Freeports are a special kind of port where normal tax and customs rules do not apply. They can be airports as well as maritime ports. Freeports are intended to stimulate economic activity in their designated areas, specifically for manufacturing businesses that import, process and then re-export goods. They also have the potential to be new centres of excellence as we electrify, automate and digitise our future.

Within each Freeport, there are two types of sites: customs sites and tax sites.

Freeports – the two sites

Tax sites provide several advantages, such as accelerated capital allowances, relief from business rates and relief from stamp duty and land taxes.

Customs sites are separate secured zones that are physically within the UK but are treated as being offshore, enabling businesses to defer tax duty and import VAT on goods.

In a nutshell, if a raw material or component part comes from outside of the UK into the customs site, no tax is paid on it unless it then leaves the customs site and enters the UK. Goods and materials are allowed to move between customs sites within the Freeport itself (being treated as offshore), provided a manufacturer can prove that what goes into one custom site is exactly the same as what is moved to another custom site and there has been no break in the supply chain.

Manufacturers and Inward Processing Relief

If a manufacturer is located within the customs site, it can process the component parts to create the finished product, only paying tax on it if it enters the UK – no tax is payable if the business is exporting to an international market directly from the customs site. This is called Inward Processing Relief, but it is not open ended – there is a limit on the amount that a business can manufacturer within the customs site and the finished product has to be created before it leaves. Technology will be used to track all of this.

Why is technology so important?

Freeports have the potential to be centres for innovation, and data-enabled services and intelligence will be vitally important.

Technology that tracks the supply chain will be key – monitoring not only the movement of materials and goods into the customs sites but also what goes on within those sites and when the materials and goods leave the customs sites.

Freeport operators are generally using one of two systems: Tradelens and Destin8. Both systems will be configured to monitor the movement of goods by tracking the containers through the Freeports and into the secure customs sites. HMRC will also be operating a Customs Declarations System (CDS).

Businesses will need seamless integration between the systems they implement and the CDS and Freeport monitoring systems – many implementation efforts fail because someone underestimated the scope or importance of preparation for integration. Getting this right will enable improved productivity and quality of operations within the business.

What are the potential legal issues?

There are a number of emerging technologies for manufacturers, from robotics to big data analytics - Artificial Intelligence is helping production teams analyse data and use the insights to replace inventory, reduce operational costs and offer seamless quality control over the entire manufacturing process.

However, procuring and implementing new technologies can often be challenging and risk analysis will play an important role. There are also important legal issues you need to cover off in your contracts for the systems you're purchasing to ensure that you are adequately protected if things go wrong. 

An example of when things go wrong is illustrated by a recent case, which deals with the failure of a high value digital transformation.

What happened in CIS General Insurance Limited v IBM United Kingdom Limited?

The contract involved a circa £50 million project for the implementation of a new system and £125.6 million for management services to manage the system for a period of 10 years from implementation. This followed an initial £5.6 million solution outline phase agreement to scope the system. Things did not go well - the solution was meant to be implemented over two releases, but neither of the release dates were met which led to CIS refusing to pay an IBM invoice, arguing the milestones had not been achieved. As a consequence, IBM terminated the contract. 

CIS said that IBM was in breach and should pay back CIS all the money it had ‘wasted’ as a result of IBM's wrongful termination. IBM counterclaimed for payment of its invoice. CIS claimed £128 million in damages and the court awarded CIS just £16 million based on costs incurred as a result of delay in reaching contractual milestones.

The case emphasises, amongst other things, the importance of carefully considering at the outset whether out of the box solutions might need adapting for use in particular circumstances. This is likely to be a particularly important consideration for any manufacturer considering how best to upgrade its production and supply chain systems to align with a Freeport's infrastructure and systems.