Brexit deal & the pandemic sink “Singapore-on-Thames” low-tax dream

Any prospects of the UK becoming a European version of the low-tax Singapore trade hub seem finally sunk as the Chancellor prepares for his March budget. A corporation tax rise – rather than a swash-buckling cut from the current 19 percent – looks possible as the government edges to towards repairing its pandemic-shattered finances. And the last-gasp Brexit Trade and Cooperation Agreement will tie the UK up from aggressive tax incentives for fear of retaliatory EU tariffs. But do not despair – the UK is, and will always remain, a tax cutting champ.

Corporation tax hike to signal fiscal fortitude  

Whilst the UK economy is too fragile yet to impose the sort of blockbuster tax hikes that will inevitably be required to meet the expected £400bn deficit for the 2020/21 financial year, the path for future fiscal consolidation must now be set to reassure financial markets. At 19 percent, the UK’s Corporation Tax rate is one of the most competitive in the OECD. A small rise to, say, 21 percent would still leave it near the top of league.

The experience of the Osbourne Chancellorship, when rates were slashed from 26 percent to 19 percent, showed that aggressive cuts do not fill the coffers or attract major new investment. Although in fairness, the stealth widening of the business tax base did counter the headline rate cuts.

So far from the UK heading towards lower business tax paradise, a rise is more likely in the next year or so.

Brexit trade agreement keeps UK tax policy in check

On the eve of the last stage of the UK’s exit from the EU on December 31, 2020, it struck the Trade and Cooperation Agreement with the EU which included limits on direct tax policy. This comes despite some promises from Brexit supporters of turning the UK into Europe’s Singapore – a low tax platform into Europe.

Under the Agreement, the UK is still free to compete on tax rates. But many tax avoidance and anti-money laundering restrictions were imposed by the Trade and Cooperation Agreement on UK tax policies to secure a goods tariff-free deal, including:

• UK will not have to abide by EU anti-tax avoidance Directives (laws), but will instead remain signed-up to OECD measures
• EU can use retaliation tariff mechanisms within the Agreement should UK the give unfair tax subsidies to individual companies or sectors. For example, the UK had given reduced tax rates on patents registered in the UK, which was attracting significant investment from Germany. The UK eventually modified its tax subsidy in 2015.
• Option for the EU to impose anti-money laundering obligations on the UK if its much-vaunted post-Brexit free port schemesact suspiciously
• The EU has also held back on granting the UK’s financial services regulatory ‘equivalence’ in the EU and will likely use this as leverage to keep the UK in line with broad EU tax rules
• A non-regression clause on EU country-by-country reporting standards which aims to give transparency to multi-nationals using cross-border tax rules to gain unfair advantages.

The UK will always be a tax champ

Whilst the pandemic and Brexit limits have now put to bed finally the option of the UK becoming some sort of Singapore-like tax haven, the UK will remain a tax efficient jurisdiction. Its leadership in tax simplification and anti-avoidance measures make it the model for others to follow – including its erstwhile club, the EU. The UK will remain the European low income and corporate income tax champ.