Special Investment Zones: What’s in it for small and micro businesses?

Innovation districts. Knowledge clusters. Research and development centres. Knowledge-intensive growth clusters. Special economic zones. Call them what you wish, the long-discussed investment zones are now a reality, announced as part of the Spring Budget 2023.

Here, they are called Special Investment Zones – there will be 12 across the UK, including eight in England.

These zones are “expected to be set across a sensible economic geography to facilitate effective collaboration between industry and research institutions,” says the Institute for Government. “Tax sites must be located within investment zones on underdeveloped land which can be split across three areas totalling no more than 600 hectares. Timelines are to be confirmed but the government hopes to have all proposals agreed by March 2024 with funding to commence in 2024/25 financial year.”

Tax incentives include relief from Stamp Duty Land Tax, relief from Business Rates, enhanced capital allowances, increased structures and buildings allowance, and reduced employer National Insurance contributions.

Each zone is funded to the tune of £80 million. But it’s not the tax breaks nor the funding that micro, small and medium businesses should be excited about. Instead, experts say, it’s the opportunities that are likely to arise around them.

“I think business owners who are in tune with the economy will see the opportunities,” says Mujibur Rahman, founder and Director of RSA Accountants in central Birmingham, and Regional Ambassador for IFA in the Midlands.

“There are two different types of business operators. You’ve got the type who are proactive and who are always looking for opportunities. Those are the people who I think will be benefiting from special investment zones. Then you’ve got those who are so focused on their business that they’re not aware of what’s available to them.”

Will the tax pot shrink?

Special economic zones do come with risk – reducing the size of the potential tax pot without economic benefit if the subsidies, rebates and concessions mean that the companies lured to the area don’t contribute to its economy in a meaningful way.

A well-managed investment zone programme, however, is typically beneficial to a nation’s economy.

“The concept of special economic zones is a great idea to stimulate the economy,” Mujibur says. “They will create jobs. They will create opportunities. Initially they may reduce the tax that the government will be taking, but without these investments we are going to continue our downward spiral.

“We see businesses closing every day, so that’s tax coming out of the system. We need to move in the right direction.”

How do micro and small businesses go about investigating the opportunities that investment zones might offer? Mujibur suggests starting with local authorities, whose job it is to not just develop these zones, but also to promote them to relevant businesses.

“The central government will set the guidelines for local authorities to implement,” he says. “It is then the local authorities that need to promote opportunities effectively via business forums, networking events and various other platforms.”

Accounting businesses, Mujibur says, should also be familiarising themselves with various opportunities offered by local investment zones, so they can properly and thoroughly advise clients.

“I think particularly now, as business owners and managers are approaching us for advice to help them navigate through these challenging times, as professional advisers we should be able to be proactive in promoting these opportunities.”

Special investment zones that have fuelled growth

Credit for the concept of the special economic zone goes to Shannon, Ireland, inspired in part by a small duty-free port in Panama and in part by a need to remain relevant once jets could fly further and faster, overshadowing the allure of Shannon’s duty-free airport shopping.

In turn, the Shannon free zone inspired China’s establishment of its own special economic zones, which have helped fuel the nation’s almost unimaginable economic growth over the past four decades.

China is widely regarded as a modern example of special economic zone implementation that prioritises economic benefit and fuels growth.

There are various types of special economic zones in China, with some at province level and some at city level. They all offer some sort of special economic privileges, including what has been known as a ‘three-plus-three’ policy, meaning a business can waive its first three years of income tax, then pay half for the next three years.

But that’s just the beginning, with many other benefits including relief from various duties, streamlined procedures and, importantly, autonomous operation. In a nation known for its red tape and top-heavy bureaucracy, these locally governed zones allow businesses to thrive, or fail, quickly.

Foreign direct investment in these zones is also encouraged, offering multinational businesses a less daunting route into the Chinese market. These zones, in fact, contributed directly to China roaring up the foreign direct investment (FDI) charts during the 1990s and early 2000s.

Prior to the COVID disruption, China Daily reported that “China is the third-largest recipient of FDI in the world. Beijing appears keen to continue to improve China’s attractiveness to foreign investors with its continued plans to cut red tape for foreigners and its announcement to increase foreign investment in healthcare, education, sports and culture”.

Having suffered economic blows from both Brexit and the pandemic, the UK and its businesses could do with a dose of the same.

What must the government do to succeed?

The details of the special investment zones project are still being negotiated.

Chartered town planner and regional policy expert Tom Bridges, Leeds Office Leader and Director Cities Advisory at Arup, says there’s a five-step process government should follow.

1. Identify the right locations and sectors through a “hard-headed and evidence-based” process that pinpoints genuine sector strengths and scope for investment.
   
   
2. Keep government spending and fiscal incentives balanced and flexible. “The availability of flexible spending to support initiatives such as research and innovation, skills, local infrastructure, enterprise, and planning and development can really help places support growth,” Bridges says.
   
   
3. Provide certainty through faster planning, rather than less planning.
   
   
4. Develop the entire ecosystem, rather than just the bricks and mortar. “Successful investment zones will need strong partnerships with the right players around the table, and places should identify current gaps and weaknesses in their local ecosystem,” he says.
   
   
5. Develop strong, dedicated, local leadership to deliver “clear, coherent and compelling strategies, based on evidence, realistic proposals and projections for future change, and around which partners can build a coalition and shared commitment.”

Once that roadmap is in place and readily transparent, small and micro businesses can identify how they can benefit and where they belong.