UK FREEPORTS - Will Tax Incentives Fulfil Their Purpose?

The Government has announced its intention to create 10 Freeports across all four countries within the UK; and possibly more if the bids demonstrate a strong justification of such. Following Government Consultations between February and October 2020, the Government has recently issued their Freeports Bidding Prospectus. This invites bids to create UK Freeports (sea/air/rail) and can be from discreet entities or consortia/joint ventures - wishing to promote their location(s) as particular Freeports around the UK. 

The bidding process permits questions and clarifications up until Tuesday 21 December 2020 with submissions by 1200 (noon) on Friday 05 February 2021. Successful bidders are due to be announced by ‘Spring 2021’ – although, as many familiar with Government legislation will know, the Governmental seasons rarely resemble the astronomical or meteorological ones! Winning bids will secure seed finance to build up a more detailed business case - to test and validate their compliance with the Government’s ‘Levelling up’ key policy areas:

• Supporting emerging industrial clusters
• Commercial property led investment
• Integrate transport infrastructure
• Align and upskill local populations to secure growth & investment
• Regenerate the Freeport and surrounding areas with:
  • Employment &
  • Economic activity

It is envisaged that these Freeports will benefit from a wide range of tax reliefs, including:

• Reduced and/or simplified Customs & Excise;
• Reduced Stamp Duty Land Tax (SDLT) between 01 April 2021 and 31 March 2026 (albeit with potential variants in Scotland & Wales, subject to the decisions of the devolved Governments);
• Enhanced Structures & Buildings Allowances (SBAs);
• Enhanced Capital Allowances (a 3rd iteration of ECAs!);
• Reduced Employer National Insurance Contributions;
• Business Rates Relief; and
• Tax Increment Financing (TIF).

The Government is also keen that bidders demonstrate how their specific proposals integrate with other Government policies and funding initiatives; including the £160m Green Energy Fund, the £200m Port Infrastructure Fund and the £900m Getting Building Fund.

Some property investors, agents or tax advisers may well recall the first Enterprise Zones (EZs) introduced by Mrs Thatcher’s Government between 1981 and 1996, that were designed to replace defunct legacy industries such as coal mining, ship building and other ‘heavy industries’ that no longer needed vast sites, nor employed the majority of local inhabitants. These EZs gave a ten year period to facilitate the building of premises within the designated area and then tax relief for up to ten years from first use – with 100% tax relief on the building available. Some argued that the original EZs were a huge success, boosting regeneration and growth across the country from Glasgow to Middlesbrough, Telford, Swansea and London’s Docklands. Others considered them very expensive in terms of cost per job created and that they only ‘shifted’ existing investment and employment from stronger commercial centres to these designated zones - with investors simply fixated on the tax breaks. Most of the current EZs (typically timing out by 31/03/2021) do not provide ‘boosted’ capital allowances – only 8 of the current EZs enable ‘Enhanced’ capital allowances that provide 100% First Year Allowances (FYAs).

The Freeports proposals include the creation of new ECAs – albeit the exact proposals (most likely as 100% FYAs) are not yet identified. We would expect that these will most likely relate to Plant & Machinery expenditure (including Integral Features) but we will have to see the full details next year to be certain. Additionally within the Freeport, the balance of the building/structure construction costs are to have a ‘boosted’ level of SBAs at 10% per annum, on a straight line basis; effectively accelerating the tax relief from being spread across the current 33 1/3 years to a reduced 10 year period.

Whilst we welcome the boosting of these important tax incentives to further support the UK economy, the recurring issue for these tax measures is that they are defined over time-limited periods that do not fully reflect the reality of the UK property & construction sectors. For any fiscal incentive to really drive the decision making process (rather than becoming ‘icing on the cake’) they must be designated for an appropriate period to enable the tax payers to conceptualise, design, obtain planning permission, raise finance and develop out the facilities within the relevant period. The Government would do far better by designating these tax benefits for a ten year period to ensure they contribute and help achieve the wider policy goals – much like the original EZs introduced some 30+ years ago.

If you (or any of your clients or business contacts/associates) are involved (or considering getting involved) in any of the Freeport proposals, either directly or via a group/consortia, then please do contact us to understand how these capital allowances measures could boost the cost effectiveness of any proposed or future development expenditure, achieving the optimal tax savings potentially available.