Mitchell Charlesworth: Freeport tax incentives

Tue, May 25th, 2021

Tax Director Phil Hartley on the Freeport tax incentives offered to businesses.

The government plans to create eight new Freeports in England as a means to boost trade, jobs and investment across the country.

We expect the special taxation and customs rules for the areas will help businesses to trade and manufacture goods more cost effectively, countering the effects of other complications such as Brexit and Covid-19.

What are Freeports?

A Freeport is an economic zone, typically encompassing a freight seaport or airport, where typical VAT and customs rules don’t apply. This makes it cheaper and easier for raw materials or components to be imported to manufacturers, processed into manufactured goods and then exported. They can also have simpler planning rules, helping businesses to quickly build or adapt premises in the area.

The locations of England's eight new freeports were announced by the Chancellor at the Budget in March 2021:

• East Midlands Airport
• Felixstowe and Harwich
• Humber region
• Liverpool City Region
• Plymouth
• Solent
• Thames
• Teesside

The eight Freeports will create some 170,000 jobs in the coming five to ten years, according to the ports’ own calculations.

What areas are included in the Liverpool City Region Freeport?

The Liverpool City Region Freeport will cover 300 hectares of land and is 45km in diameter from Wirral Waters in the west to Port Salford in the east. It also includes sites such as the Port of Liverpool, which is the UK’s biggest western facing port, 3MG in Widnes and Parkside in St Helens.

What are the tax incentives of Freeports?

Within a Freeport, Customs Duty and Import VAT are only charged on goods if and when they are released from the Freeport, or after a set period of time. This enables businesses to process, store and transport goods with greater flexibility, giving them a cash flow benefit and also reducing the tax paid when raw materials may normally have a higher duty rate than the manufactured or processed goods. Freeports can also help businesses to improve processing time due to reduced transportation.

Freeports will also benefit from greater Capital Allowances when purchasing Plant and Machinery or building new structures in the Freeport zones. Companies will be able to claim 100% Enhanced Capital Allowances on the purchase of new and unused Plant and Machinery that is incurred for a trade being carried out at the Freeport site. The purchase will need to be incurred before 30 September 2026 for the item to qualify for this benefit. Also, qualifying expenditure on structures and buildings within a Freeport zone will qualify for Enhanced Structures and Buildings Allowance at 10% per year for 10 years on expenditure incurred before 30 September 2026. This is a significant increase on the current level of 3% per year for 33 years for non-Freeport areas.

Whilst the above enhanced Capital Allowances will undoubtedly be beneficial to companies operating in the Freeport areas, Phil Hartley, Tax Director at Mitchell Charlesworth, warns that the benefit of the 100% Enhanced Capital Allowances will not be felt until purchases after 31 March 2023 due to the new Super Deduction. Phil said:

“With the introduction of the Super Deduction for purchases on new and unused Plant and Machinery companies operating in the Freeport zones will obtain a higher benefit from claiming the Super Deduction rather than the 100% Enhanced Capital Allowance. For example, the purchase of £2m worth of new and used Plant and Machinery before 31 March 2023 would attract £494,000 of tax relief under the Super Deduction rules compared to £380,000 under the 100% Enhanced Capital Allowances. The true benefit of this additional Capital Allowance will be felt on purchases after the 31 March 2023 when, using the previous example, the benefit under the 100% Enhanced Capital Allowances will increase to £500,000, as a result of the increase in Corporation Tax rate to 25%, compared to £295,000 under the existing Annual Investment Allowance and Writing Down Allowance rules. It will therefore be important for companies to consider the timing of their purchases of Plant and Machinery to maximise the tax benefit.”

The government has also signalled its intention to offer Stamp Duty Land Tax relief on land purchases within Freeport sites where that property is to be used for qualifying commercial activity. This is expected to apply until 31st March 2026.

It has also been announced in the Queen’s Speech on 11 May 2021 that Freeport employers will be able to pay less National Insurance for all new workers hired from April 2022.

For more information and support in international trading, Mitchell Charlesworth is a member of the Kreston international network of accountants, with expert advisers able to support businesses with a wide range of international business services. Please contact Phil Hartley on 0151 255 2300 or email phil.hartley@mitchellcharlesworth.co.uk.

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