Will freeports simply benefit industry giants at smaller UK manufacturer expense?

Posted on 7 Jun 2021 by The Manufacturer

Trade experts and industry leaders welcome the return of freeports - but warn that bespoke detail could be needed to maximise benefits for UK manufacturers. Fleur Doidge reports.

Freeports, done wrong, could create a dynamic in which the mightiest or best located stand to gain most – whether the manufacturers seeking favourable taxes and tariffs are UK-based or headquartered abroad.

Tax savings and tariff inversion – where manufacturers might enjoy lower tariffs on imported components coupled with lower export charges for the finished items – by their nature are likelier to benefit larger manufacturers than small ones, warns Phil Tomlinson, Professor of Industrial Strategy at the University of Bath.

“Empirical evidence suggests freeport status tends to encourage firms to relocate – often a few miles down the road – to be inside the boundary. Thus, freeports are sometimes seen as a ‘beggar thy neighbour’ policy, displacing rather than generating investment,” he says.

“Yet, as trade experts at the University of Sussex have shown, the opportunities for UK manufacturers to take advantage of ‘tariff inversion’ is limited, largely because average import tariffs into the UK are already very low,  typically lower than export tariffs on final goods.”

Phil says manufacturers will likely need to choose either duty drawback or free-trade agreement-based preferential tariffs, with those betting on the latter less likely to invest in or relocate to freeports. Also, high-end or advanced manufacturers, demand for whose products may be less about price, may be less affected by export tariffs anyway.

Goods shipped in and out of freeports from elsewhere in the UK may also attract additional paperwork, customs forms and checks, potentially most burdensome for SMEs, Phil notes.

Andrew Thurston, Customs Duty Consultant at MHA MacIntyre Hudson accountants, agrees that benefits predicted for the “well intended, ambitious” freeport plan remain uncertain. However, alcoholic drinks, textile, confectionery and food-processing sectors with tariffs over 8% and potential excise may stand to gain most.

“The customs-related benefits are certainly less than before 1 January 2021 (before Brexit). Manufacturers may simply move production to freeports for the tax benefits. There’s also uncertainty over controls on manufacturers within a freeport and whether these will be financially viable or burdensome for both HMRC and ports,” Andrew warns.

UK Manufacturers World Trade Export Europe Supply Chain - image courtesy of Pixabay.
image courtesy of Pixabay.

Will the devil be in the detail?

Johnathan Dudley, National Head of Manufacturing at Crowe UK tax advisers and accountants, sums it up: manufacturers prepared to relocate or partner within a freeport could benefit, as long as services are competitive and not tied up in red tape. “Just like in enterprise zones, there is a danger that they will create areas of poverty ‘around’ the freeport area, too,” Jonathan adds.  “It’s essentially a postcode lottery for businesses and those not in the area will be at a disadvantage.”

Richard Austin, Head of Manufacturing at business advisory firm BDO, says industry and business clustering, as in freeport zones, can indeed be beneficial. However, a more bespoke approach to manufacturing in particular than is represented in the UK Government freeport plan could be needed. “Businesses need full transparency and long-term industrial strategy that outlives political cycles,” he says, adding that 65% of manufacturers in a BDO survey said they would invest more in the UK if incentivised.

Richard Parkinson, Port Director at Marchwood logistics and port managers Solent Gateway, notes that manufacturers setting up new facilities in a freeport that require significant investment, including heavy industry with sufficient footprint, may enjoy customs relief. “Industries that benefit least include those that want to push items straight through a port – customs benefits are centred on storage over 90 days or assembly/manufacture inside a customs site,” he explains.


Will it be worth moving to a freeport?

Christy Wilson, associate at law firm Katten Muchin Rosenman UK, says freeports are intended to be special economic zones in which doing business becomes easier and cheaper. Wilson says manufacturers in UK freeports may enjoy:

  • Duty deferral for goods on site
  • Duty inversion where tariff on finished goods is lower than on components
  • Duty exemption for goods imported for processing, then re-exported
  • Suspension of import VAT
  • Simpler importing procedures
  • Tax incentives enhanced 10% over 10 years for non-residential buildings (until 2026)
  • First-year capital allowance of 100% for plant and machinery investment (until 2026)
  • Stamp Duty Land Tax (SDLT) exemption on property acquisition (until 2026)
  • Five years of business rates relief for new or relocated businesses
  • 0% Employer’s National Insurance Contributions for up to nine years