Does UK’s freeports plan offer a post-Brexit trade solution?

The bidding process to become one of the UK’s new freeports is expected to be launched soon, with the successful applicants to be confirmed in the first half of 2021.

This article was originally published on Lloyd's List

The UK government’s proposed plan to establish ‘freeports’ is either an elaborate exercise in window-dressing, a stated desire for the country to rediscover its maritime capabilities, or a real solution to the facilitation of trade and infrastructure post-Brexit.

Between February and July, the UK government established an extended consultation period to review and inform its ‘freeports’ policy.

Plans are being considered to create up to 10 freeports in the UK, which are designated areas (that could be sea ports, airports or rail hubs) combined with special economic zones or ‘enterprise zones’ where the business and trade laws are different from the rest of the country.

They are not necessarily directly linked to the maritime sector specifically, but have been welcomed by major industry stakeholders.

Under the proposals, tax concessions would be granted to goods imported into freeports (i.e. without payment of customs duties), with duty becoming payable only when the goods enter the domestic market.

While being within a country’s geographical borders, freeports are effectively outside a country’s customs borders.

Freeports are designed to encourage businesses that import, process and then re-export, thereby providing a much-needed stimulus for economic activity.

UK freeports would operate under a different regulatory and customs framework than other ports or hubs. They would be national hubs for global trade and investment across the UK, promote regeneration and create high-skilled jobs in ports and surrounding areas (prioritising deprived communities), and hotbeds for innovation.

Other tax incentives are likely to be introduced in order to facilitate trade especially with the economic ramifications of Covid-19 likely to be a feature well past the UK leaving the European Union customs union.

Freeports are not an alien concept to the UK. There were seven in operation at various points from 1984 to 2012 including Liverpool, Southampton, Tilbury and Glasgow Prestwick Airport.

While the re-establishment of freeports in the UK has been linked with Brexit, they are not (presently) prohibited by EU law, and there are over 80 free zones in the EU.

The government has supported maritime trade via its ‘maritime 2050 strategy’ consultation, providing a roadmap of industry and governmental actions required to augment the UK’s position in the maritime professional business sector. The economic reason is clear —the maritime sector facilitates approximately 95% of UK trade. 

The bidding process to become one of the new freeports is expected to be launched soon, with the successful applicants to be confirmed in the Spring 2021.

Associated British Ports has already confirmed in its response to the consultation that it is seeking to secure freeport status to several of its ports in south Wales. 

Concerns with the current proposals 

Lack of details

The government’s policy proposal states that goods would not attract tariffs, import VAT or excise duty until they leave the freeport and enter the domestic market. They also include simplified customs procedures and declarations, which will likely encourage imports. Further, tax incentives might include business rate discounts, stamp duty reductions, tax credits on research and development, larger capital allowances and relaxed requirements for employers to pay national insurance contributions.

These have been welcomed by port owners as clearly any tax incentives are potentially beneficial to their customers. However, the lack of clarity and detail in the proposals make it difficult to understand whether the policy will offer the necessary benefits to stimulate economic activity. The UK Trade Policy Observatory (UKTPO) has cautioned that the wider economic impact can be mixed unless there is a focus on the design, infrastructure and availability of capital and access to skilled labour within the freeport.

The existence of freeports in the UK ended in 2012 as they were no longer deemed necessary, and it is difficult to predict to what extent they are likely to be successful under the current proposals, while there remains uncertainty surrounding the UK’s trade regime (including the tariffs on imports) and UK Global Tariff following Brexit.

It is therefore impossible to calculate what the exact potential benefits of freeports will have on the economy until the issue of tariffs is settled. Commentators have warned that the exact tax incentives on offer to companies using freeports is also likely to be a major area of difficulty for the government in its negotiations regarding its future relationship with the EU.

This is because the EU freeports have to comply with EU state aid rules and competition, in order to ensure there is a level playing field for businesses.

The UK government states that the UK will not be subject to the EU state aid rules, but any significant deviation that would place UK business at a significant competitive advantage over its European counterparts is likely to be contested.

Potential for business to be transferred and not increased overall

Post-Brexit, goods imported into Britain will of course still be subject to tariffs, and goods which enter via the freeport will still be required to pay tariffs once they enter the domestic market, whether that is in the UK or elsewhere. The tariffs will not therefore be eliminated, but paid at a different stage of the process.

While the proposals may streamline certain customs procedures, remove some of the dreaded ‘red tape’ businesses loathe, and potentially allow freeports to become a hotbed for innovation, it is difficult at this stage to ascertain what the actual benefits of paying the tariffs at a later stage may be.

As such, business may just in fact be transferred into the freeports, and not actually increased overall. Indeed, the UKTPO analysis has reported that at a time where UK tariffs are already low, there would be no benefit at all if already established businesses simply relocate to the freeport in order to pay potentially significantly less tax without contributing to greater economic activity and employment. 

Concerns over money laundering and tax evasion

With innovation in processes, any customs and tariff system is open to cyber-crime.

The EU operates 83 freeports across 21 members states. In April 2019 the European parliament demanded the scrapping of EU freeports following its report on tax evasion and money laundering. The report argues that freeports provide operators ‘with a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership can be concealed’.

Under the current proposals, the new UK freeport operators would be responsible for security (each freeport area would be surrounded with perimeter fences) and maintaining records of the goods entering and leaving the site, including whether or not the goods had been processed/manufactured while there (and therefore potentially subject to additional/differing tariffs).

Unfortunately, this derogation of authority simply does not go anywhere near far enough to address the potential issues raised by the European parliament.

Proper consideration ought therefore be given to involving the relevant customs authorities [HM Revenue and Customs] and stakeholders responsible for preventing money laundering including the banks in order to ensure compliance with the UK anti-money laundering regime as set out in the Proceeds of Crime Act 2020 and associated legislation.