“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.

, , , ,

  • It will be interesting to see how this feeds into the upcoming Scottish Constitutional Commission.

    Wendy Alexander suggested that corporation tax could not be devolved to Scotland because of the Azores ruling. It may be academic given the rest of his conclusions but Varney did not support that particular argument:

    “A move to a differential corporation tax rate for Northern Ireland would be possible in principle. However, it would involve legislative changes and legal issues would affect the design of such a scheme. Also, the fiscal consequences of such a move would have to be borne immediately by the Northern Ireland Assembly.”

  • Joe Hickey

    Time for Unity with the economically prosperous South I think.

  • Comrade Stalin

    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.

    I’d like to know how this number (£220m per year) was computed; and in any case it seems rather small potatoes against the UK’s annual tax take of circa £450bn. It’s a fraction of 1%; and I’ll bet it could be paid for quite through an equivalent reduction in the UK subvention to the NI economy.

    It says here that InvestNI’s annual budget is £200m/year. The government almost seems to be making the argument that the tax cut could be afforded by eliminating InvestNI, an entirely pointless institution most of us would be happy to see the back of.

    It’s all academic anyway. The UK government are never going to create a tax haven within the UK. If they did, the City of London would up sticks and move to Belfast. There is no way they’d even think about countenancing that.

  • Dewi

    Fascinating paper – rifle shot cf scatter gun analogy of the South an excellent description of approach to FDI.
    Jospeh – don’t really think City of London would up sticks ? They ain’t moved to the Virgin Isles yet.
    Would be interested in Dubliner’s comments on the approach taken – very much a British Nationalist approach I suggest. In contrast with Ahern’s direct grants for infrastructure improvement.
    Thanks Pete – we need some more economic stuff.

  • ulsterfan

    A timely reminder to the Ulster Nationalists of DUP and the “ourselves alone” of SF that Westminster rules.

  • The Raven

    Ummm….nobody ready to have a pop at the public sector yet? No? No cries to dump them all on the private sector?

    Anyone?

  • PeaceandJustice

    It’s only right that corporation tax is kept the same across the UK – despite the DUP wanting joint policies with Eire when it comes to money. People in areas like the north of England would have been less than impressed. It suggests that if the price is right, the DUP are willing to deal with the future of the country.

    The DUP should be pushing for further UK wide cuts in corporation tax if they are still a Unionist party.

  • Dewi

    “For example, a recent National Audit Office report found that, in 2005-06, one-third of the UK’s 700 largest businesses paid less than £500,000 each in corporation tax, while another third paid less than £10 million each. This shows a large skew in the distribution of the total £24 billion corporation tax paid by these 700 companies.”

    Bunch of crooks the lot of them.

  • Dewi

    Another interesting element of the paper is the South’s use of European funding on infrastructure improvement. Wales had a pile of Objective 1 funds over the past 7 years but the “sustainability” requirements of the rules made it very difficult to spend it on roads. Probably logical in a global sense but if your infrastructure is poor to begin with then difficult to progress far without investment in that area.

  • The Raven

    Without having enough time until I am at work tomorrow to peruse properly, are they referring to ROI’s use of the Structural Funds between 1990 and 2000? The rules changed a lot after 2000, which is the time by which ROI had most of their main work done.

    Still gotta wonder how we didn’t cash in earlier…or at least to the same degree…

  • Dewi

    The Raven – I think so – I didn’t know that you had Objective 1 as well – did you waste it as efficiently as us ????

  • Tkmaxx

    Varney unsurprisingly misses the NI point. He misses the greater picture of FDI and the small porportion of FDI that NI actually receives. Overseas investment is attracted by simple straight forward tax incentives. Listening to Woodward tonight who would feel the economy is safe in NI or GB. We have an unimaginative Prime minister and Chancellor. All good for further integration with the RoI.

  • The Raven

    I *love* the FDI apologists on this site. “Build them shiny factories….and they will come…”

    I listened to many discussions this evening about the effect corporation tax has on inward investment, but time and again – and I know this from my own experience – potential investors ask about corporation tax *last*. See Dewii’s “crook” post above. They ask about quality and number of workforce, proximity to market, availability of infrastructure, both physical and virtual, and so on.

    Here’s the blue-in-the-face moment coming up. Let’s have a look at companies which have been operating in Northern Ireland for, say, twenty years or more. I’d be interested to see how many are locally-owned and how many are FDI.

    I am not doubting the FDI success of ROI. I am, however, doubting the sense of attracting 200-300-worker plants from overseas, when we haven’t even begun developing our own entrepreneurial capacity.

    I am doubting the sense of it, when 900 people get laid off in a rural region like the North West.

    I am doubting the long term staying power of global corporations, when – for example – they move from here to save £15m a year in labour costs in Malaysia.

    Take the last rural development programme. Have a look at how many jobs were created, for, on average, £4,000 per job. And then take a look at your average FDI job cost. Double that. The difference? The rural development programme worked with local, indigenous business. Look at the piddling wee Start a Business Programme. Survival rates of over 70% with 1.5 jobs created on every £400 grant, an amount which in itself is scandalously low. And this has all been independently verified by PWC.

    We DO have an unimaginative Prime Minister and Chancellor, TK…but not for the reasons you may think.

  • dewi

    Personally I would not rush to decry agriculture – good quality organic food could be a big USP – difficult with the blasted oligopolistic supermarkets but I’m certain quality will out in this sector. Don’t know what the wind is like over there but sustainable energy must be good (manufacture of machinery a big deal) – Good luck!

  • Belfast Gonzo

    Pete

    To be fair to Robinson, he’d been letting us all down gently for some time.

    Two points: as others have noted, the time for cashing in on the peace process was after the signing of the GFA. Not a decade later, when the goodwill had largely dissipated and the global economy wasn’t in as good shape.

    If the Chuckle Bros had got together before devolution and decided to play collective hardball instead of going for the pathetic promise of a piddly ‘review’, they might have negotiated something better.

    Peter might be prudent, but his party has cost us billions.

  • gram

    >>”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.”<< Would love to know how they calculated this. Do they consider the increased corporation tax take from new business encouraged to set up here as a result of a corporation tax change? Meanwhile no one gives a toss that the Olympics will cost 10bn+ and rising. Hopefully we can soon put to bed the myth that we are all public sector scroungers over here. When we try to do something for ourselves and encourage non public sector employment we are slapped down.

  • Dewi

    “Meanwhile no one gives a toss that the Olympics will cost 10bn+ and rising.”
    It’s even worse than you think

  • John East Belfast

    This is a very robust and common sense document the conclusions of which I fully concur and I hope it buries this whole distracting nonsense once and for all.

    It was only ever about ROI based companies cashing in on the lower wage costs and less unionised workforce of NI whilst paying one low corporate tax rate throughout the island.

    The fact that it was spearheaded by the Belfast Telegraph – a publication with an historic 40% + Net profit Margin and owned by the Dublin based INM Group – said it all. That letter they sent in August signed by a mjority of ROI based business people with Northern based operations – including the loathsome Michael O’Leary before he had even opened up the Ryan Air routes totally let the cat out of the bag – none of this I am sure went unnoticed by Varney although he was too diplomatic to spell it out. Interesting though that in his list of individual contributors in schedule F he describes it as the INM letter as opposed to one signed by a group of Business people – subtle dig methinks

    Meanwhile all our politicians and some institutions who didnt want to appear to be calling for higher taxes went along with the con.

    Most of them didnt know what they were talking about – Archbishop Eames signing that letter as a token northerner made me laugh.

    In addition it is another blow to the All Ireland agenda which was also an undoubted motivation by some and one which seemed to go over the heads of unionist politicians

  • gram

    >>It was only ever about ROI based companies cashing in on the lower wage costs and less unionised workforce of NI whilst paying one low corporate tax rate throughout the island.<< Sure it was. And the Celtic tiger has been fueled only by indigenous businesses.

  • This issue will come up again because the whole issue of tax raising powers will be raised in the Scottish Constitutional Commmission, which is backed by Labour, the Tories and the Lib Dems:

    “One key issue, which must be part of these efforts, is to strengthen the financial accountability of the Scottish Parliament. In short the financing of the Parliament almost wholly through grant funding does not provide the proper incentives to make the right decisions. Hence strengthening the financial accountability of the Scottish Parliament by moving to a mixture of assigned and devolved taxes and grant is something the Commission should consider.”
    http://www.scottishlabour.org.uk/a_new_agenda_for_scotland

    Presumably, Brown is trying to co-ordinate his responses to Holyrood and to Stormont, but he will have to offer the Scots more than is in Varney’s review.

    Perhaps Alexander’s speech is an indication of where Varney’s second review might go.

  • Comrade Stalin

    The UK government could have been smarter about this, and pointed out that tax parity with the RoI means that we have to pay 21% VAT. I reckon this would actually increase the net tax burden here if it were done.

    What the taxman giveth, the taxman taketh away ..

  • GavBelfast

    Small beer, perhaps, but two areas where ‘tax’ could easily reduced, give a bit of a boost to the economy here and also hit the black economyh would be to reduce fuel duties to closer to the RoI’s (as happens in some border regions in other parts of other European countries where there is a disparity) and the scrapping of air passenger duty for flights to and from here, in common with Highlands and Islands of Scotland.

    Why aren’t lot pushing these – in the case of the second example, what’s good enough for Scotland should be good enough for this ‘off-shore’ region. How could even Brown refuse this concession for the sake of consistency and parity?

  • Quagmire

    “A timely reminder to the Ulster Nationalists of DUP and the “ourselves alone” of SF that Westminster rules.”

    Would be too sure if thats a good thing, from the unionist perspective that is.

  • ulsterfan

    The position of NI within the Union rests with the will of the Majority living there and while Westminster is sovereign I can not see under any circumstances how they could end the union against the wishes of the majority. It would not be in the interests of UK Parliament.
    As a Unionist I have no concern on this matter.
    The issue was raised to show the lack of independence of the Assembly.

  • Quagmire

    You are correct, the future position of the north does lie in the hands of its populous. However I wonder how long it will take the “average prod” to realize that they are being squeezed by westminister and that indeed they’re interests are best served in a single unified Irish economy/state? Fianna Fail recently stated that they are to set up in the north. They are doing so, they say, because they were asked to by various stake-holders in the north, all of whom do not exclusively belong to a nationalist background. Who are these other interested parties? It does not require a seismic shift to achieve Republican utopia but rather 5-10% of Unionism. The garden centre prod perhaps? We do not need all of you, just some of you.

  • IJP

    JEB

    This is a very robust and common sense document the conclusions of which I fully concur and I hope it buries this whole distracting nonsense once and for all.

    Even though in an ideal world I’d love to see lower business tax here, in the real world it’s hard to disagree with this.

    But chance would be a fine thing! Expect 2008 to be littered with Belfast Telegraph lead articles about financial deals (and subsequent ‘let-downs’).

    Comrade

    The UK government could have been smarter about this, and pointed out that tax parity with the RoI means that we have to pay 21% VAT. I reckon this would actually increase the net tax burden here if it were done.

    Varney does point this out, alongside the higher rate of paying top-rate income tax and lower capital gains tax.

    What the taxman giveth, the taxman taketh away ..

    Precisely.

    Hence my (and people like JEB‘s) frustration with the debate. You cannot get away without discussing the overall fiscal regime.

    In reality, Varney indicates it’s not that bad – what we’re lacking is skills and infrastructure.

    Oh yes, and we have an alarming tendency to live segregated lives thereby eating up public spending unnecessarily and restricting labour mobility. But whisper that quietly to those whose political mandates depend on that very segregation…

  • ulsterfan

    Quagmire

    Don’t believe everything FF says.
    Your analysis is too simple. To get the “garden centre prods” to change their minds will not be sufficient when at least 25% of Catholics wish to remain within the Union.
    There is also the perception that if 50% plus 1 wish to be in a UI this will happen .Wrong.
    What about the other 49% who refuse to be governed if they feel their freedom, liberty and culture is not respected.
    It seems that FF and all other Republicans have a lot to do and the rest of us will sit back and then pronounce if they have done enough.
    In my opinion the policy makers in the South have done nothing this past 30 years and are only starting.
    A long way to go boys—-enjoy the journey and soul searching

  • Quagmire

    “Don’t believe everything FF says”

    I don’t, was merely stating what it says on their website.

    “25% of Catholics wish to remain within the Union.”

    Were you talking talking to them all? lol. Wise up. Haven’t met one yet and thats quite surprising considering there are approx 250,000 of them. (The Gospel according to Ulsterfan)

    “What about the other 49% who refuse to be governed if they feel their freedom, liberty and culture is not respected.”

    Not my problem. That what it says in the GFA. If u dont like tough. No-one has a veto over the majority.

    “It seems that FF and all other Republicans have a lot to do and the rest of us will sit back and then pronounce if they have done enough.”

    Again we dont need all of you, just some of you.

  • Quagmire

    Incidentally I too am a Ulsterfan! Uladh Abu!!

  • ulsterfan

    quagmire

    You are not doing enough to get the numbers you seek.
    What have you to offer ?
    At the moment the people you seek are not even listening never mind interested.
    The 25% Catholic was taken from a detailed survey talking to many hundreds.
    You must not be moving in the right circles.

  • Quagmire

    A detailed survey? Care to elaborate or is it just some kind of UUP “wishful thinking document”. “Talking to many HUNDREDS” HAHAHA.Loads of people surveyed there then?? Where was it carried out? When was it carried out? Who carried it out? I would suggest from having read some of your previous posts that you are a member of/supporter of the UUP in which case may I suggest that it is you sir that is “moving in the wrong circles” considering that no-one votes for them anymore. Every time I see Reg on TV my knees tremble with fear. lol.

  • ulsterfan

    Quagmire

    Belfast Telegraph
    We have also strayed from original topic.
    For my part no further discussion.
    Happy Christmas!

  • Quagmire

    Belfast Telegraph/UUP same difference. Nollaig shona duit. xo