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Freeports: The old and the new

What are freeports and can they be part of the solution to improving the UK’s trading position post Brexit?

The Prime Minister recently announced that the UK should consider expanding the use of freeports across the UK to encourage and develop advantageous business conditions. So, what are freeports and can they be part of the solution to improving the UK’s trading position post Brexit?

We should note here that the old stalwart of customs legislation: The Customs and Excise Management Act 1979 already offers a free zone designation so in fact the idea is already in legislation and has been for some time.

Freeports are typically located within a single country’s legal jurisdiction but are considered outside it for customs purposes. To draw out a more realistic description: they are in effect a large customs warehouse where work can be carried out on goods and raw materials can be imported to be added to those goods. Businesses within the zone can import, warehouse and re-export products duty-free. This cuts down costs for businesses and can help with cashflow.

Some governments offer incentives to help freeports develop, such as tax breaks to companies that relocate to within the freeport area. However, in 1984 several locations in the UK were given freeport status but failed to live up to potential as other freeports around the globe offered more benefits and, possibly, laxer controls.

But are they unique in the services they offer? Processing of goods under a suspensive regime already exists within the UK’s customs regimes and is already available to companies – sometimes without any prior authorisation. This processing can also be done at the company’s own premises and not within a designated free port area. Inward Processing (relief) allows goods to be processed under duty suspension if the goods are subsequently re-exported after processing or the product is released from the regime and the relevant duty and import VAT is paid when it passes the factory gate. Likewise, customs warehouses provide storage in duty suspension and can be located within a company’s own premises without the need to send goods to other locations.

It is estimated by HM Government that a UK freeport regime could create more than 80,000 jobs for the British economy.

However, many criticisms from the opposition benches suggest that freeports drain vital resources and workforces away from communities and centralise them into a specific location with dramatic effects on the surrounding businesses and communities; akin to the analogy that the creation of major shopping malls had on small retailers in towns like Dartford. More so, care needs to be taken over monitoring carefully the conditions and care of the workforce employed in these zones to ensure that labour standards are maintained.

Additionally, the freeport regime is better suited and more successful when operated in a high tariff jurisdiction. With the UK’s interim tariff placing a zero rate of duty on many products and allowing Postponed VAT accounting for import VAT it is likely that the regime would be under-utilised as the benefit is negated in such a low tariff environment.

Perhaps more sinister are the dangers of money laundering and prohibited goods moving illegally with a reduced degree of customs control. However, many free ports have a greater degree of security, inventory control and guarantee levels inbuilt to provide oversight. However, standards and compliance are not standardised across the world.

The potential locations and regulatory regime for the proposed freeports have not yet been released. Not doubt there will be a bidding process ahead of any final agreement. However, would a reinvigoration of knowledge of the existing customs regimes amongst businesses be a wiser move than trying to complete with freeports in different and more attractive jurisdictions?

For more information, please contact Simon Sutcliffe.