Both freeports and investment zones can benefit from a range of incentives which can include Stamp Duty Land Tax Relief (and its equivalent in the devolved administrations), Business Rates Relief, Lower Employer NI Contributions and Enhanced Capital Allowances. There can also be more generous planning conditions and specifically in freeports, simplified customs procedures.
In this article we examine the rules more closely and focus on the potential Enhanced Capital Allowances available; specifically, the 100% first-year allowances (FYAs) for plant and machinery and 10% enhanced structures and buildings allowances (SBAs). We will also set out and compare the different results for a project within a 'special tax site' compared to the same project outside and reliant on 'full-expensing', 'annual investment allowances' or basic 'writing down allowances'.
As you will see, the benefits can be considerable but there's a catch - the expenditure must be on assets for use and within the tightly controlled 'special tax site' boundaries. Some of the reliefs are targeted at companies with limited 'qualifying activities' and others are not. There are time limits, general exclusions and of course anti-avoidance provisions to prevent abuse.
What difference does special tax site status make?
The main capital allowances benefit in 'special tax site' status results from the enhanced SBAs and the inclusion of both 'main rate' and 'special rate' pool assets in the 100% FYA computation. For a £12 million logistics warehouse HQ this results in a potential £1.3 million tax differential that only starts to align after Year 10. That's a valuable cash flow saving that could make a real difference to any profitable business involved.
Case Study - Logistics Warehouse HQ
In this example, we show the differences between a £12.1 million logistics warehouse HQ with qualifying plant and machinery of £4,848,380 (40%) and £7,081,331 (58%) of SBAs.
The big difference in allowances and potential tax savings (represented with a corporation tax rate of 25%) is achieved by:
The requirement to not split the 'main rate' of £2,566,938 (21%) and 'special rate' of £2,281,441 (19%) in the special tax site for the purposes of different FYAs (100%/50%) associated with 'full-expensing', allocation of the £1m Annual Investment Allowance (AIA) or writing down allowances (18%/6%).
The significant differential between 10% and 3% SBAs enables the £7,081,331 of SBAs to be written off over 10 years compared to 33.333 years.
To enjoy the benefit of any FYAs or SBAs a business will still need to identify the different qualifying items in the same way as any other capital allowances project so expect to work closely with an experienced capital allowances specialist to plan and make the most of the benefits.
Another important feature is that although the FYAs associated with the above Enhanced Capital Allowances follow the same 'general exclusions' as other FYAs like 'full-expensing' there are differences in eligible 'qualifying activities' which companies seeking to take advantage of should consider carefully - planning and modelling will be essential.
Restricted Qualifying Activities
The 100% FYAs for plant and machinery in a special tax site are aimed at 'trading' companies (i.e. businesses that sell goods or services to customers for reward) and certain types of undertakings (e.g. transport) so commercial property landlords are ineligible.
However, the 10% SBAs are not limited in the same way and are not just available to landlords but also companies and individuals which has the potential to open up some interesting opportunities to spread the overall cost of the investment between unconnected* partners in a more commercial and tax efficient way (e.g. Prop Co and Op Co).
Since the level and proportion of plant and machinery (P&M) and SBAs can vary significantly between assets (e.g. a hi-tech factory may have a 60%/39%** ratio of P&M to SBAs whereas a warehouse could have a comparable ratio of 10%/89%**) modelling and careful planning will be essential as will consideration of all the applicable anti-avoidance to prevent abuse.
*there are a number of additional restrictions associated with transactions between connected persons.
**It is very rare for any project to have 100% qualifying expenditure.
Special Tax Sites within Freeports and Investment Zones
It is important to note that not every designated area has uniform rules, for example, within Freeports (which were introduced in 2020 via a bidding process) there will be 'customs sites', 'tax sites' and joint customs and tax sites. Only building projects within a special 'tax site' boundary will qualify for direct tax incentives like enhanced capital allowances and for every site there should be a freeport map to accompany it.
Investment Zones are newer having been announced in the mini-budget of September 2022, put on hold in Autumn 2022 and then revived in the 2023 Spring Budget with the first expected to be operation in the 2024-25 financial year. As the final package of incentives and boundaries are still being negotiated with each local region, not every area has an agreed 'tax site' and further details can be found from the Department for Levelling Up, Housing and Communities on status.
Where are the UK's Freeports?
There are currently 12 Freeport Sites in the UK and links to their websites can be found in the table below. The latest maps can be found here.
England | ||
Scotland | ||
Wales | ||
Where are the UK's Investment Zones?
The government has currently committed to establishing 13 Investment Zones across the UK with website links to the responsible agencies (where available) below. The latest maps* can be found here.
England | ||
East Midlands Combined County Authority (EMCCA)* | Tees Valley Combined Authority (TVCA)* | |
Scotland* | ||
Wales* | ||
*Final details of incentives and tax site boundaries are awaiting publication.
Special Tax Sites Time Limits
The original freeports were meant to last 5 years with an an expiry date of 30 September 2026; however, with the inclusion of investment zones and wording change to reflect 'special tax sites' there is a new 10 year 'sunset' provision which results in the following extensions:
30 September 2031 for special tax sites in respect of English Freeports
30 September 2034 for special tax sites in respect of Scottish Green Freeports and Welsh Freeports
If you would like more details, or have a question on this, or any related matter please do not hesitate to get in touch.