In a measure aimed at developing the UK’s post-Brexit international trading arrangements, it was announced last month that several Free Ports (sometimes referred to as Free Trade Zones) would open in the UK.
What are Free Ports?
Free Ports are commonly used throughout the world, although less so within the EU, to promote international trade and, in particular, the export market. The UK government has indicated that it will introduce several broader tax and financial incentives to encourage businesses to operate within the UK Free Ports, including greater capital and buildings allowances. Full details of the financial incentives have not yet been made available.
There are currently no operational Free Ports in the UK; while several ports have been authorized in the past, none have active authorizations. As a member of the EU, the UK was unable to negotiate its own individual trade agreements with other countries but, post-Brexit, the UK has the freedom to set its own trade policy and re-introduce Free Ports. The Free Port sites that have been announced so far are: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth & South Devon, Solent, Thames, and Teesside.
Free Ports are designed to both facilitate international trade and promote the region’s economic development in which they are located. A Free Port is an area that is physically within a country but effectively treated as being outside of it for tax purposes. It would need to be a designated physical area. It wouldn’t be a single building but a geographical location. It would most likely entail an enclosed area where the flow of goods and people entering and exiting could be controlled. This is important as there would be a need to prevent criminal behavior relating to people’s illegal entry or the unpaid import taxes for goods.
The first Free Ports will likely open in the UK towards the end of this calendar year.
Other ways of achieving import savings
As a result of Brexit and the UK’s exit from the EU Customs Union, many businesses review their international trade arrangements and make changes to ensure that their supply chains remain optimal and unexpected tax costs do not arise. The possible use of Free Ports in the UK should be included in these exercises.
While Free Ports may sound attractive, there will be significant costs and upheaval for businesses relocating some or all of their operations to within a Free Port. Government incentives will help to reduce these costs. However, it is worth keeping in mind that businesses may be able to replicate the Customs Duty advantages of Free Ports through existing Customs Duty management strategies.
For example, the use of customs duty reliefs such as Inward Processing, Returned Goods Relief, or Customs Warehousing to mitigate the cost of import tariffs. These are specific reliefs that can help alleviate the payment of import taxes when the goods do not remain in the country. These reliefs will be of particular interest to those organizations that temporarily move goods into a country for manufacturing/ processing before then moving on to another location; the crossing of a Customs border generally results in the payment of irrecoverable import taxes, so multiple movements and payments can have a damaging impact on margins.
In summary
The UK government announcing the creation of Free Ports is a positive development in the UK’s international trading arrangements. Businesses will be waiting to see the full details of tax reliefs and other incentives of relocating to/setting up with a Free Port. Businesses, though, should keep in mind that they are likely to be able to replicate most, if not all, of the Customs Duty advantages through the use of existing Customs Duty reliefs.