Brexit: the Free Port opportunity?

Peter Snaith, a partner in Womble Bond Dickinson’s commercial team and head of its manufacturing sector group, gives his thoughts on the potential for a “free port” on Teesside.

In 2016 Rishi Sunak, MP for Richmond, published a report arguing that free ports would have the post-Brexit potential to:

– increase manufacturing output

– reinvigorate the North

– promote trade

With a “no deal” Brexit now being the government’s working assumption, it is time for a realistic assessment of those potential benefits.

Crucially, a “free port” is not an unregulated tax haven. It offers practical benefits in terms of reduced or delayed tariffs on goods processed or assembled for re-export or for eventual sale in the UK market, avoiding repeated charges on goods such as chemicals and car engines that cross borders during the manufacturing process.

Its main function is to defend existing industries and jobs, with the possible future benefit of attracting new investment. The potential benefits for our region associated with a free port or free trade zone are significant.

To work well, a free trade zone requires detailed regulations, precisely tailored to the practical and economic realities of the region.

The current law

Post-Brexit free ports can be created under the Taxation (Cross Border Trade) Act 2018. In their basic form, the effect is simply to delay customs duties on goods temporarily stored within the port.

However, the law also allows the government Treasury and HMRC to create free ports that go significantly beyond the basic storage procedure, and that could deliver significant benefits such as tariff-inversion where the tariff due on a final assembled product (such as a car) is considerably less than the tariffs that would be payable on its separate components.

There is also a major administrative benefit, reducing the cost and burden on small and medium sized enterprises of having to make separate applications for benefits such as inward processing relief.

Physical or virtual zones?

Although most discussion has focused on the possibility of geographically-defined free ports, the law also allows HMRC to treat a customs declaration as valid if it is made through “a system for recording information where the system is approved by HMRC and the information is made available to HMRC”.

Where any such system is approved, HMRC may also disapply any other provision relating to customs declarations.  This potentially allows the development and adoption of supply chain management systems, based on technologies such as blockchain and distributed ledger that would permit the creation of “virtual” free zones.

The capacity of blockchain and distributed ledger systems to demonstrate origin and to track any transfer of custody or of value would allow goods to be treated as within a “zone” even if they are outside the physical perimeter.

This could reduce the risk of distorted or unfair competition, and protect supply chain participants across the region. It also mitigates to an extent the competition for designated status between our regional ports, if there is scope for more than one to be created.

Likely developments?

Initially, at least, the government’s focus is likely to be on the designation and definition of “physical” free zones and free ports.

Designation would not, in itself, deliver significant benefit. To work well, such zones would have to be specifically tailored to the local economy, reflecting particular areas of specialism (such as chemical processing or automotive manufacturing).

It would also be essential to ensure that designation conferred sufficient  benefit on the full range of supply chain participants, including small and medium sized enterprises that may not be “tier one” suppliers, but who form the vital base for local economies.

Consequently, any bodies applying for free port or free zone status should act now to consider the feasibility and detail of its proposal. Applicants who go to the Treasury and HMRC with a clear and detailed understanding of their area’s specific economic conditions and needs, and who engage with government to ensure that regulations accurately reflect those local factors, will significantly enhance their chances of success.

From a regional perspective, it is encouraging that there is potential for more than one North East port to secure designated status.

Before joining Womble Bond Dickinson, Peter Snaith worked as an in-house lawyer in the chemical sector for a number of ICI’s international speciality chemicals businesses. He was subsequently global legal manager for ICI’s Acrylics business following its sale to Ineos. Since his return to private practice, he has maintained a focus on working with chemicals and chemistry-using companies and with manufacturing companies in general.

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