Creating around 10 “freeports” across the UK could help boost trade and manufacturing after Brexit, according to the government.
Chancellor Rishi Sunak – who is expected to announce the location of some freeports in his Budget on Wednesday – says they could “turbo-charge” the economic recovery in the wake of Covid-19.
But critics insist they do not benefit the economy overall, and increase the risk of tax dodging and lower employment standards.
What are freeports?
Freeports are areas, usually around a maritime port or airport, where goods can be imported without having to pay import taxes, called tariffs.
These taxes only become payable when the goods leave the freeport and are transported somewhere else in the UK.
Otherwise, they are re-exported without having to pay the relevant UK tariff.
They are allowed in the EU – and the UK had seven freeports at various points between 1984 and 2012.
After this the UK phased them out, although a number of so-called enterprise zones – which have similar aims – were set up.
Why are they being brought back?
Following Brexit, the UK wants to bring back freeports to regenerate deprived areas.
In England, companies inside the sites will also be offered temporary tax breaks, mostly lasting five years.
These include reductions to business rates as well as stamp duty, a type of land tax. Employers will also pay reduced national insurance for new staff.
Ministers say “at least” seven freeports will be set up in England. Each one can be up to 45km (27 miles) across.
Scotland, Wales and Northern Ireland will set their own freeport policies.
How will sites be chosen?
More than 30 areas in England have reportedly bid to become a freeport, with the winners due to be announced in the spring. The freeports will then be set up later this year.
Bids in England will be ranked according to their potential to drive innovation, the involvement of the private sector, their importance to the economy, and how quickly they can be set up.
But the government says the most important factor will be how they help deliver its ambition to “level up” the country by reducing regional inequality.
Officials will draw up a “longlist” of candidates, with ministers then making the final decisions and publishing their reasons afterwards.
The government says it will consider other factors – such as the impact of Covid-19 on local areas, and ensuring freeports are “spread fairly” across England.
Ministers have faced scrutiny in the past over how winners from such “levelling up” projects are chosen – including how grants from a £3.6bn fund for struggling towns were awarded.
A committee of MPs said the contest lacked transparency and could “fuel accusations of political bias,” although ministers defended the process as “robust”.
Will freeports benefit from Brexit?
There are currently around 80 freeports dotted around the EU.
But some Brexit-backing politicians argue their potential is limited by the bloc’s rules on business subsidies – such as government cash payments or tax breaks.
They want the UK – now that it’s no longer in the EU – to pursue a more generous policy.
Jonathan Branton, a partner at law firm DWF, said the UK does have more flexibility in this area now it doesn’t have to follow the EU’s subsidy rules.
He also points out that such tax breaks offered to freeport firms would no longer require prior sign-off from the European Commission.
However, he adds that the Brexit trade deal – agreed by the UK and the EU – still requires subsidies to be justified. Otherwise, they could be challenged in UK courts.
In more extreme circumstances, the EU could ultimately respond to UK subsidies by introducing tariffs on some UK goods deemed to be damaging EU trade or investment.
Furthermore, the UK will still be subject to World Trade Organization rules – which say you can’t introduce subsidies linked just to export performance.
There are also questions over Northern Ireland, whose goods trade with the EU will stay bound by the bloc’s subsidy rules under the UK’s withdrawal deal.
Treasury minister Steve Barclay has admitted the freeport model used in Great Britain will need to be “adapted” for Northern Ireland.
Northern Ireland’s devolved government says it is working with the Treasury to find out how much of the model it will be able to follow.
Are they a good idea?
Supporters say freeports can help increase manufacturing and direct jobs and investment towards areas that would otherwise struggle to attract them.
But opponents say they don’t boost employment overall, and diverting economic activity comes at a cost to the taxpayer.
The Labour-led Welsh Government says it has reservations about freeports, although it has not ruled out introducing them in Wales.
The SNP Scottish Government – which has previously been critical of freeports – now plans to introduce its own scheme, dubbed “green ports”.
Exact details have not been set out – but bidders will be asked to promote “sustainable” growth, and pay the voluntary real living wage.