A consultation has launched regarding up to 10 freeports in the UK.
The government’s aims for these proposals are to boost economic activity across disadvantaged areas of the country, and the plans draw from freeports in existence in other parts of the world. We look at how the freeport proposals might work in practice and what the implications could be for the UK’s labour market.
What is a freeport?
Freeports are secure customs zones, usually located around seaports or airports, which have in place special rules in relation to business and trade laws. Importantly, goods can be imported, manufactured, stored and exported without being subject to customs duties.
Freeports are not a new idea – they existed in the UK until 2012 and are still commonly used in other parts of the world, with the most well-known examples including Dubai, Luxembourg, Singapore and the Isle of Man. They are well-established in the USA, which has almost 300 foreign-trade zone’ allowing manufacturers to import raw materials at a low cost and make them into goods for export at a lower rate of duty.
The proposals and the reasoning behind them
The government’s freeports consultation entitled “Boosting Trade, Jobs and Investment Across the UK”, is based on ideas first raised by Boris Johnson during his Conservative leadership campaign. The consultation paper suggests that the creation of UK freeports would ’release the potential’ of deprived communities and allow them to benefit from opportunities created by leaving the EU.
The government’s proposal is to build upon the traditional customs-related benefits of a freeport to create a bespoke, enhanced UK package of incentives. The consultation paper discusses the following elements:
- Tax: The government is weighing up changes to various tax measures, including business rates discounts and enhanced capital allowances (both of which are already available in existing enterprise zones), stamp duty land tax, research and development tax credits, VAT and excise on goods, and – most interestingly from an employment law perspective – employer’s National Insurance contributions.
- Planning: The proposal includes planning liberalisation to enable faster development. Amendments to permitted development rights and zonal planning are discussed, as is a revamp of the National Policy Statement for Ports.
- Regeneration measures: A stated aim of the freeport scheme is to revive disadvantaged UK towns and cities. The government envisages investing in infrastructure and housing to accommodate growth and offering business support to local enterprises. The policy paper also sets out an expectation that businesses involved in freeports will support local colleges and universities to help upskill the local workforce.
- Innovation: The proposal also contains several elements aimed to promote technological innovation in freeports.
Once the freeport scheme comes into force, areas will be invited to bid for freeport status. Several parts of the UK have expressed their interest in the scheme, some of which - Liverpool and Belfast, for example - had been classified as a freeport under the previous regime.
Potential implications for employers
The consultation paper suggests that freeports could be a lucrative opportunity.- Any companies looking to capitalise on it will need to put its mind to the potential consequences, both positive and negative.
According to the government, a prime reason for setting up in or relocating to a freeport is that it will reduce the costs of hiring workers. The consultation paper does not specify exactly how this will work beyond floating a potential reduction in Employer National Insurance contributions, but it clearly envisages that businesses will recruit new workforces.
This may not translate into reality, however. Setting up a large operation, especially as one of many large businesses establishing themselves in the same area, will require a significant pool of workers to draw from. Underprivileged areas of the UK are unlikely to have sufficient workforces to fill the significant number of vacancies and may lack people with the expertise needed for specialist roles. Whilst the government’s suggestion is that businesses will work with higher education providers to train people up, in reality they are likely to move existing workforces into the freeport zones or advertise the vacancies nationally.
If a company is planning to move its existing workforce - or at least part of it - into a freeport, then the question becomes how they can do this. In the absence of both parties agreeing to do so the primary consideration will be whether they have the contractual right require the employee to relocate. In other words, the employment contracts of the staff to be moved must contain a mobility clause permitting the employer to relocate them to another site.
Even where there is such a clause in the contracts, the employer is obliged to exercise that clause reasonably – a failure to do so could amount to a breach of the implied term of mutual trust and confidence. Reasonableness will depend on a range of factors, including whether the employee was given sufficient notice of the relocation, how far the employee’s new workplace will be from their home and whether the employer will meet the costs of the employee’s relocation.
If the employer looks to advertise for roles, then, as stated above, they are unlikely to confine that search to the areas local to the freeports. They may choose to advertise regionally or nationally, or in some cases even internationally. In the post-Brexit landscape, an issue all employers have to grapple with is the hiring of EU staff for UK roles.
According to the government’s latest policy statement on post-Brexit immigration rules, an EU migrant would have to have a job offer for a skilled role with a salary of at least £25,600 and achieve at least 70 points under a new Australian-inspired points system. It seems unlikely that employers moving into freeports will be able to rely on EU migration to fill low-skilled, modestly paid jobs, as such roles will not meet new visa requirements.
The final factor employers will need to consider is what the future will look like. As mentioned above, freeports have existed in the UK before and were removed. There is no guarantee that, even if introduced, the proposed freeport structure will stand the test of time or a change in the political tides. If things change, employers who have established themselves in freeports need to have a contingency plan in place.
The best way of doing this is to build flexibility into employment contracts, not only to allow for mobility as discussed above, but also to give the employer the option to change other terms and conditions of employment as may be required. Whilst this would be rather straightforward for new hires into the freeport, it would be more complicated in the case of existing workers.
Potential implications for workforces
A stated aim of the proposals is to create new jobs in underprivileged areas. A report by Rishi Sunak MP - now Chancellor - in 2016 claimed that as many as 86,000 jobs could be created across Britain through the introduction of freeports and construction group, Mace thinks the figure could be as high at 150,000. Creating more jobs will clearly be beneficial to local workforces and should lead to a decrease in the unemployed populations in areas surrounding freeports. This could help retain talent within those communities and reduce the numbers of people who feel they must move away from their hometowns to find work.
However, as trailed above, there is no guarantee that the introduction of freeports will have this effect. It is likely that employers moving into freeports will populate the roles in the new premises at least partly by moving existing workforces from other parts of the country. If so, this could reduce the number of opportunities created by the freeports for local workers and lead to a downturn in the areas from which people are moved. At the very least, competition for workers will undoubtedly increase.
One possibility might be for employers to use any saving in NICs (if that is what is being proposed) to increase employees’ salaries. Lower operating costs in freeports might also mean that there will be additional capital available for salaries which might give freeports the edge when it comes to attracting talent. However, this may come at the expense of other parts of the country.
The government acknowledges in the consultation paper that there is a risk of workforces simply being relocated. The paper notes that the government must have due regard to the Public Sector Equality Duty when formulating new proposals and attempt to eliminate discrimination and ensure equality of opportunity as between different communities. The consultation paper invites view on:
“whether any of the measures mentioned throughout this document might have any negative impacts under the Public Sector Equality Duty including through displacing economic activity from one area to another. There is evidence in some cases that zone-based policy can have a displacement effect, leading to reduced job opportunities in areas which are not Freeports”.
A factor in the impact of any displacement is where in the country the workforces have come from. Were an employer to move staff from London into a freeport, the impact on the economy and labour market in London may well survive unscathed. On the other hand, if an employer moves its operations to a freeport from another underprivileged area of the UK, the consequences for the community left behind would be far more significant. It is also possible that the relocation of workforces from areas which are currently secure, albeit not booming - parts of the South East, for example -, could unsettle those local economies and create problems where previously there were none.
Another consideration is the kind of jobs that will be created in freeports. The consultation paper envisages the creation of skilled jobs in what it calls ‘hotbeds for innovation’. However, there is a risk that the lower regulation and cheaper costs of operating in freeports could inadvertently create room for exploitation and the erosion of employment rights.
It is not hard to imagine recently reported Victorian workhouse conditions as recently alleged in a well-known retailer surfacing in businesses geared towards exporting cheap goods. How that risk can be reduced is not addressed in the consultation paper, but one would imagine that existing employment protection would remain in place to help address these concerns. The TUC has recently reported their view on the position saying that “Workers in Free Ports are likely to have less protection than the rest of the UK. This ultimately means lower pay and less job security in coastal communities already facing long term economic problems.”
A potential upside for workforces of the freeport proposals is the government’s emphasis of upskilling local people to match the needs of employers in freeport areas. Areas which have previously suffered from some form of brain drain would benefit hugely from schemes designed to train and develop their workforces and tap into potential which had previously gone underutilised. A point to note, however, is that the consultation paper seems to leave responsibility for upskilling in the hands of the businesses set up in freeports. Whilst some businesses might be entirely on board with the suggestion, others might prefer to take shortcuts, not least because the government claims that freeports will allow employers to cut the costs of hiring. Perhaps some governmental oversight and/or additional incentives for training will be necessary to ensure that companies commit to training in a way that is expected of them. However, that would be contrary to the ethos of reducing legislation.
It is also important to ask whether the entire concept of freeports is best placed to improve the lots of lower skilled workers in underprivileged areas. By their very nature, freeports are defined geographical plots which will literally be fenced off from the wider area, so the scope of any benefits will be confined to those areas. Within the freeports themselves, most of the benefits are likely to be enjoyed by the corporates which set up in them, in the form of tax reductions and customs exceptions. Perhaps a more effective way of helping low-paid employees across the country would be to increase the income tax Personal Allowance to allow them to take home more of their earnings.
Risks of deregulation
The government has claimed that it will draw from other countries’ experiences with freeports in formulating a scheme which works for the UK. Various studies have found that freeports or free zones have a beneficial impact on economic activity within their areas – lower duties and administration costs encourage the importation of goods, whilst the concentration of one sector such as manufacturing or related sectors such as manufacturing and import/export businesses into one place can create a boost known as the agglomeration effect.
In terms of identifying the potential downsides of the proposals, the government should have regard to the European Commission’s study entitled “Money laundering and tax evasion risks in free ports”. The report was conducted at the request of the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance following concerns that free zones in the EU were being used to launder money and facilitate tax evasion and avoidance. It looked in particular at Luxembourg’s Le Freeport, a privately owned freeport which has significant involvement in the storage of high-value artwork.
The report notes that most freeports involve a degree of secrecy which allows goods to be brought into them without the ultimate beneficial owner being disclosed. Further, the value of goods stored in freeports is usually declared by the owner or their representative, which creates a risk that they could be over- or undervalued. It concludes that freeports share similarities with offshore financial centres – including high security and discretion – which allow them to operate as tax havens.
The government of Luxembourg identified these issues and sought to deal with them. In 2015, Luxembourg’s national anti-money laundering laws were extended to its freeports and those operating within them almost five years earlier than would have been required under EU law. As the EU’s fifth anti-money laundering directive has since come into force and been implemented in UK law, the UK’s freeport model will have to be similarly strict – a fact which the consultation paper acknowledges.
From an HR perspective one can but imagine if things go awry that confidentiality clauses and whistleblowing legislation may feature prominently in the freeports of the future!
Reflecting on the proposals
The UK government’s consultation paper promises that its freeports will operate on a ’brand-new, best-in-class, bespoke model’ aimed at boosting trade, jobs and investment.
The idea is not novel and, judging by other countries’ use of free zones, it is likely to lead to some kind of economic boost, which is to be welcomed.
Indeed, if they are set up correctly freeports could be hugely beneficial to certain areas of the UK and companies are undoubtedly going to be attracted to them. In turn, they will require a suitably trained workforce to service their needs. Whilst one would hope that would lead to the creation of new jobs into which local people will be recruited, the likelihood is that businesses will relocate existing staff to fill at least some of the roles their freeport operation requires.
Much will depend on the detail of the proposals, which have yet to be decided. For employers and potentially affected workforces alike, it will be a case of watching this space until the government publishes its response to the consultation. Businesses may want to defer some of their medium/longer term planning just to see what is ultimately being proposed.
The timeframe for public responses to the consultation is currently open and interested parties can submit their views online. The deadline for response is 20 April 2020.
If you require any assistance on these or other employment issues then please do not hesitate to contact Kevin McCavish, Partner and Head of Shoosmiths’ London and Thames Valley Employment Team, on 03700 868802 or [email protected] or Sarah Owbridge at [email protected].