Are new freeports the way forward for UK trade?

Legislation | | MIC Customs Solutions |

What benefits could a new generation of freeports bring to the UK, and what risks will need to be addressed?

The ability to develop new freeports has been touted by the UK government as one of the major economic benefits of Brexit. These free zones, which are being established all around the country, promise to offer significant financial advantages for businesses within the designated areas, as well as provide a large boost to surrounding regions.

Initially, eight such areas were set to be established in England, with a further two in Scotland. However, bidding for new locations in Wales to be added to this list concluded last year.

With three of the original locations becoming fully operational towards the end of 2022 after receiving final government approval, what benefits can businesses and local governments in the selected areas expect to see, and what issues may they have to be wary of as a result of loosened trade and customs rules? 

Which areas are covered by the new zones?

In England, the initial areas to be granted freeport status under the original 2020 consultation were at East Midlands, Felixstowe and Harwich, Humber, Liverpool, Plymouth and South Devon, Solent, Thames, and Teesside. 

Meanwhile in Scotland, two areas in the Firth of Forth and Inverness and Cromarty Firth were designated as Green Freeports in January this year and are run jointly by Westminster and the devolved Scottish government. Applicants for freeport status in Scotland were also required to demonstrate a commitment to sustainability by creating green jobs and contributing to a goal of net zero emissions by 2045.

The first of the English freeports, at Plymouth, Solent and Teesside, became fully operational in December 2022, with the remaining five areas expected to follow suit in the coming months. The government estimates these areas will drive millions of pounds in investment, as well as thousands of highly skilled jobs.

Levelling up minister Dehenna Davison commented: "Now they are up and running, these Freeports will harness local expertise to grow vital industries and turbocharge our national economy. Freeports will generate prosperity and spread opportunity throughout the UK by driving innovation and throwing open our doors to trade with the world."

Each selected freeport area is set to receive £25 million of seed funding to help upgrade local infrastructure and stimulate regeneration in and around the zones.

What could the benefits of UK freeports be?

One of the main benefits of these zones to international businesses is that the UK's normal customs rules do not apply to goods within the designated areas. This includes simplified import declarations for items within the zones and the ability to move goods between customs sites without the need to use transit or complete a declaration digitally.

This would, for example, enable businesses to import raw materials to the freeport and store and process them on-site, before either re-exporting the final products or releasing them to the UK market. 

When goods move out of the freeport into the UK, final duty is only paid on either the end product or originally imported goods - whichever is lower. Meanwhile, no duty or VAT is paid on the exported goods.

In addition to this, businesses operating within freeport zones are also exempt from a range of other taxes, including Business Rates, Stamp Duty Land Tax (SDLT) and Employer National Insurance Contribution. This should further help incentivise companies to relocate or expand to these business-friendly locations.

The expectations are that this will lead to significant investment in these areas, which will in turn create jobs and increase trade to and from the UK. This could make them a key part of the UK's trade strategy as the country seeks to establish itself as an independent nation outside the EU, by enabling the zones to be used as a key point for the storage, processing and reexport of goods between thirds-parties without the need for additional customs duties.

What risks could the areas open up the UK to?

Although freeports have been highlighted by the government as a Brexit benefit, their establishment did not depend on leaving the UK - indeed, there are currently more than 80 freeports across the EU.

However, a 2019 report from the European Parliament called for freeports to be scrapped across the bloc due to concerns over tax evasion and money laundering. It argued that a lack of oversight provides a "safe and widely disregarded storage space" for trade to be conducted untaxed and for ownership can be concealed.

The new post-Brexit freeports are also not the first time the concept has been attempted in the UK. In previous years, when the UK was still subject to EU rules, freeports existed in locations such as Liverpool and Southampton. These closed in 2012 after the government declined to renew their licenses, with worries about the potential for crime one reason for this.

Some commentators have raised concerns that the new generation of freeports does not do enough to clamp down on issues such as money laundering and smuggling. The Royal United Services Institute think tank, for example, highlighted a link between freeport trading and an almost six per cent increase in the value of counterfeit goods being shipped into a country.

Inadequate physical security could also lead to customs duties on items entering the rest of the country being evaded, a vulnerability that is increased by a lack of clearly defined boundaries.

"It is important that security measures are proportionate to risks and that the government fulfils its promise to learn from existing ports, which requires taking account of the existing criminal risks in locations where freeports will be established," the report stated.