Legal briefing | 23 Sep 2021 |

Freeport customs sites: promising opportunity or not worth getting excited about?

The UK Government argues that freeports will provide significant customs benefits for businesses - but not everyone agrees. In this briefing, part of a series on UK freeports, we look at the types of business that might benefit from freeport customs arrangements and whether the critics are right to be sceptical.

Freeports: the background

Earlier this year, the UK Government announced plans for 10 new freeports, which it hopes will support its "levelling up" agenda. Freeports are special economic zones based around one or more transport hubs (e.g. a port or airport). The policy was partly inspired by the success of freeports in the US, where special customs arrangements have played an important role in attracting businesses. However, the proposed UK freeports will offer a range of other benefits as well, including advantageous tax and planning treatment – and as explained below, this is important to bear in mind when assessing the potential opportunity offered by freeports. For more information, see our briefing "Freeports: what, where and when?".

What customs benefits are on offer?

In summary, based on the UK Government's Freeports Bidding Prospectus, freeports will offer 2 key customs benefits:

Simplified procedures: most goods entering a freeport customs site will be subject to a simplified set of paperwork requirements, which should lower costs.
No tariffs: goods entering a freeport customs site will also not be subject to any duty. Tariffs and import VAT will only be payable in the UK if the goods leave the site and enter the UK internal market. Similarly, if goods are dispatched to another country, no tariffs would be payable in the UK but tariffs may well be payable at the point of import in the country of destination.

However, it is critical to appreciate that these benefits will not be available throughout the entire freeport area (of up to 1500 km sq); they are restricted to approved customs sites located within that wider area. Whilst there is technically no limit on the number of customs sites which an individual freeport can have (or the size of those sites), there are significant practical constraints on how large an area they could cover. For example, each site will need to be secure in order to prevent smuggling and other illegal activity, which (among other things) is likely to require a substantial perimeter fence alongside other security measures.

What types of business might benefit?

There are three main types of business which might benefit from the customs arrangements at freeports:

Wholesalers/retailers serving the UK market: freeport customs sites would allow goods to be imported in bulk and then stored in warehouses without incurring any duty. Customs duties and import VAT would only be payable at the point when the goods leave the freeport customs site and are sent to e.g. retail outlets. This is known as tariff or duty suspension. From a cashflow and stock management perspective, it can have significant benefits. For example, instead of having to pay a large tax bill on taking bulk delivery of the goods, the business would pay a series of smaller amounts, corresponding to the quantities of goods being dispatched from the warehouse, spread over a longer period of time. In the US, freeports are widely used to manage stock and cashflow in this way.
Manufacturers/processors serving the UK market: a manufacturer based in a freeport customs site would not have to pay duty on any of its raw materials or components brought into the site. It would only have to pay duty on the final manufactured product when it left the freeport customs site and entered the UK market. This is particularly advantageous where some of the raw materials or components are subject to high tariffs, but the final product is subject to a lower tariff (known as tariff or duty inversion). In such a case, manufacturing in a freeport customs site is likely to be materially cheaper than doing so outside. Freeports in the US are also widely used by businesses looking to exploit tariff inversion.
Manufacturers serving non-UK markets: some manufacturers may also be interested in using freeport customs sites to assemble or manufacture products for export to non-UK markets, because no duty would be payable in the UK on components or raw materials brought into the site (duty would only be payable, potentially, at the country of destination based on tariffs applicable to the final product). In some cases, those manufacturers may also be able to exploit tariff inversion in the country to which they intend to export products i.e. the country of destination imposes high tariffs on relevant components or raw materials, but lower ones on the final product (manufactured in the freeport).

What do the critics say?

Critics of freeport customs arrangements make the following points:

It is possible to achieve similar benefits outside freeports; for example, tariff suspension can be achieved by storing goods in a bonded warehouse facility;
Using a freeport can make it more difficult to take advantage of trade agreements (as goods manufactured in a freeport may not qualify for preferential tariff treatment); and
There is significantly less scope for tariff inversion in the UK than there is in the US (see, for example, research by the UK Trade Policy Observatory).

Are the critics right?

In our view, all the above criticisms are valid – but we do not think they are necessarily fatal to the freeports concept as a whole:

Firstly, whilst it is correct that the customs benefits on offer are not particularly unique, it's important not to view them in isolation from the rest of the freeports "package". For example, if a business has a need for a new warehouse facility for tariff suspension purposes, the possibility of accessing customs benefits alongside various tax reliefs (which would lower the start-up costs of the warehouse operation) could be quite compelling, as compared with the position outside a freeport. That said, this would require the new facility to be located in a freeport customs site which was also a freeport tax site (it is possible to combine the two, but not all freeport customs sites will offer tax benefits).
Secondly, the concerns about trade agreements are only relevant to manufacturers which plan to export to countries with which the UK has trade agreements. Even where that is the case, it may be that the product concerned is subject to a relatively low tariff, which may not be sufficient to make the manufacturer's pricing uncompetitive.
Thirdly, the "branding" advantage of freeports should not be underestimated, which may make it easier to attract investment; by way of example, for many US investors, freeports are a well understood concept, which makes the customs benefits an easier "sell" (as compared with having to explain concepts such as "bonded warehousing" or "inward processing relief").
Fourthly, whilst the scope for tariff inversion in the UK does indeed appear to be more limited than in countries such as the US, Brexit may encourage a shift towards more trade with non-EU countries, with more product being imported in bulk and needing to be stored and/or processed (e.g. put into appropriate containers for retail sale etc) in the UK. Freeport customs sites could provide ideal locations for new warehousing and processing operations of this type aimed at the UK domestic market (see further our briefing on the impact of Brexit and COVID on UK ports, distribution and manufacturing).

What about economic displacement?

Another common critique of freeports is that, rather than encouraging new businesses to establish, they will simply encourage businesses based elsewhere in the UK to relocate– so that "levelling up" for one area would result in "levelling down" elsewhere. This is ultimately a policy issue for Government, but it remains to be seen whether freeports will have this effect. If – as suggested above – developments such as Brexit mean that there is a need for new warehousing/manufacturing activity to serve the UK market, this would involve new business rather than economic displacement.

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