“many of the important levers are in Northern Ireland’s hands..”

As the BBC reports here – and as their NI political editor Mark Devenport notes here – as well as in the Belfast Telegraph here, Sir David Varney’s Review of taxation in Northern Ireland, as promised by then-Chancellor Gordon Brown, has been published, to the “disappointment” of the NI Finance minister, the DUP’s Peter Robinson. It’s almost as if he thought corporation tax would be reduced.. He’d probably be the only one who did.. ANYhoo, the full report [pdf file] and associated notes are available via the HM Treasury site.
From the full report’s Executive Summary [pdf file]

Terms of reference

On 22 March 2007, following representations from the Northern Ireland political parties, the Chancellor announced a review to report on: ‘How current and future tax policy, including the tax changes announced in the Budget 2007, can support the sustainable growth of businesses and long-term investment in Northern Ireland.’ In delivering a report to this terms of reference, the Review examined the case made for a differential rate of corporation tax in Northern Ireland, as well as other business tax issues that were suggested in response to the ‘call for evidence’ and in meetings. In order to put tax in the context of wider policies to support the sustainable growth of business and long-term investment, the Review considered opportunities and challenges for the restored devolved administration.

Submissions to the Review

The Review conducted meetings in May, June and July with interested parties in Northern Ireland and the Republic of Ireland. This included discussions with: the Northern Ireland Minister of Finance; the Minister for Enterprise, Trade and Investment; the Chairman of the Northern Ireland Industrial Taskforce; the Director of the Economic Research Institute of Northern Ireland; the Northern Ireland Business Alliance; the Federation of Small Businesses; the key Northern Ireland Assembly committees on Finance & Personnel and Enterprise, Trade and Investment; and spokespeople from the main political parties.

In addition, a wider ‘call for evidence’ was launched on 1 June 2007. A comprehensive list of acknowledgements is at Annex F.

The Review has been grateful for the volume and quality of responses. The vast majority of submissions to the Review, including those by the Northern Ireland Executive and the key
committees of the Assembly, have called for a preferential rate of corporation tax in Northern Ireland. Most cited the recent study by the Economic Research Institute of Northern Ireland (ERINI) as evidence to the economic benefits. Respondents have also highlighted wider tax and other issues as key to growth and investment in Northern Ireland.

Assessment

The Review has concerns with the approach taken by the ERINI study. Primarily, the Review believes the study underplays the role of supply-side factors and overestimates, relative to the academic literature, the responsiveness of investment to a change in the rate of corporation tax. The approach taken by the Review has been to set out the legal and design requirements for a preferential rate of corporation tax in Northern Ireland. Having analysed the Northern Ireland economy and the reasons behind the success of the Republic of Ireland economy, the Review estimates the likely additional investment in Northern Ireland from a move to a 12.5 per cent corporation tax rate. This uses the standard methodologies from the empirical literature to make a value-for-money assessment in terms of likely tax receipts. Of course, due weight should be given to the generic uncertainties inherent in such economic analysis when formulating policy.

The assessment of the Review is that in considering the costs and benefits for Northern Ireland in isolation, a clear and unambiguous case for a 12.5 per cent rate of corporation tax cannot be made. It is clear from this initial assessment that there would be an up-front cost of near £300 million per annum in lost corporation tax receipts, with no cost recovery in terms of tax receipts in a reasonable period of time.

From a UK-wide perspective, the overall case against a reduction in the corporation tax rate in Northern Ireland is more marked. The likely displacement of both capital and profits from the rest of the UK, and the fact that this would be subject to a lower rate of corporation tax, mean that a reduced rate of corporation tax for Northern Ireland would certainly come at a long-term cost in reduced resources to be shared by the UK regions or in the financing of public services. The policy would result in a net cost of about £2.2 billion over ten years, with no prospect of full cost recovery over the long run. [added emphasis]

The Review has looked at other areas of business tax policy, which are set out in Annex D.

Additionally the summary has this to say

Opportunities and challenges

For Northern Ireland, the return of devolution should mark a turning point. During decades of conflict, the Northern Ireland economy suffered from poor private investor confidence and became heavily dependent on public spending. The restoration of devolution is an opportunity to build a successful private sector led economy within a buoyant global environment.

However, this is dependent on the ability and willingness of the public and private sectors to undergo a cultural transformation. The Review has suggested some potential challenges to consider. [added emphasis]

These include:

• strengthening the skills base and addressing high economic inactivity;
• tackling the size of the public sector and efficiency of the administration;
• fostering innovation through better university and business collaboration; and
• prioritising trade and investment promotion across government, including working links with the Irish Investment & Development Agency and UK Trade & Investment.

Both the UK Government and the Irish Government have an important part to play. However, many of the important levers are in Northern Ireland’s hands. Devolution provides the opportunity for the Northern Ireland Executive to determine its own priorities for promoting economic growth.

Also in the Report – Chapter 3 Tax and Northern Ireland

CONCLUSION: TAX AND NORTHERN IRELAND

3.104 This chapter has set out that, both in terms of legal and design requirements, it would be possible to establish a regime which delivered a preferential corporation tax rate for Northern Ireland. However, this would require substantial legislative changes and would place a significant additional burden on UK business and HM Revenue & Customs.

3.105 Having established the difficulties in interpreting and making strategic choices on the basis of the ERINI’s analysis, the Review has set out an alternative approach. The Review has used the standard econometric literature on responsiveness of investment to tax to assess the extent to which a corporation tax cut would induce increases in foreign and domestic investment, as well as profit shifting. Due weight should be given to the uncertainties inherent in such economic analysis when formulating policy.

3.106 Consequently, the Review considers that there is not a clear and unambiguous case for a preferential rate of corporation tax in Northern Ireland based on an assessment of the costs and benefits for Northern Ireland.

3.107 This partial assessment is quite apart from the UK wide costs associated with profit shifting and the displacement of capital, as well as the indirect costs on competition associated with these flows.

3.108 Overall, the net cost of the policy to the UK Exchequer is estimated to be in the order of £2.2 billion over ten years, with no prospect of cost recovery over the long run. This does not include the implications of possible international or regional reactions. Other areas of business tax policy have been considered as part of the Review, accounted at Annex D.

3.109 On this overall assessment, the policy would result in a net cost for the UK and for Northern Ireland. Indeed, the policy does not represent good value-for-money when considering the up-front cost of near £300 million per annum to the Northern Ireland Assembly’s block grant.

These funds would be better directed towards improvements in the region’s business environment, which Chapter 4 examines.