Online to the Department for International Trade 20 April 2020

The Northern Ireland Tax Committee of Chartered Accountants Ireland made the following responses to specific questions as part of this consultation

Customs

Q1: To what extent do you agree/disagree that the reduced declaration requirements for moving goods into a Freeport represent a useful simplification of the administration of customs processes? Please explain your answer.

Strongly agree

Q1.i: Please explain your answer.

Without reduced customs declaration requirements within Freeports, this would be a disincentive for manufacturers and businesses to locate within Freeport zones. Although Freeports would initially remove tariffs, import VAT or excise until they leave the Freeport and move into the domestic UK market or remove them entirely unless they are re-exported, the customs declaration requirements to initially move goods into a Freeport zone need to be administratively simple but at the same time capture the goods in sufficient detail to enable them to be clearly traced and identified.

Should a Freeport be located within Northern Ireland we would assume that the customs rules set out in the Protocol on Ireland/Northern Ireland would apply for goods moving onwards to the Republic of Ireland and vice versa for goods moving into the Freeport from the Republic of Ireland to maintain the all-island economy.

Q2: Please suggest any ways in which you think the administration of customs processes could be simplified further in Freeports.

It is proposed that a simplified form of C21 will be used as a starting point for implementing simplified administrative processes for moving goods into the Freeport zone. One suggestion which could be considered to simplify the administrative process further could be used when the goods are leaving the Freeport zone. The original Freeport simplified form C21 completed for the initial import could be used as the starting point for this with additional sections added to the form. Further bolt-on sections could be added to show:-

• If the goods have been subject to further manufacturing/value added processes within the Freeport and their new value as a result; and
• how the goods are leaving the Freeport – via either re-export, into the UK domestic market, declared for another customs procedure such as transit or to the Republic of Ireland from Northern Ireland (i.e. under the rules set out in the Protocol on Ireland/Northern Ireland).

Excluded goods and excise goods

Q11: To what extent would the suspension of import VAT be of value to your business?

Moderately valuable to my business

Q11.i: Please explain your answer.

We have answered this question from the perspective of the potential value of import VAT suspension to businesses generally.

The suspension of the initial import VAT would present a valuable upfront cash flow benefit to businesses when importing into the Freeport zone as import VAT would not be payable until the point in time that the goods leave the Freeport and enter into the UK domestic market. This would provide an important cash flow boost to those VAT registered UK businesses which are integrated in international supply chains.

However, we assume that this is now a moot point given the announcement in Budget 2020 on 11^th March that from 1 January 2021 postponed accounting for VAT will apply to all imports of goods.

Tax

Q19: How could the following policies be used to encourage employment and investment in business, infrastructure and innovation in a Freeport or surrounding area? Please explain your answer, and support your response with evidence where possible:

• facilitative solutions on VAT and Excise Duties for goods within Freeports (UK Wide)

Duty inversion would be a particularly important consideration for business importing into the Freeport zone who then move the finished goods onwards into the UK domestic market. If the duty on a finished product is lower than that on the component parts, a company could benefit by importing components duty free, manufacture the final product in the Freeport, and then pay the duty at the rate of the finished product when it enters the UK’s domestic market. This would present a clear incentive to locate a business and invest within a Freeport given the potential cost saving achieved.

We once again assume that facilitative solutions on VAT are now a moot point given the Budget 2020 announcement on the introduction of postponed accounting for import VAT from 1 January 2021.

• Stamp Duty Land Tax (“SDLT”) (England and Northern Ireland)

At its highest level, 5 per cent SDLT is currently payable when purchasing a commercial property for any consideration in excess of £250,000 in England and Northern Ireland. For example, the purchase of a commercial property costing £500,000 results in a SDLT liability of £14,500.

On 1 April 2016, the SDLT rates for non-residential properties were reformed and moved from a ‘slab’ to a marginal rate ‘slice’ system. For most commercial property transactions this resulted in a lower SDLT liability. This is born out by the HMRC publication Annual Stamp Tax Statistics 2016–17 which show that in the first year of the change, transactions increased by 6 per cent from the previous year yet non-residential SDLT receipts decreased by 6 per cent. This would denote a clear correlation between property investment decisions and the upfront cost of SDLT. Therefore, lower rates of stamp duty land tax (“SDLT”) for purchasers of commercial properties would be a clear incentive for encouraging infrastructure development within Freeports as the overall cost would be lower. The Government could also consider implementing a form of “first time buyer’s relief” for purchasers of commercial properties within Freeports.

Any stamp duty land tax incentives within Freeports should be equally available to non-residents.

Anecdotal evidence from the establishment of the Northern Ireland enterprise zone at Atlantic Link in Coleraine suggests that many smaller manufacturing businesses are not able to purchase properties outright and prefer to rent. We would therefore suggest that infrastructure incentives within Freeports should also consider ways to incentivise landlords and their tenants to take up occupation within Freeports to ensure the cost of purchasing/renting property within Freeports is not prohibitive. This could include incentives in relation to rates and accelerated tax reliefs for premiums paid on leases.

Under normal tax rules, when a tenant pays a premium, the element which is taxed as income is split over the term of the lease and a full up-front deduction is not received. Tenants located in Freeports could avail of full relief for the premium paid as income deducted either completely up front or over a shorter period of time than the lease term. If relief was obtained in full up front, this would mirror the treatment already available to the landlord who is taxed upfront on receipt of the premium partially as income and partially under the capital gains tax rules.

• Research and Development (R&D) Tax Credits (UK Wide)

Recent research from the University of Oxford Saiid Business School states very clearly that “Current research shows that tax incentives for R&D have been effective in stimulating innovative activity”. The UK already has a generous system of R&D tax reliefs for innovation activity. Therefore, to ensure innovation is further incentivised within Freeport zones, the following measures could be considered for companies located within a Freeport zone which are carrying out qualifying R&D activity:-

• enhanced rates of R&D tax relief for SME and “large” companies;
• a fast-track process for any companies claiming the payable R&D tax credit;
• for companies claiming under the SME regime, the rate of the payable tax credit could be enhanced from the current rate of 14.5 per cent to match the actual rate of corporation tax, 19 per cent; and
• SMEs in receipt of notified State Aid who are currently only able to claim relief under the “large” company taxable R&D expenditure credit regime could be allowed to claim under the SME scheme; subject to any continuing EU State Aid constraints which may still apply after the end of the EU transition period.
  • Employer National Insurance Contributions (UK Wide)

The current cost of employer national insurance contributions (NICs) is 13.8 per cent for earnings above the secondary threshold (currently £8,788 on an annual basis). However, the UK also provides the following employers NIC tax incentives, each of which are designed to encourage employment in specific sectors:-

• an employment allowance which allows eligible employers to reduce their annual employers NICs liability by up to £4,000 so long as their employer’s NICs bill in the previous tax year was less than £100,000;
• employers with employees under 21 pay no employers NIC up to the upper secondary threshold (currently £50,000), employer’s NIC is 2 per cent on amount above this threshold; and
• employers with employees under an apprenticeship also pay no employers NIC up to the upper secondary threshold, again a rate of 2 per cent applies on amount above the threshold.

Therefore, any employer NICs incentives for Freeports should go beyond the incentives currently in place in the UK. The Government could consider offering enhanced versions of each of the above to drive employment. As a suggestion, an enhanced employers allowance could be offered to eligible employers located in Freeport zones for the first two years, subject to any continuing EU State Aid constraints which may still apply after the end of the EU transition period.

Q21: In your view, are there any particular tax policies that could increase the risk of tax avoidance or tax evasion activity being routed through a Freeport?

No

Q21.i: Please explain your answer.

There are already well known and defined anti-avoidance provisions for each of the potential tax policies set out in question 19.

Q22: In your view, would any of the potential tax policies set out in this document unnecessarily increase the administrative burden of business activity in the Freeport?

No

Q22.i: Please explain your answer.

There are already well known and defined administrative policies for each of the potential tax policies set out in question 19.

Q23: Please provide any other feedback you have relating to tax incentives for Freeports.

We take this opportunity to set out a number of further suggested tax incentives for Freeports.

Freeports should act as hotbeds of innovation in order to form innovative business clusters that benefit the local area. In addition to enhanced incentives for R&D tax relief, the Government could offer companies within Freeport zones an enhanced version of the UK’s Patent Box regime. This could take the form of rate of corporation tax for qualifying intellectual property profits generated by the company below the current 10 per cent and a relaxation of the modified nexus test introduced in 2016 where the Freeport company can still maximise the benefit of the patent box corporation tax rate despite the qualifying development having been carried on by another company in the same group.

To drive equity investment in Freeport companies, enhanced versions of the tax advantaged Enterprise/Seed Enterprise investment schemes could also be considered, subject to any continuing EU State Aid constraints which may still apply after the end of the EU transition period. For example, the rate of upfront income tax relief available under the EIS regime could be increased from 30 per cent to 50 per cent and the holding period for the share disposal exemption reduced from three years to two.

We also make the following suggestions in respect of capital allowances for capital spend in Freeport zones:-

• enhanced capital allowances could be offered akin to those currently available within UK Enterprise Zones;
• alternatively, the annual investment allowance (“AIA”) limit could be higher than that available to other UK businesses. This current AIA limit is £1,000,000 per year which is due to fall to £200,000 from 1 January 2021; the £1,000,000 limit could be maintained for Freeports;
• a higher rate of relief (say 10 per cent) could be made available for new structures and buildings (currently 3 per cent); and
• the business premises renovation allowance scheme could be re-introduced.

Overall, each of the above suggestions builds on existing/previous tax legislation which already contains anti-avoidance provisions relevant to that measure.

Other comments

Q69: Please provide any other comments you have relating to any section in this consultation.

The sections on Planning and regeneration, Additional policy considerations and Allocation and governance of Freeports in England should equally considered in respect of any Freeports established in Northern Ireland.