribbean countries.

Provided England’s new freeports can meet requirements around governance, they should be able to share in £175m of seed capital funding which has been set aside to help the locations prepare for the change, including marketing their new status to businesses that might start or relocate, and implementing the kinds of systems and processes needed to run a customs-free zone.

Jackie Heeds, Infrastructure and Projects Partner at Freeths, says the zones will offer tax incentives to businesses to set up shop within the freeport area, although those incentives are presently set to expire within the next 5  years.

Under the plans, freeports should benefit from expedited planning rules and fewer restrictions on what can be built within the zones, as well as financial benefits and cost reductions for development.

“There are structural and building allowances for expenditure on construction of non-residential structures in the freeport and these are available for buildings brought into use by 30^th of September 2026,” she says.

“You have enhanced capital allowances, which involve investment into new plant and machinery, and there is stamp duty land tax relief on purchase of land and buildings, also available until that date.

“Then we have full business rates relief available for five years, applying to new businesses and existing businesses that expand.”

These incentives sit on top of customs and tariff benefits for businesses operating within the freeport, with duty deferred for goods while onsite, as well as ‘duty inversion’.

“Duty inversion means that a finished product will attract a lower tariff than if you were bringing goods in, and there is also the suspension of import VAT on goods entering the freeports,” Ms Heeds says.

“What they are effectively saying is that businesses in the freeport can have a simplified import procedure.”

So will these measures be enough to see the revival of the areas selected for freeports — some of which have suffered from years of neglect, declining job prospects and reduced opportunity?

Andrew Thurston, Customs Duty Consultant at MHA MacIntyre Hudson, says manufacturers of high-tariff goods such as alcoholic drinks, textile, confectionery and food-processing industries would most benefit from using a freeport, as these good have tariffs of over 8% and can incur excise duty.

But whether new manufacturers in these sectors are prepared to start or relocate to freeports remains to be seen.

“The UK’s plan to create eight freeports is ambitious and there are good intentions behind the policy to encourage manufacturing in the UK,” he says.

“But there is a concern that freeports may not create the level of investment in England that is hoped for by the government.

“Manufacturers may simply move their production to freeports to have the tax benefits. There also remains uncertainty over the controls to be imposed on manufacturers operating within a freeport and whether these will be financially viable, as well whether they will cause potential administrative burdens for both HMRC and ports.”

Ms Heeds says recent research by University of Sussex suggests the tariff inversion benefits may be insufficient, particularly with UK tariffs on intermediate products tending to be typically lower than tariffs on final goods

There are also potential risks for businesses that come with the strict requirements to ensure goods from a freeport don’t enter the broader market — or that the freeports don’t become a haven for stolen or smuggled goods.

“We did have freeports previously in the UK and they weren’t deemed a huge success,” she says.

“There may not be enough of an incentive for a business to relocate. When you look at the horizon for incentives, September 2026, it may not be long enough for businesses to move.

“There is also a big focus in the freeport prospectus about administration and responsibility. This will require additional monitoring, more due diligence, and will lead to additional costs.”

A final challenge for the freeports will be to leverage the benefits and incentives on offer to create value for UK business, not just a low-tax neighbourhood for manufacturers.

Many of the most successful special economic zones around the world combine tax and property incentives with measures to spur the growth of local companies, enhance technological development and encourage entrepreneurship.

They can do this by clustering complementary businesses together and enticing ‘enablers’ to the freeport zone, that can help accelerate commercialisation and innovation, leading to high-value jobs.

“From a business perspective, they are going to be looking at access to transport infrastructure, at access to skilled labour, and access to capital in the zone,” Ms Heeds says.

“When companies are going into a freeport, they are going to be considering these different aspects and weighing them up before they move in.

“One of the issues with these freeport locations is they are often in areas with historic deprivation and you may not be able to get the right skills and resources.

“To really create an economic benefit, a freeport has to have more than bonded warehouses.”

For Mr Klitou, an ongoing issue for the UK’s plan for freeports will be how they will fit in with the trade deals the UK is currently negotiating around the world.

There are concerns that some of the deals ‘rolled over’ post-Brexit with different countries may have carried over old clauses that could prevent businesses located in freeports from accessing reduced tariffs on exports.

“I know that in a few signed deals, there were issues as no specific clause was included regarding freeports, and that could mean that tariffs are still imposed,” he says.

“The biggest challenge for the UK is being able to come to an agreement for a trade deal with the EU that considers the freeports they want to set up and it’s something that has to be included in trade deals.

“The EU is one of the largest trading partners of the UK and it’s something that cannot be avoided. It has to be discussed and agreed and included in a trade deal otherwise there is always going to be uncertainty as regards to the freeport’s eligibility.

“And uncertainty in businesses is never good.”