The Chancellor announced the first eight Freeport locations: Solent, East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Teesside and Thames.
Businesses operating in these Freeports will benefit from more generous tax reliefs, customs benefits and wider government support, bringing investment, trade and jobs, but what exactly are the advantages businesses can expect to gain from operating in a Freeport?
The government announced in the Budget that it will legislate for powers to create ‘tax sites’ in Freeports in Great Britain and whilst these sites still need to be approved and confirmed by the government and parliament, it is expected that businesses in these sites will be able to benefit from the following tax reliefs:
- Enhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings
- Enhanced capital allowance of 100% for companies investing in plant and machinery
- Full relief from Stamp Duty Land Tax on the purchase of land or property
- Full Business Rates relief
- Employer National Insurance contributions relief.
Published papers indicate what to expect
Four policy papers relating to Freeports were published as part of the Budget, detailing designation of Freeport tax sites, enhanced capital allowances for plant and machinery, enhanced Structures and Buildings allowances and Stamp Duty Land Tax relief for Freeports. New legislation will be introduced in Finance Bill 2021 to introduce a power to designate one or more tax sites within any of the Freeport locations in Great Britain from 9 March 2021. This power should enable tax sites to be designated and recognised in law as geographical areas where businesses can benefit from certain Freeport-specific tax reliefs.
Enhanced capital allowances for plant and machinery
To incentivise companies to invest in plant and machinery within Freeports, an enhanced capital allowance (ECA) will be introduced for companies incurring qualifying expenditure on plant and machinery for use within Freeport tax sites, after those sites have been designated.
The Finance Bill 2021 will introduce provisions into the Capital Allowances Act 2001. Although draft legislation has not yet been published, the expectation is that the ECA will be 100% of the cost of the qualifying investment in the tax period in which the expenditure is incurred. This will apply to both main and special rate assets. To qualify, the plant and machinery must be new or unused, and must be purchased for the purpose of a qualifying activity and for primary use within a Freeport tax site. The ECA will remain available until 30 September 2026 but would be clawed-back if the primary use ceases to be within a Freeport tax site with five years of acquisition or being brought into use.
Enhanced structures and buildings allowances
As an additional incentive for business to invest in structures and buildings within Freeport tax sites, an enhanced rate of Structures and Buildings Allowances (ESBAs) is expected to be available for business incurring qualifying expenditure on construction of new, or renovation of existing, non-residential structures and buildings within Freeport tax sites. The policy paper indicates that:
- The ESBA will be available where the first contract for construction of the relevant structure or building was entered into on or after the date of designation of the Freeport tax site, provided the qualifying assets are brought into use on or before 30 September 2026.
- The enhanced rate will be at 10% on a straight-line basis (i.e. over 10 years).
- Where a structure or building falls partly within a Freeport tax site, a just and reasonable apportionment of qualifying expenditure may be made in calculating the ESBA.
- Where civil society organisations invest in non-residential structures and buildings in Freeport tax sites, they may choose to comply with evidence requirements so that, when they dispose of the asset, any subsequent owner may claim the EBSA if entitled to do so.
We assume the ESBA will reduce the base cost in the asset for the purposes of tax on chargeable gains, as is the case for Structures and Buildings Allowances currently.
Stamp duty land tax relief for freeports
To reduce the cost of investment in land and buildings in Freeport tax sites, a relief from Stamp Duty Land Tax (SDLT) has been announced. The policy paper does not confirm whether the relief is partial or full but does indicate that it will apply to qualifying transactions with an effective date falling on or between the date of designation of the Freeport tax site and 30 September 2026.
There will be a requirement for the property to be acquired for use in a ‘qualifying manner’ and then actually put to such use. (It is not yet clear what a ‘qualifying manner’ will be, but the policy paper indicates that the property will need to be used for a commercial purpose) and there will be claw-back provisions which will apply if the purchaser fails to use the property in a ‘qualifying manner’ during a ‘control period’ of up to three years. HMRC will be permitted to seek information from purchasers to ensure that the relief continues to be available during the control period.
Other tax incentives
There are no papers published in respect of business rates or NICs. However, the Budget 2021 announced that full Business Rates relief will be available to all new businesses, and certain existing businesses where they expand, within Freeport tax sites until 30 September 2026. Relief will apply for five years from the point at which each beneficiary first receives relief.
The government also intends to make an employer National Insurance contributions relief available for eligible employees in all Freeport tax sites from April 2022 (or, if later, when the Freeport tax site is designated). This would be available until at least April 2026 with the intention to review the relief and potentially extend it for up to a further five years to April 2031.