There is no arguing that it will take some time for the UK, and indeed the world, to recover from the Covid-19 pandemic. Couple this with Brexit, and Rishi Sunak had quite a task on his hands to deliver a Budget to help stimulate growth in the UK economy. At the end of his statement, however, he pulled the rabbit out of his hat: freeports. Is this programme really the 'flagship government programme' promised by HM Treasury? Can it really deliver on its aims to increase the attractiveness of the UK as an international trading nation post-Brexit and boost the UK economy? 

The idea of freeports is not new. In fact, they were pledged in the Tory Party 2019 manifesto. What the Chancellor did announce in his Budget was that the programme is going ahead. He also announced the eight locations in England for them: East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City region, Plymouth, Solent, Thames, and Teesside. The choice of locations is reflective of the Government's 'levelling up' agenda together with the welcome inclusion of Thames to bring post-Brexit benefits to the London area too. It is hoped that these areas will be able to benefit in the post-Brexit era, with Government freedom to provide tax and other incentives free of state aid concerns. The Government will have the power to designate further freeports as required. Whilst the exact details have yet to be ironed out as to what types of external investment the freeports will attract, this article will look at what we do know and how these compare to freeports in Asia – China and Hong Kong specifically.

The basic concept of freeports is that they operate as custom zones within a jurisdiction's land border, but they have different customs rules to the rest of the jurisdiction. These altered customs rules in theory should allow businesses operating in a freeport to benefit from tariff benefits and simplified customs procedures. In other words, the Government intends that freeport trading should be both cheaper and simpler to effect in certain circumstances. They are usually located at ports, hence the name, and other common features of freeports, which may differ from the usual country legislation, include tax, planning and regulatory policies.

Looking East, policies concerning the foreign exchange and financial industry in China are generally seen as conservative. Whereas in Hong Kong the financial industry has seen unprecedented growth in recent years, and as a result, the area has become a key financial services centre in Asia. The process to apply for a financial services licence in Hong Kong is relatively simple and straightforward – a key benefit to boosting investment. Positioned as one of the world's top three international finance centres, Hong Kong attracts much business from the financial services sector. The area is built on a prudent and robust financial regulatory regime, couple that with the absence of capital control, and Hong Kong is certainly an attractive proposition for conducting business. The Closer Economic Partnership Arrangement (CEPA) gives Hong Kong's financial service providers and professionals greater market access and flexibility into mainland China and serves as a gateway for foreign firms seeking access to the mainland. 

In China itself, the Government has established 18 Free Trade Areas (FTAs) across the mainland. The first opened in 2013 in Shanghai, and these are often seen as an effective approach to widening reforms and further opening up the country's economy. Each FTA in China is focused on attaining a specific goal. For example, the Lingang FTA has seen an expansion of China's first FTA and is well-positioned to rival the most competitive FTAs around the world. It has become a special economic region in China with significant international influence. Jiangsu's FTA, which is among the six pilot zones that were announced in August 2019, is geared towards fostering institutional innovation and overseas investment cooperation. Hainan Province FTA is the only FTA established based on a province, they are usually smaller and based on a city or even a district. It is believed that one purpose of Hainan FTA is to partially replace the role of Hong Kong in foreign direct investment to China. There are many preferable policies in Hainan FTA, including talent settlement, tax, market access, among others.

What can we expect for the UK's freeports? In his March statement, the Chancellor went as far as to state that they would operate as special economic zones and would have different rules applied to them which would make it "easier and cheaper to do business". He confirmed that they would indeed come with simpler planning; cheaper customs in the way of favourable tariffs, VAT, or duties; and lower taxes; amongst other benefits. But what for financial services?

The UK Government's stated primary aim of these freeports is to boost trade, employment, and innovation within the freeport area itself, within the wider surrounding area, and nationally. To achieve this goal, investment is required. The Government is seeking in particular international investment as they are intended to be national hubs for global trade and investment.

Those bidding to be freeport operators will need to demonstrate how they will bring new investment into the area and the wider surrounding areas. Customs and tax incentives are to be introduced in to stimulate this investment, however there are no direct investment tax incentives for financial institutions. It is understood that in the UK freeports, it will be the recipient of the funding that will receive tax and customs incentives thereby making the financial investment in such businesses attractive through the potential of enhanced returns. There will also be customs incentives including tariff benefits such as duty deferral while goods remain within the freeport itself.

While a number of tax incentives have been announced, including stamp duty land tax relief on the purchase of land in designated tax sites where the land is to be used for a qualifying activity; we have yet to heart what this qualifying activity will include, though it is highly unlikely to include use in the financial sector. There will also be enhanced structures and buildings allowances (SBA) such as enhanced tax relief for firms constructing or renovating buildings and structures within the freeports, a 10% allowance of costs for construction or renovation against profits on a straight-line basis over 10 years for freeport qualifying expenditure. Freeport qualifying expenditure meets the following conditions:

  • construction begins when the building or structure is situated in a freeport;
  • the building or structure is first brought into qualifying use by the person entitled to the SBA when the building or structure is in a freeport on or before 30 September 2026;
  • the qualifying expenditure is incurred when the building or structure is in a freeport tax site and on or before 30 September 2026;
  • the person who incurs the qualifying expenditure is within the charge to income tax or corporation tax when it is incurred; and
  • an allowance statement is made by the person who incurred the qualifying expenditure, relied on for the first valid claim for a SBA in respect of that expenditure and states that the person wants the expenditure to be freeport qualifying expenditure.

Enhanced capital allowances at 100% of first year for capital expenditure on plant and machinery has also been confirmed for use for a qualifying activity. Unfortunately, this 'qualifying activity' does not include use for leasing and therefore this incentive will not stimulate the finance leasing market. It will more likely lend itself to straight funding by banks and funds of the businesses incurring the expenditure.

Other benefits include a 0% rate of Employer National Insurance contributions on earnings up to £25,000 a year for new employees in freeports. Though, it is not clear as yet whether this will only apply to employers operating in qualifying sectors. And finally, a business rates relief of up to 100% on certain business premises in the areas.

As yet, no direct incentives for banks and funds have been announced. However, it is expected that the indirect incentives will be sufficient to encourage global investment into UK freeports. We can only hope that this is true. Perhaps the Chancellor should look at incentivising financial services more directly to ensure that the UK remains competitive on a global scale and one of the top financial services hubs in the world. Afterall, a UK post-Brexit, some would argue, should be looking to woo and entice the financial services industry rather than have them set up elsewhere in the likes of Asia with their benefits for example.

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