Freeports Tax Incentives
Updated: Feb 3, 2021
Last month saw the UK Government open up a bidding process in England to establish at least seven new Freeports. The first are expected in 2021, as part of at least 10 across the whole of the UK.
At the centre of the new Freeports policy is an ambitious new customs model. A firm can import goods into a Freeport without paying tariffs, process them into final goods and then either pay a tariff on goods sold into the domestic market, or export the final goods without paying UK tariffs.
Areas given Freeport status are expected to benefit from a wide package of tax reliefs, including on purchasing land, constructing or renovating buildings, investing in new plant and machinery assets and on Employer National Insurance Contributions.
The full bidding prospectus was published on Monday 16 November and a summary of the proposed tax reliefs are below.
Stamp Duty Land Tax (SDLT) Relief
The government intends to offer SDLT relief on land purchases within Freeport tax sites in England where that property is to be used for qualifying commercial activity. It is intended that this relief will apply from 1 April 2021 until 31 March 2026. Clawback of this relief is intended to apply in cases where land is not used for a qualifying purpose within a control period, usually three years or earlier if the land is sold.
All purchasers of qualifying property and land would be able to claim this relief through the SDLT return.
Enhanced Structures and Buildings Allowance (SBA)
The government intends to offer an Enhanced SBA rate, providing enhanced tax relief for firms constructing or renovating structures and buildings for non-residential use within Freeport tax sites. This accelerated relief is intended to allow firms to reduce their taxable profits by 10% of the cost of investment every year for ten years, compared with the standard 3% p.a. over 33 and a third years available nationwide.
This relief would be claimable where qualifying expenditure is incurred, all associated construction contracts are entered into and the asset in question is brought into qualifying use between 1 April 2021 and 30 September 2026. Qualifying firms will claim capital allowances as part of their income or corporation tax return.
As is standard under the existing SBA, claimants will be required to retain an allowance statement to demonstrate eligibility for claims throughout the 10-year period over which relief can be claimed.
The standard SBA capital gains clawback and anti-avoidance provisions will be maintained under the enhanced SBA in Freeports.
Enhanced Capital Allowances (ECA)
The new ECA the government intends to offer in Freeport tax sites will provide enhanced tax relief for companies investing in qualifying new plant and machinery assets. This accelerated relief is intended to allow firms to reduce their taxable profits by the full cost of the qualifying investment in the same tax period the cost was incurred.
Firms investing in the Freeport tax site would be eligible to benefit from the relief where the qualifying investments are incurred on or after 1 October 2021 until 30 September 2026. Assets eligible for relief must be for use primarily within defined Freeport tax areas.
Firms will access the measure by claiming capital allowances as part of their corporation tax
As is standard for capital allowances, the Freeports ECA will feature a balancing charge in some situations where a purchased asset for which the ECA has been claimed is then later sold (disposed of). The standard disposal rules for capital allowances for plant and machinery will apply including, where appropriate, balancing charges.
Employer National Insurance Contributions (NICs) Rate Relief
The government intends to enable employers operating in a Freeport tax site to pay 0% employer NICs on the salaries of any new employee working in the Freeport tax site. This 0% rate would be applicable for up to three years per employee on earnings up to a £25,000 per annum threshold.
An employee will be deemed to be working in the Freeport tax site if they spend 60% or more of their working hours in that tax site.
The relief is intended to be available for up to 9 years from April 2022. Partway through, the
government intends to review this relief and decide whether it should be continued up to its end 24 date in 2031. The relief would end no earlier than April 2026 and would therefore be available for a minimum of four years. The government will provide further detail on timings in due course.
The government will ensure it has the power to prevent access to the relief for those employers found to be abusing this relief by manipulating their employment practices, for example dismissing staff specifically to benefit from it.
To claim this relief employers will have to be registered with the Freeport Governance Body and operating in the Freeport tax site. Employers will be able to claim the relief through the existing Real Time Information returns, and the government will work with payroll software providers to facilitate this. Employers will be required to notify HMRC when an employee is no longer eligible due either to the three year per-employee eligibility period coming to an end, or to the employee or employer ceasing to meet the eligibility criteria.
Business Rates Relief
The government intends to offer up to 100% relief from business rates on certain business
premises within Freeport tax sites. This relief is intended to be available to new and certain existing businesses in Freeport tax sites in England from 1 October 2021 and would apply for 5 years from the point at which the beneficiary first receives relief. The point at which a business first receives relief must be by 30 September 2026. The cost of the relief will be funded by central government.
It is intended that newly formed businesses and businesses relocating to a Freeport will be eligible for the relief. Partial relief would also be available to existing businesses in Freeports that expand into new or additional property, expand their existing property, or expand into an unused part of an existing property following redevelopment, providing the increase in rates bills attributable to these factors is reasonably ascertainable by the local authority. New businesses or new growth will be assessed against the position on 1 October 2021. Where the Freeport tax site is located within an existing Enterprise Zone with business rates relief, businesses must choose between the Enterprise Zone offer or the Freeport offer.
Eligible firms will be able to apply to the relevant local authority to access this relief. Subject to guidance from MHCLG, local authorities will be able to finalise the details of the schemes in their Freeports, including any local displacement tests and the design of an application process, as they see fit.
Local Retention of Business Rates
It is intended that the council or councils in which the Freeport tax sites are located will retain the business rates growth for that area above an agreed baseline, following the example of Enterprise Zones.
This will be guaranteed for 25 years, giving councils the certainty they need to borrow to invest in regeneration and infrastructure that will support further growth.
Retained receipts should be used to cover borrowing costs (where relevant); re-invest in the
Freeport tax site to generate further growth; or offset expected effects of displacement of local economic activity from deprived areas.
Bidders will need to submit bids by Friday 5 February 2021, and bids will be assessed by a Ministry of Housing, Communities and Local Government (MHCLG) chaired assessment panel in March 2021, with decisions made in Spring 2021.
The Government is working with the devolved administrations to develop similar proposals that establish at least one Freeport in Scotland, Wales and Northern Ireland, in addition to those allocated in England via this process.