Freeports: What are they and what are the Capital Allowances implications?

One of the key events of 2021 for the accountancy sector was the creation of eight new so-called freeports across England. The move, announced in March, could have major implications for tens of thousands of businesses across the country, affecting how they can be run in the most tax-efficient way. It’s essential that anyone advising those businesses is up-to-speed on what this means, so here we take a deeper look at the new phenomenon of freeports, including what they are and where they apply, as well as the capital allowances and other benefits within these areas. We’ll also look at the related issue of Enterprise Zones. What’s the big idea? The UK Government is hoping freeports will bring significant economic uplift to some of the most deprived areas of the country. The intention is that they will incentivise businesses to invest in these areas, which will in turn regenerate them — boosting jobs, trade and general economic activity. It is expected this will then overspill into surrounding areas and ultimately provide a boost to the entire UK. It is projected that the introduction of these freeports will create around 170,000 jobs over the next five to ten years. What Are Freeports? As their name suggests, freeports are usually located around shipping ports or airports, and operate as a secure custom zone. They are established in designated locations that have extra government support in the form of various tax breaks and other financial benefits, increasing their attractiveness to businesses looking to start up, expand or relocate into new areas. Where have they been set up? The UK Government has said freeports will be established at: East Midlands Airport Felixstowe and Harwich Humber region Liverpool City region Plymouth Solent Thames Teeside These initial eight are all in England but there could later be moves to replicate the scheme in Scotland, Wales and possibly Northern Ireland too. How do they work? The freeport areas are restricted to defined plots within these eight regions and can be located in different parts of a wider area. For example, the freeport in the Humber region will include parcels of land across a 30 mile radius, taking in the ports of Hull, Grimsby, Immingham and Goole. In these specified areas, firms will be able to import goods from overseas without paying tariffs, manufacture goods and then either export them or deliver them to the domestic market. If goods are delivered elsewhere within the UK, taxes are then paid. If these goods are exported overseas, they are exempt from tariffs being charged. Capital Allowance Benefits Within Freeports For expenditure incurred on plant and machinery (P&M) up to 30th September 2026, a 100% enhanced capital allowance deduction can be applied as long as the P&M is unused, is not second-hand and is primarily for use within the freeport zone. If, within five years of being brought into use, the P&M starts being used primarily outside the freeport zone, notice must be given to HMRC within three months. This triggers a clawback of the enhanced capital allowances claimed. For expenditure that would normally qualify for Structures and Buildings Allowances, there will be an increase in the capital allowances available to 10% per annum on structures that are brought into use in freeport zones up to 30th September 2026. This is an increase from 3% per annum normally. The company must be subject to UK Corporation Tax to claim the enhanced capital allowances deductions. Are there any other attractions? On top of this — and the fact goods can be imported and exported without tariffs — there are a number of additional benefits for companies operating within freeport zones. These include: Land purchased for qualifying use in any of the freeport zones will be free of SDLT until 30th September 2026. Employers operating in a freeport tax site will pay 0% employer NICs (Class 1) on the salaries of any new employee working there. This 0% rate would be applicable for up to three years per employee on earnings up to £25,000 per annum from April 2022. 100% relief from business rates on certain business premises within freeport tax sites until 30th September 2026. Relief will apply for five years from the point at which each beneficiary first receives relief. Regeneration and infrastructure grants: successful bidders will be able to access a share of £175m of seed capital funding to kickstart the freeports. Are freeports for you? For businesses still dealing with the effects of both Brexit and the ongoing pandemic, getting decisions about the future right has never been more critical. Freeports are now a key part of the UK's economic strategy and businesses of all sizes in all sectors should be looking at whether they should be engaging in the opportunities they potentially offer. Ensuring that they are getting informed advice as part of that decision-making process is imperative because without a detailed insight into the tax and other financial implications of operating in freeports businesses cannot hope to reach the right answers. And therefore it is also imperative that anyone working in accountancy and taxation is fully aware of how they work and the benefits they potentially confer in order to give the right advice. What’s different about Enterprise Zones? Enterprise Zones are similar to freeports in that they are designated locations across England. Their purpose is to provide tax breaks and government support and, as with freeports, they were introduced to help struggling local communities attract business and create jobs. The benefits to businesses of operating within Enterprise Zones were decided on a zone-by-zone basis, rather than sharing a universal list of benefits as the newer freeports do. Consequently, the benefits they confer are more complex. Some of the Enterprise Zones attract 100% enhanced capital allowances on plant and machinery expenditure, for example, whereas other benefits include business rate relief and funding initiatives. Enterprise Zones were first introduced in 2012 and, over the following five years, some 48 were created across England — but they are now being phased out. In the newest zones — established in April 2016 and April 2017 — businesses must be located in the zone before March 2021/2022 to qualify for reliefs. Carmen Morrison is Senior Capital Allowances Analyst at specialist tax consultancy Catax. She can be contacted at Carmen.Morrison@catax.com.