What could the impact be of freeports on UK businesses?

A government consultation on the creation of ten new freeports to keep industry moving after Brexit has just closed, with results announced soon.

International Trade Secretary Liz Truss said last year that freeports would create “thousands of jobs”, adding:

“Freedoms transformed London’s Docklands in the 1980s, and free ports will do the same for towns and cities across the UK”.

But freeports aren’t actually new

Freeports exist elsewhere in the world, such as on the Isle of Man, Luxemburg, Singapore and Dubai, and these plans draw upon their principles. The idea is that they will increase economic activity across the UK’s most disadvantaged areas, and redistribute prosperity further away from Westminster. Of course, with the Brexit transition deadline looming, time is of the essence.

The fact is that the EU is our largest and closest trading partner. According to a recent House of Commons briefing paper, in 2019 UK exports to the EU made up 43% of all UK exports, totalling £300 billion. UK imports from the EU stood at 51% of all UK imports, totalling £372 billion.

Here we look at what the freeport proposals are all about, and how UK companies may be affected.

What is a freeport?

Freeports are typically located around airports and seaports. They are secure customs zones that operate differently to the rest of the UK in that they have their own unique business and trade laws. This means that goods can be exported, imported, manufactured and warehoused without usual customs duties having to be paid.

How will freeports affect businesses?

Freeports have been touted by the government as highly beneficial to UK companies, particularly those that need to import or export. However, this largely depends on the business itself, with plenty of both positives and negatives.

Hiring new staff may be cheaper

Companies looking to set up or relocate to a freeport will likely be able to enjoy reduced Employer National Insurance contributions, according to the proposals. Whilst this is certainly attractive, much larger organisations setting up in freeports will require a substantial pool of staff to start off. But with the whole point being that freeports will exist in more deprived or disadvantaged areas, local specialist expertise may not be readily available. The government therefore hopes that businesses will be able to work with local colleges and universities in training people up, but in reality they’re likely going to need to look further afield.

Employee rights will need to be considered

For companies that need to move employees to a new freeport site, another challenge will be in legally enforcing staff relocation. For example, if an employee insists they don’t want to relocate – and there’s nothing in their contract that stipulates they must – then things could get difficult. Therefore, more flexible contracts will need to be drawn up that means staff must relocate if they’re asked to. Being reasonable will also come into play here, to include considering whether an employee has been given enough notice to relocate, whether they must pay their own moving costs and if they have family or caring duties.

Then there’s the hiring of EU staff for UK roles

The government’s latest rules on immigration post-Brexit say that EU migrants must have secured a skilled job earning at least £25,600 in order to work in the UK. They must also achieve a minimum of 70 points under a new Australian-inspired points system. This is likely to exacerbate the problem of not having enough employees to move the company into a freeport zone, as they won’t be able to rely on EU migration to fill lower paid, unskilled jobs; EU migrants simply won’t be able to get a visa.

Businesses need to be adaptable

Whatever the new freeports system looks like on day 1, it’s unlikely to look the same years later. How it will weather political and economic storms over time is anyone’s guess, so businesses based in these special trading areas must have good contingency planning in place.

How can accountants best prepare for the launch of freeports?

The situation around freeports will continue to change, so it’s crucial that accountants keep abreast with developments particularly around tax arrangements. Information is regularly updated on the website.

What are the tax arrangements likely to be?

It’s been touted that the tax arrangements for freeports will be very similar to those of existing enterprise zones. These currently give rise to a couple of key tax incentives. 

Firstly there’s the business rates discount on offer, which is worth up to £55,000 per year for five years for all new businesses that set up or relocate there. Secondly, for businesses located in certain areas of enterprise zone, enhanced capital allowances can be claimed by any companies investing in plant and machinery.

Alongside these incentives, accountants should also be aware of the other benefits the proposals outline. These include R&D Tax Credits, changes to stamp duty land tax, and reduced VAT and excise duties.

Organised crime

There has been some resistance to freeports from the European Commission, citing that – if not probably managed – the UK will be open to increased tax evasion and smuggling. This is because the zones offer a less controlled area where high value goods can be bought, stored and moved on illegally. Whether or not these concerns have legs is obviously yet to be seen, but if freeports go ahead accountants will need to be extra vigilant going forward.

To conclude

Boris Johnson has made it clear that in a post-Brexit world something closely resembling the free trade we have with the EU now must be replicated. Negotiations are still underway, but freeports are one way in which the government is set to pressure the EU, by opening up trading pathways between the UK and the rest of the world. What this all eventually means for businesses, and the accountants that support them, remains to be seen.

By Barrie Dowsett, CEO, Myriad Associates

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