Freeports: what are the risks and benefits of the Singapore-on-Thames model?

The Chancellor announced eight freeports in the 2021 budget. What are they and how do they work? By Steve Hemsley

The notion of a low-tax, deregulated economy to fire up the UK post-Brexit was first mooted in 2017 by then-prime minister Theresa May.

The idea of a “Singapore-on-Thames” was originally raised as a threat to dissuade the EU from negotiating an agreement that would punish the UK. Since then, the idea has captured the imagination of tax and economic experts alike.

Of course, there are many differences between the two countries. The UK has a serviceled economy, while around 22% of Singapore’s economy is made up by manufacturing.

The UK government wants to revive manufacturing as part of its levelling up agenda and Brexit could mean lower taxes and subsidies to support producers investing in new factories.

What is clear is that the UK is no longer obliged to comply with the EU Code of Conduct for Business Taxation. The code was never legally binding, but was designed to stop members rolling back existing tax measures to gain a competitive advantage.

Those against a low-tax, deregulated economy warn there could be a race to the bottom around areas such as corporation tax (it is 17% in Singapore but already 12.5% in Ireland). They also fear that free ports will encourage tax avoidance or evasion and encourage money laundering. The UK has said it will continue to abide by the OECD’s tax avoidance processes.

Supporters of the Singapore model point out the benefits to business, in particular to entrepreneurs and startups where the UK is a world leader. There is also a need to encourage inward investment and boost consumer confidence after a difficult 2020.

In theory, the UK could abolish VAT. This is considered unlikely because it is such a major revenue earner globally and represents 18% of UK tax receipts. The UK is also signed up to the OECD International agreed standards on VAT.

A major unanswered question, though, is how the EU would react to having a tax haven as a noisy neighbour. It could mean the 27 members accelerate their economic integration and introduce more common tax rules, particularly around corporation tax.

AT spoke to a range of experts to get their take on the pros and cons of creating a ‘Singapore of the West’.

What the experts say

If the UK really wants to become Singaporeon-Thames, then it must be bold with its tax changes, say tax experts.

Finn Houlihan, founder of independent UK tax advisers ATC Tax, says corporation tax should be lowered to 10%, income tax cut and tax breaks introduced for certain industries.

“This would attract new companies and encourage entrepreneurs to start businesses in the UK. It would also help the current talent within the UK to grow their businesses,” he says.

He adds that the government must exploit the country’s existing strong infrastructure.

“The UK has high-profile markets in commodities, currency trading, derivatives and fintech, plus established, strong relationships with other trading hubs, including Singapore.”

Mark Kearsley, tax director at DSG Chartered Accountants, describes the creation of Singapore-on-Thames as an extreme approach and one the EU would have to respond to.

“The EU trade agreement comes with a commitment to tax transparency and effectively ensuring a level playing field,” he says. “Significant divergence from the current tax regime could result in UK businesses facing tariffs and other remedial measures from the EU, so this view is unlikely to hold.”

He says the creation of freeports – which have existed in the UK before – could help UK businesses. “They would benefit from simplified processes to regenerate brownfield sites, a package of tax relief and simplified customs procedures.”

Kearsley adds that one tax relief currently constrained by state aid regulations is enterprise management incentives. These popular share schemes promote growth and retain talent by providing individuals with significant tax benefits.

“The Treasury Committee launched an inquiry into the UK tax system last summer. It is focusing on the long-term pressures of the system and how it needs to change to ensure the UK protects its tax base.”

All change on tax? Maybe – but not yet

The UK in a Changing Europe think tank offers a non-partisan view on the Singapore-on-Thames debate.

Senior fellow professor Sarah Hall says there remains a lack of clarity about whether the government wants to follow a Singapore-on-Thames agenda.

“The government is keen on deregulation, but is unsure how it wants to use its freedom specifically to change tax,” she says.

She adds that there is a keenness to use tax breaks to help specific sectors of the economy, including tech and renewable energy businesses.

“We could see a green-led recovery. This is one sector where the UK leads the world. The 2021 United Nations Climate Change Conference is due to be held in Glasgow in November.”

Professor Hall also warns about the ethical implications of creating a low-tax economy.

“Since the financial crisis, we have seen public opinion move away from wanting a deregulated tax haven. Such a move could have an impact on the country’s credibility globally around economic leadership and sound corporate practice,” she says.

Entrepreneurs wait and see

Brexit is an opportunity for the UK to create a new vision around tax, says Sam Dumitriu, research director at think tank the Entrepreneurs Network (EN). EN is part of the growing group of voices which says entrepreneurs should benefit from the UK’s new-found tax freedom.

There could be changes to Entrepreneurs Relief, The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), for example. Chancellor Rishi Sunak announced in the March 2020 budget that he would limit the lifetime tax relief available to those selling their businesses to £1m, down from £10m, but this could be revised in future.

Potential changes to EIS and SEIS will depend on the government’s commitment to encouraging early-stage investment and a willingness to offer more generous tax relief to investors.

“Tax reliefs will increase investment in start-ups, but freedom around tax is probably limited initially, although we could see things streamlined,” says Dumitriu. “There should be less red tape, which can slow down entrepreneurs and even mean start-ups lose investment.”

The ethical arguments

Paul Monaghan, chief executive at the Fair Tax Mark (FTM) certification scheme, is keen to see a more just tax system post-Brexit to fund public services.

FTM is a joint initiative between the Ethical Consumer cooperative and Tax Research UK.

Monaghan believes there is a battle going on within Downing Street about whether or not to follow a Singapore-on-Thames agenda.

“It is strange we’re talking about reducing the tax take at a time when so many areas need support,” he says.

He adds there is scope to increase corporation tax because, at 19%, the UK has one of the lowest rates.

“How many advantages do British businesses need to compete abroad? Do we really want a race to the bottom? We need to address areas such as productivity.”

Monaghan says there could also be changes in VAT as part of a drive for a fairer tax system, along with changes around state aid to help different industries and revisions of capital gains and inheritance tax rates.

He is critical of plans to create up to 10 freeports, which he says will encourage tax avoidance and evasion and create unfair advantages for some businesses.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.