David Mundy and Tom McNamara of BDB Pitmans look at the U.K. government’s recovery initiative to establish Freeports post-Brexit and Covid-19, and discuss the detail of the recently published Bidding Prospectus.

“Boosting our economy, levelling up our country and creating hotbeds for innovation” are the far from modest ambitions of the U.K. government in publishing its Bidding Prospectus for Freeports.

The government launched the bidding process on November 16, 2020 for the allocation of Freeports in a handful of locations across England. The government’s news release can be found here and the Bidding Prospectus here.

Conceived in the context of a post-Brexit Britain, the government has made significant play of the importance of this initiative, “as we look to our future as an independent trading nation, out of the EU and into the world.”

Now, however, Freeports take their place in the “Build Back Better” locker of government recovery initiatives, post Covid-19.

Aimed at ports, local businesses, multinational investors and public agencies, the aim of the Prospectus is “to provide clarity you need to reach out across your networks and outline together, how you can best meet our objectives.” It is a well-known pet project of the Chancellor Rishi Sunak—one he has championed since being elected a member of parliament in 2015. Politically, therefore, it has support at the highest levels. This is a policy initiative to be taken seriously.

The Prospectus applies to Freeport applications in England only: separate processes will be run in each of the nations of the U.K. and will be announced separately. This article outlines the main points that can be taken from the Prospectus, including the tax incentivization which is at the heart of the initiative.

Some Key Questions

What are Freeports?

A Freeport is a special type of port where normal tax, customs and other regulatory rules do not apply. For example, imported goods can enter a Freeport with simplified customs documentation and without paying tariffs. Freeports include sea, air and rail ports.

The full array of economic levers and regulatory interventions that may accompany Freeport status are set out in the Prospectus. They are:

  • customs benefits;
  • tax reliefs;
  • simpler, more streamlined planning rules;
  • access to a share of the 175-million-pound ($236 million) seed funding;
  • innovation funding; and
  • wider government funding, including for example the Green Energy Fund and Ports Infrastructure Fund.

What is Their Purpose?

As briefly touched upon above, the aim of Freeports is to deliver the U.K. government’s core objectives of:

  • establishing Freeports as national hubs for global trade and investment across the U.K;
  • promoting regeneration and job creation; and
  • creating a hotbed of innovation.

The second point above is termed “the lead objective.” The Prospectus confirms that “Bids in deprived or vulnerable areas which demonstrate an ability to deliver investment and innovative-rich Freeports are more likely to be successful in their application given the government’s lead objective.”

Who Can Apply For Freeport Status?

Air, sea and rail ports are all eligible to apply and bids from multiple ports (e.g. a seaport and a rail port) to form a single Freeport are encouraged. Bids are being invited from “bidding coalitions,” which means ports in coalition with local and international businesses, academic institutions, local authorities, mayoral combined authorities and local enterprise partnerships. Cross-border bids can also be submitted—a Freeport can be established in sites located in more than one U.K. nation.

Are There Geographic Parameters?

Freeports must be contained within an “Outer Boundary,” which is set at 45km. As a general rule, this means that the furthest permitted distance between any two sites (e.g. a customs site and a tax site) within the same Freeport is 45km and that the largest area that a Freeport Outer Boundary can cover is a circle of diameter 45km.

A word of caution: careful thought needs to be given to the size, shape and location of the Outer Boundary: “Bids judged to be designed simply to maximise the area contained within the Outer Boundary without clear economic rationale will fail the bidding process at the pass/fail stage.”

Within the Outer Boundary, there must be:

  • at least one port (air, sea or rail); and
  • at least one customs site, to which the customs measures/benefits would apply.

Within the Outer Boundary, a single tax site no greater than 600 hectares in area is permitted. The tax reliefs/exemptions would apply within that area. However, up to three individual sites of between 20–200 hectares each may be permitted, where a demonstrable economic case is made out. The 20–200 hectare guideline can be exceeded at a single site, but the overall area of the tax sites within the Freeport must in no case exceed 600 hectares overall; those that do will automatically fail the bidding process.

Given the extent of potential tax exemptions available, there are likely to be significant advantages for businesses to be located within the tax site and this will no doubt give rise to substantial discussion and negotiation.

What Are The Tax Incentives?

Bidders are required to set out on a map the area where they propose the tax measures should apply. A governance body will be required to maintain a record of all the businesses in operation or applying to operate within the site. A brief summary of some of the reliefs/exemptions is provided below.

  • Stamp Duty Land Tax (SDLT) relief will be offered on land purchases where property is earmarked for qualifying commercial activity. The relief will be available from April 1, 2021 to March 31, 2026 but with clawback provisions where the land is not used for such purposes in a control period (likely to be three years). Different rules will apply in Scotland and Wales.
  • Enhanced Structures and Building Allowance (SBA) is to be available for firms building or renovating structures for nonresidential use. The relief (which will allow firms to reduce taxable profits by 10% of their investment costs every year for 10 years) will be claimable where qualifying expenditure is incurred or assets brought into qualifying use between April 1, 2021 and September 30, 2026.
  • Enhanced Capital Allowances (ECA) will take the form of accelerated relief intended to allow firms to reduce taxable profits by the cost of the qualifying investments in the same tax period the cost is incurred. Relief will be available where the investment is incurred on or after October 1, 2021 until September 30, 2026. There will be provision for a balancing charge on disposal of assets on which the relief has been claimed, alongside the standard disposal rules for capital allowances for plant and machinery including a balancing charge.
  • On Employer National Insurance Contributions (NICs) the government says it will allow employers operating in a Freeport tax site to pay 0% employer NICs for any new employees working in the site (in short those who spend 60% of their working time on that site) for up to three years per employee on earnings up to a 25,000-pound threshold per year. Subject to review, the relief would be available for up to nine years from April 2022.
  • Business Rates Relief of 100% is intended to be available to new and certain existing businesses from October 1, 2021 and apply for five years. Partial relief will be available for existing businesses on the site that expand into new or additional properties. Where the site is located within an existing Enterprise Zone with business rates relief, recipients would need to choose between the offers available.

The tax site rules of the Prospectus require careful consideration. There is, for example, a preference for tax sites to be located within areas that are below national average gross domestic product and above average national unemployment currently or over the last five years.

Applying For Freeport Status

All applications for Freeport status must be submitted to the Ministry of Housing, Communities and Local Government, via the dedicated online portal. Applications must be submitted by 12.00 noon on February 5, 2021.

The bidding form contains two broad sets of questions: essential bid information and detailed bid information.

Essential Bid Information

The essential information operates on a pass/fail basis. If the response to any of these questions is incomplete/incorrect, the bid fails. If a bid passes this stage, the detailed bid information is marked on a low, medium and high basis and weighted according to the breakdown set out in the Prospectus.

The essential information required includes a map of the Outer Boundary, the customs and tax sites and a clear rationale for choosing that boundary and those sites, evidence of local authority support, and—a potentially difficult question—how the location of any tax site mitigates against displacement of economic activity from deprived areas.

Detailed Bid Information

The detailed information required must demonstrate compliance with the following criteria:

  • ability to deliver against government’s objectives;
  • deliverability of proposal at pace—this is the largest section and is likely to involve a lot of work. Among other things, details of costs and funding required to deliver the proposal must be provided, along with an implementation plan (describing how, when and by whom specific milestones or targets required to deliver the coalition’s Freeport strategy must be achieved), proposed governance arrangements, details of how the Freeport proposal will support delivery of the U.K.’s net zero ambitions, monitoring and evaluation plans; and
  • a high level of private sector involvement—this requires, for example, bidders to confirm the primary type of business that is part of the bid and/or that the bidder aims to attract, along with the specific trade and investment support measures that would benefit the proposal.

It is proposed that the favored bids will be announced in spring 2021, following the conclusion of the government’s bidding process. That seems a challenging agenda. Successful bidders will then be granted seed funding to support governance set-up costs and will be asked to develop detailed business cases for their spending plans through the summer.

The government has committed to at least 10 (and one in each of the four nations of the U.K.) but the Prospectus makes clear that the government expects there to be a single Freeport per Local Enterprise Partnership (LEP) area and there are currently 39 LEPs, so the numbers are not entirely clear. The overall theme of the Prospectus is that, if bids are good enough, the government will not hold back in awarding Freeport status.

Planning Points

At 50 pages, this is a detailed and, in parts, complex Prospectus. The early February deadline for submissions means that bidding coalitions need to be forming now, if they haven’t already, and beginning to work up their detailed proposals before Christmas.

This may be a challenge for some, given the approaching Brexit transition deadline and ongoing Coronavirus pandemic, so the process is likely to favor those who are able to pool resources into broad, well-organized coalitions at an early stage in the process.

The Prospectus is of course obligatory reading for any prospective coalition partner. For ports and airports assailed with the demands and uncertainties of new Brexit border requirements and the challenges of dealing with imports and exports in a world afflicted by the pandemic, this Prospectus is a formidable addition to already full inboxes.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

David Mundy is a Partner and Tom McNamara is a Senior Associate with BDB Pitmans.

The authors may be contacted at: davidmundy@bdbpitmans.com; tommcnamara@bdbpitmans.com