Corporation Tax : a day late and a dollar short

Not for the first time, the vexed issue of the plan to reduce corporation tax in Northern Ireland is  in the news again in the midst of ongoing controversy about how much it will cost to implement the tax cut, and to what extent it will benefit the economy here.

Corporation tax is a rare example of a headline economic policy that enjoys public support across the respective leaderships of both the DUP and Sinn Féin. While Sammy Wilson, particularly during his time as Finance Minister, was cold on the idea (it should be noted that Wilson has a greater claim to credibility on the subject of economics than any other elected representative in NI), the new DUP Leader, Arlene Foster, has been an advocate of the cut for some time – even lobbying at one point to set the rate lower than that of the Irish republic. At the DUP Spring conference, Arlene Foster named the reduction of Corporation Tax as one of her five priorities. The Sinn Féin leadership, particularly key figures such as Martin McGuinness and Máirtín Ó Muilleoir, have also been on the record pressing home the case for the benefits of the tax reduction. The leadership of both parties ensured that a pledge to cut the tax was included in the Fresh Start agreement.

Alongside the party leaderships, the Conservatives, who are better known for their disinterest in pressing for progress in NI, have shown rare initiative in pushing the corporation tax cut onto the agenda in Northern Ireland. Labour were noticeably cool on the issue while in government, but the Tories made it a manifesto commitment in 2010. It’s likely that the Conservatives see Northern Ireland as an economic testbed for corporation tax reform, believing that if it is successful here, they will be able to easily make the case for cutting it throughout the UK.

However, the overwhelmingly positive gloss placed upon the capacity of a corporation tax cut to deliver jobs and prosperity belies the lack of real detail on the implementation, the cost, and the expected outcome. Analysis of the subject does not appear to have progressed beyond the simplistic perspective that the economic success enjoyed in the Republic of Ireland can be replicated in Northern Ireland by isolating and duplicating one specific part of their fiscal policy.

The enabling legislation, the Corporation Tax (Northern Ireland) Act 2015, is mostly impenetrable to anyone without a background in tax law, but with public service in mind, and fortified with coffee, I summoned up the courage to try to make sense of it.

As might be expected, the energy, continental shelf exploration (ie drilling for oil and gas) and financial services industries are excluded from the reduced rate – an obvious provision to prevent the City of London from relocating to the Titanic Quarter. To avail of the reduced rate of tax, companies have to either be a small or medium enterprise registered in Northern Ireland (SME), or have a presence in Northern Ireland (known as an “NIRE” or “Northern Ireland Regional Establishment”). In either case the organisation must employ 75% of its workforce in Northern Ireland. Crucially, the organisation can only claim the reduced rate of corporation tax on profits that are attributable to its activities carried out by its employees in Northern Ireland. There is a great deal of detail regulating these provisions, likely reflecting an objective to prevent abuse in the form of brass-plate tax avoidance operations.

An obvious initial observation here is that any firm wishing to benefit from the reduced rate of corporation tax will have to make extra accounting provision which will add complexity and overhead for its finance team. For example, a large employer registered in the UK with a regional office in Belfast, which books its revenue and handles payroll in London, will need to reorganise its accounts to monitor the revenue – and profit – attributable to employees in its Belfast office. In many cases this will not be at all straightforward – how, for example, do you attribute profit to a Belfast-based marketing design or software engineering team ? The need to obtain additional expert accounting and legal services to ensure proper compliance with the law while maximizing the return may end up eating a significant part of the expected tax benefit.

This is quite a significant concern given the objective of the legislation to allow Northern Ireland to compete with the corporation tax rate in Ireland. There, it is not necessary to have special accounting measures, or to comply with complex requirements around staff and where they are based. The Irish tax rate is simple, straightforward, and applies without special exclusions or conditions today.

The UK legislation is not the only source of many of the unanswered questions and issues posed by the policy; many of our worthwhile businesses will not benefit from a low rate of corporation tax. Any business which is not a corporation, such as a sole proprietor, or a limited liability partnership, cannot benefit. Small startups, especially in the high-tech industry, make losses for several years while they work on bringing their product to market and expanding their market presence. Companies which choose to make a loss while investing in expansion will also not benefit. Furthermore, many of Northern Ireland’s existing high-tech employers will not benefit, as even when in many cases they employ anywhere up to 1000 staff in high quality, business critical jobs, they cannot easily book their profit in this jurisdiction.

Many of these existing employers are already struggling with what is an increasingly hostile business environment in Northern Ireland. Business rates are an ongoing issue, and energy costs are an even more serious matter which the Executive has been dragging its heels to resolve. The Executive appears to be short on ideas for how to deal with any of this, with no mention of any of these problems appearing in Fresh Start.

On the other hand, immediate and direct beneficiaries of the reduced corporation tax rate will be organisations such as supermarkets and call centres, who already have significant local corporate undertakings in Northern Ireland. The nature of these lower skilled, low margin businesses makes accounting for Northern Ireland profits relatively straightforward; and many of them have in-house legal and accounting teams who will be well placed to ensure the necessary compliance.

The problems get worse when you consider that the Treasury plans to deduct the losses associated with the low corporation tax rate from the Northern Ireland block grant. Confusion reigns over exactly how much will be deducted, as our political leaders chose not to require the Treasury to make any specific commitments on this as part of the Fresh Start agreement. An annual figure as high as £300m per year has been quoted. This is money that will have to be raised by raising revenue or cutting public services even further. In Ireland, this is a relatively straightforward political matter as the government has the power to offset the revenue losses with increased income tax rates, VAT rates, road toll charges, car taxes, water charges, and fees for healthcare and prescriptions. In Northern Ireland, none of the Executive’s political leaders have shown any willingness to confront local people with ways to increase revenue, beyond raising the regional rate.

As well as claiming back the corporation tax losses from the Northern Ireland block grant, the Treasury has made no commitments to allow Northern Ireland to share in the increased yields of income tax, VAT, fuel duty and so on that would arise from any increased levels of employment within NI. As noted above, while the Irish government can recoup any revenue loss associated the low rate of corporation tax, in Northern Ireland these increased yields are effectively invisible.

It is a bizarre twist of irony that the Executive could well end up increasing cost burdens on existing businesses, startups and high-tech investors by cutting spending on quality education, raising business rates, and cancelling any putative support into assisting with reducing energy costs, to support a tax reduction that makes it more profitable to operate call centres and supermarkets here.

These are concerns that appear, belatedly, to have encroached upon the thinking of some representatives within Sinn Féin. The ink on the Fresh Start deal was barely dry when some elements of the party began attempting to renegotiate it in public. Sinn Féin group leader on Belfast City Council, Jim McVeigh, was first out of the blocks, saying :

We won’t be signing up to any cut unless we afford it and we won’t be able to afford it any time soon.

More recently, Chris Hazzard appeared to question the entire premise of the proposal:

Corporation tax isn’t going to be the silver bullet that a lot of people think that it is. The Fresh Start Agreement says ‘if it is affordable, we will agree’

Taking to Twitter, his party colleague, senior MLA Alex Maskey, went further, saying that the corporation tax cut would depend on “quality jobs” being created.

In each case, these representatives were going on record with their imagination of what their party committed to, rather than the reality. Contrary to some claims, Sinn Féin have already signed up to the corporation tax cut – as part of its commitment to the Fresh Start deal. Section 1.19 :

On this basis: The NI Executive commits to a commencement date of April 2018, and a Northern Ireland rate of 12.5%.

Further contrary to some of these claims, there are no affordability constraints included in the deal, and there are no conditions around the creation of “quality jobs”. Instead, the deal commits the Executive to economic reform. Section 1.18 says :

In accordance with the requirements of the Stormont House Agreement, the Executive reaffirms its commitment to take all the actions necessary to demonstrate that its finances are on a sustainable footing for the long term including successfully implementing measures in the Stormont House Agreement, this Agreement and subsequent reform measures.

Investors are not gamblers, and they will not make an investment on the basis of a policy which is subject to unilateral withdrawal. They must be persuaded that decisions are taken for the long haul.

Despite the unambiguous commitment in the deal, and the assertion of Arlene Foster that the matter is agreed, the path is being cleared for Sinn Féin to walk away from it. Under the legislation, the new tax rate must be proposed by the Finance Minister and passed on a cross-community basis in the assembly. This means that nationalists can simply veto the new rate when the vote is taken. Crucially, the new rate will be very difficult to reverse, as the reversal would similarly require both a Finance Minister proposal to increase the rate, and the assent of unionists during the following cross community vote. The “stickiness” of the rate cut will serve to strengthen the hand of nationalists trying to prevent its implementation in the first instance.

The “will they/won’t they” ongoing discussion of a deal which is supposed to have already been sealed is a symptom of a problem much more serious than our regional fiscal policies. The signal being sent out to the world is that when Northern Irish politicians sign up to a deal, you can’t trust that they’ll stick to it; you can’t be sure that, having enticed you in the door with your money, that they won’t pull the rug out from under you. Most people understand that politicking is a reality, but Northern Ireland must be one of the few western jurisdictions where politicians are willing to undermine investor confidence with endless ambiguity to suit their own parochial political concerns.

This does not compare favourably with the conduct shown by our neighbours to the south. While Ireland has something of a reputation for corruption and brown envelope politics, politicians do understand the needs of business and, more importantly, the duty that sometimes falls upon politicians to make decisions for the good of the country that will certainly do them short-term electoral harm. The self-sacrifice of the Irish Green party, and Fine Gael’s re-installation as a minority Irish government, are good recent examples. How can investors be expected to take risks when political leaders here will not ?

The endless bickering, blocking and delay has real costs. While local politicians have endlessly fiddled and wrung their hands over corporation tax, the Irish government moved to compete even more aggressively in this area, with a 6.25% knowledge development box arrangement which undercuts the UK’s patent box rate of 10%. And while we spent a couple of years fiddling and sending out mixed messages over domestic air passenger duty, the Irish government moved quickly in response to industry calls and undercut us, leading to industry accusations of “bottling it“.

The proposals to cut corporation tax, if they are implemented by the Fresh Start schedule of 2018, will have come after nearly 8 years of endless prevaricating and debates which ultimately produced nothing in the way of policy detail on the issue. They impose additional accounting and compliance complexity upon businesses, as well as costs to the Northern Ireland budget. They cannot be reversed, and there is no guarantee that they will yield any kind of worthwhile return. Why on earth would any investor bet the shop on a jurisdiction which thinks that a half-baked, poorly conceived gimmick is an adequate substitute for stable government and responsible, sustainable public finances – and why should any Northern Ireland voter continue to endorse this charade ?

Software engineer living and working in greater Belfast. Pragmatic social democrat with the odd leaning towards capitalism. Political interests include economic policy, social and political reform.

Alliance Party member, but writing in a strictly personal capacity.