Freeports: an Overview of the Key Issues

United Kingdom

Introduction

The Government’s Freeports Consultation (the “Consultation”) is due to close in just under a  month’s time, on 13 July 2020. The Consultation seeks views on the Government’s proposal to establish 10 ‘Freeports’ across the UK. It was originally due to close on 20 April 2020 but the deadline for responses was extended due to COVID-19.

Here, we consider the Government’s proposal and highlight some of the questions faced by the numerous sectors and industries that could benefit from a Freeports policy.

What is a Freeport?

A Freeport is a secure customs zone, located at a port (whether sea, air, or rail), which benefits from different (typically relaxed or reduced) customs rules, tax duties and administrative burdens, despite being located within a country’s land border. The UK currently does not have any Freeports in place, although it did have a small number up until 2012.

Reintroduction of Freeports in the UK was high on Boris Johnson’s agenda during the 2019 premiership campaign. As Chancellor, Rishi Sunak is heavily involved in the Consultation, but the reintroduction of Freeports is an idea that he has strongly supported since long before he was in his current role, having authored a policy paper entitled ‘The Freeports Opportunity’ in 2016. The proposal is deeply linked with Brexit because, although the EU does not prohibit Freeports in Member States (there are roughly 80 Freeports across the EU), the EU legal framework means that a Freeport within the customs union will be restricted and is not likely to be particularly beneficial.

The Consultation

The Consultation engages a number of different sectors and specialisms: planning, infrastructure and connectivity, logistics, production and manufacturing, trade, renewable energy, shipping, aviation, environmental regulation and tax – to name a few. The overarching objective is to boost trade, jobs, regeneration, innovation and investment across the UK.

The Consultation proposes the establishment of up to 10 Freeports across the UK. While certain aspects of the Consultation concern devolved policy areas, the Government’s stated intention is to work in partnership with the devolved administrations to enable the introduction of Freeports across all of the UK.

The proposal is flexible on what a Freeport could look like. For example:

  • no mode of port is excluded: rail ports, airports, and sea ports could all be Freeports;
  • it is generally envisaged that the new Freeports will be established from existing ports;
  • two or more ports, whether the same or different types, could combine as a single Freeport;
  • a Freeport could extend to cover a much larger area than the port itself, encompassing nearby businesses and industrial sites; and
  • a Freeport site does not have to be located directly adjacent to a port, and businesses would be permitted to move goods from a Freeport port to a separate Freeport site with the goods remaining under ‘duty suspense’.

Freeport status would come with a variety of benefits, including reduced tariffs, simplified customs procedures, tax incentives, and reduced or flexible regulation. Some of these benefits are discussed below.

The Consultation does not propose any likely locations. Allocation of Freeports will be carried out through a competitive bidding process, the exact nature of which is being consulted upon.

The Government’s original aim was to have selected the Freeports by the end of 2020, with a view to their being operational by 2021. This timeframe now looks likely to be somewhat delayed, but a revised timeline has not yet been communicated.

Key Issues

Planning, Infrastructure and Logistics

The Consultation proposes streamlined, flexible planning procedures at Freeports. The ultimate aim is to remove or significantly reduce the need for planning applications. The proposals do not sit comfortably within the existing legal and policy framework, and changes will be required to maximise the benefits of Freeports.

The Consultation identifies a number of specific planning matters for consultation, including zonal planning, the use of local development orders and the use of permitted development rights to relax planning controls and encourage development at Freeports. These proposals present challenges and need to be carefully considered to ensure that they work alongside the existing planning regime at a local and national level, and further changes may be required to marine licensing to simplify any consents in the marine environment. We will comment in detail on these issues in a future LawNow.

A key element of a successful Freeports policy will be the role of the National Infrastructure Strategy and a joined-up, connected approach to key infrastructure and logistics. For example, a joined up national strategy could allow Freeports to support the development of industrial clusters as part of a move to a hydrogen gas network, or the delivery of future offshore wind capacity. Further, the introduction of multi-modal freeports, supported by a coherent National Infrastructure Strategy, could play a key role in developing a streamlined, decarbonised logistics sector.

Decarbonisation

The Consultation does not emphasise the huge opportunities for decarbonisation that it presents. It is important that these benefits are fully explored, and that Freeports policy and positioning is aligned, ideally through the National Infrastructure Strategy, with other priority infrastructure (such as renewable energy and hydrogen) designed to achieve Net Zero as well as with the Government’s Industrial Strategy.

  • Facilitating delivery of renewable energy projects: the suspension of duties on goods imported to Freeports and the establishment of industrial ‘clusters’ at Freeport sites means that tax could be paid on a final, assembled product upon its entry to the UK market, rather than on each individual component upon importation. This could have major implications for the delivery of cheaper renewable energy projects, such as offshore windfarms, particularly if coupled with strong supporting infrastructure. It would also incentivise companies in the renewable energy sector (and others) to locate some of the supply chain in the UK, if not already. These benefits are not exclusive to offshore windfarms and could also be relied upon by other industries which are driving towards Net Zero such as carbon capture usage and storage and hydrogen.
  • Innovation and green tech: the Consultation proposes flexible regulation at Freeports and encourages the development of industrial ‘clusters’ at Freeport sites. Decreased or flexible regulation would allow Freeports to function as a ‘regulatory sandbox’, providing space for innovation and experimentation. In the face of the climate emergency, the speedy development and deployment of green technology is vital. It is important that these Freeport clusters are used to their maximum capacity and are integrated with other priority infrastructure which is supporting progress towards Net Zero.
  • Decarbonisation of ports: the push to decarbonise ports themselves would be aided by the streamlined planning processes at Freeports as it would allow for the quicker development of ‘green port’ infrastructure such as EV charging points, hydrogen and ammonia fuelling, shoreside power etc. Again, these potential benefits should be investigated in more detail and fleshed out in the final Freeports policy.

Environment and Health and Safety

More than once, the Consultation confirms that environmental and health and safety standards will not be lowered, despite the many references to reduced regulation. How this balance will be achieved remains to be seen, and the detail on the regulatory framework of Freeports must still be ironed out.

Tax

A key component of any Freeport is an attractive set of effective tax and customs rules. In addition to streamlined customs procedures, the Consultation is proposing to introduce certain tax incentives. A couple of key points to note are:

  • Proposed suspension of duties: no tariffs, import VAT or excise would be payable on imported goods into a Freeport from overseas until they leave the Freeport and enter the UK’s domestic market. As discussed above, the combination of this tax incentive with the development of industrial ‘clusters’ with manufacturing or assembly capabilities at Freeport sites could present some significant cost savings, as the tax on the final product may be less than that on the individual components. It could also incentivise an increase in UK-based assembly and manufacturing, thereby providing jobs and benefitting local communities.
  • Tax incentives: the Government is looking at, amongst other policies, the impact of tax incentives from Enterprise Zones and assessing whether something similar could be implemented in respect of Freeports. No guidance has been provided to date on the likely tax incentives but the Government has suggested that they could involve a reduction / attractive rates in relation to excise duty and VAT on goods within a Freeport, business rates, SDLT, R&D tax credits, employer NICs, and enhanced capital allowances.

Security

Security is the major concern of many Freeports critics, who see a link between Freeports and money laundering, tax evasion and trafficking. The Consultation provides little insight into the Government’s intended method of tackling these risks, and it is seeking views on the question. It is important that this aspect of the policy is agreed before pushing ahead.

Comment

Opinion on Freeports is, as usual, divided. Critics emphasise the risks of illicit activity and argue that Freeports will simply relocate business from other areas of the UK as opposed to creating real growth. Proponents argue that Freeports can be used to create trade and innovation hubs, promote regeneration and job creation, and provide an opportunity for ‘levelling up’ different regions of the country.

In our view, the success or failure of UK Freeports will largely turn on the detail of the proposals and the extent to which they are integrated with existing and emerging policy. The Consultation is published by the Department of International Trade whereas many of the policies that it will impact are led by departments such as BEIS and the DfT. A coordinated approach to the final policy will therefore be key to the success of this initiative. The Consultation engages a wide range of different sectors and specialisms, and presents a huge number of questions – this article has highlighted only a few. Watch this space for continued insight and analysis as the Consultation progresses.