Free port bids must prove they will help regenerate the local area and cannot be used to afford tax breaks to those wanting to import luxury goods, ministers have said.

Chief Secretary to the Treasury Stephen Barclay said “ideally” the first free ports would be “operational by the end of the year”.

“We are extremely keen to do things at pace,” he told the Commons International Trade Committee.

But ministers told MPs on Wednesday that successful bids would have to demonstrate that they could “level up” the surrounding region, with Government ready to strip areas of free port-associated benefits if there are examples of tax fraud.

The Government, as per the 2019 Conservative Party manifesto, wants to develop up to 10 new free ports in the UK, with seven slots available in England.

The bidding process started in November.

The free port model works by allowing companies to import goods tariff-free and only paying once it is sold into the domestic market, or exporting the final goods without paying UK tariffs.

There had been fears raised that free ports could be turned into high-end security compounds to allow owners to import and store luxury goods without facing customs charges.

Le FreePort in Luxembourg is said to act as a maximum security centre for the super-rich to store art, fine wine, vintage cars and other treasures.

Chief Secretary to the Treasury Stephen Barclay
Chief Secretary to the Treasury Stephen Barclay (Victoria Jones/PA)

But Luke Hall, a junior minister in the Ministry for Housing, Communities and Local Government, who was standing in for Housing Secretary Robert Jenrick, ruled out such a prospect in the UK.

“In the free ports consultation, we were clear that we don’t intend to designate free ports for purposes of high-value luxury storage – we were quite clear about that,” he said.

Mr Hall said the Government would be “closely monitoring” that the desired outcomes for free ports, such as creating regeneration and investing in innovation, were being met once the 10 have been given the go-ahead.

In a warning to those looking to exploit the tax breaks that will come with the post-Brexit reduction in red tape, he said ministers had the power to “de-designate a tax site if there is lots of non-compliance”, mentioning the example of tax fraud.

Tax breaks will be available in free port areas, including discounts on land purchases and waiving national insurance contributions for employees earning up to £25,000, in a bid to encourage the private sector to drive regeneration.

Explaining the rationale, Mr Barclay said: “The sites that are often around ports that are likely to become free ports are areas that need levelling-up, so what you want is businesses investing in those areas.

Luke Hall, a junior minister in the Ministry for Housing, Communities and Local Government
Luke Hall, a junior minister in the Ministry for Housing, Communities and Local Government (Chris McAndrew/UK Parliament/PA)

“What it is doing is incentivising businesses to go after innovation because of the other aspects of the package around the regulations but also to invest in those areas that need levelling up and do that in terms of those tax incentives.”

Mr Barclay said it was hoped free ports would increase productivity but, without knowing which bids would be successful, explained the Treasury did not yet know by how much they could potentially boost gross domestic product (GDP), the main marker of the economy’s health.

Asked why a 45-kilometre limit had been placed on the distance between sites within designated free ports, Mr Barclay replied: “This is about being targeted, this is about regeneration and that’s why we want to have a geographical limit but there is scope for innovation within that.”

The former Brexit secretary said he could not be more specific about when the successful bids will be announced other than the earlier declaration that they will be revealed in “the spring”.

Cabinet minister Mr Jenrick had been due to appear as a witness at the session but Mr Hall said the Secretary of State felt it was “more appropriate” for another minister in the department to attend as he was involved in the decision making process around where the free port locations will be.