Scotland is the latest complication for a lower Northern Ireland corporation tax rate

Westminster is in a terrible muddle over devolving corporation tax. The right hand doesn’t know what the left is doing. The UK government gives nominal support to lower corporation tax for Northern Ireland but slaps it down for Scotland. Naturally Alex Salmond was among the first to point out the illogicality of that position and grabbed it for the SNP’s advantage. Lib Dem Bizz Secretary Vince Cable hadn’t heard of the Scotland Bill, it seems. After finding the arguments in favour of a lower rate for Scotland “irresistible” for Scotland, he was forced into an embarrassing climbdown, not realising it was against government policy. Secretary of State Owen Paterson is a long standing champion of a lower rate for NI but washes his hands of it when it comes to lobbying the sceptical Treasury.

If ever evidence was ever needed for Whitehall to abandon its casualness towards devolution and adopt a joined up approach, this is it. And what about the vast majority of the UK population in the English regions who are left out of the supposed benefits?  The UK is adopting tax competition between regions in a fit of absence of mind.

What are the real arguments in favour for NI? The first seems to be that so little corporation tax is lifted anyway they may as well take a punt on reducing it. The damage to the block grant would be minimal.

Next comes the cause of integrating –  or at least harmonising – the northern economy with the south’s – what used to be described as opening a northern branch office of the Celtic tiger. Sadly out of date or premature, depending on your perspective.

The NI Select Committee produced scarcely a single figure in support of it. They rightly bemoaned the fact that no one knows the size of the NI corporation tax take. So how can a cost benefit analysis be made until this is known? They worry about brass plating, the practice of moving company HQs to tax havens to avoid higher tax rates. The obvious way to avoid this is to grant tax concessions to companies on the size of their payrolls.

Estimates of the impact of a 12.5 % rate on the size of the block grant vary wildly. The figure of £200 million a year has been bandied about. But now I see that Sammy Wilson is quoting a dramatically higher figure. No wonder he’s mister push-me-pull-you on the issue as he squares up to the (surely unimpressed) Treasury.

Finance minister Sammy Wilson warned there were still tough negotiations to be held with the Treasury and said the proposed cost of taking on the powers because of a reduced block grant from Westminster were “totally unreasonable”.

He calculated the cost proposed at present would be equivalent to the spending cuts made to Stormont departments over the next four years.

“There is no point in us taking on something if the cost is so great that it outweighs any benefits, or it puts immense, immediate pressure on public spending in Northern Ireland.”

According to Mr Wilson, £4bn has been lost to Northern Ireland’s block grant over the period from 2011-2015 because of last autumn’s spending review at Westminster.

So the cutback in the block grant might range from £200m to £1 billion a year – a tidy sum  at either end.

Who knows how long  it would take for NI business to make up the shortfall by wealth creation. Certainly a long time in the present investment climate. In Alan Trench’s blog post is a link to Robin Wilson’s case against at this stage. NI doesn’t have the skills base to amortise the concession. And why should we trust such a small business community to deliver? We need to hear a lot more from them than the usual exhortation.

What next?  The UK government needs to get its act together on the principle before Northern Ireland can go it alone. You can be sure of one thing. The politics of Scottish bid with independence not far in the background, will complicate the final decision for Northern Ireland.

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  • Frustrated Democrat

    A very ill informed blog on many levels.

    Owen Paterson has not washed his hands over lobbying the treasury, he has lobbied them consistently and he has helped put in place the most effective business lobby, GROWNI, ever seen in Northern Ireland with all of the major business groups involved, their launch was today. They even had a treasury Minister as an observer.

    There are ample figures if Mr Walker chose to look for them – try ERGNI – and when the consultation paper was launched all 5 major parties were in favour of a corporation tax reduction. He choses to use a link to Robin Wilson whose background would not appear to be relevant to international industrial development and tax polices and currently more to intercultutal dialogue in football when the most prominent economic and business brains are available.

    There have been no decisions taken over a rate many prefer 10% to 12.5% it would be for the executive to decide the rate, over what period to introduce it and who would benefit if the power was revolved.

    This is the only show in town and the only danger for everyone in Northern Ireland would be if it was not introduced.

  • Frustrated Democrat

    A look at http://www.niconservatives.com will show Owen Paterson at the GROWNI event.

  • exsdlp

    Oh dear, what a misinformed original post. If Owen Patterson has washed his hands of the argument, then I would love to see and hear him in full support.

    As for Robin Wilson, I am afraid he never left the ivory tower of academia. I wonder has he ever set foot in a factory floor. Still at least he dragged himself away from the runaway success that is Platform For Change long enough to write his thoughtful inustrial analysis.

    If NI doesn’t do this – and quickly – then we’re screwed long term. Thats the bottom line – something neither Brian Walker nor Robin Wilson would appear to have heard of.

  • Brian Walker

    It’s my very point that I’m ill informed. My critics above may be satisfied with the glass half full arguments restated after months of silence by the lobby called ERGNI. If they really do know more please enlighten us. As is obvious from my post I’m not opposed to lower corporation tax in principle but I’d say – and so would many others – the case is not yet made.

    Both Owen Paterson and the Executive have played odd roles. Normally it’s the devolved body which you’d expect would lead the pressure for tax changes. In this case it was the UK SoS acting as a sort of lobbyist within the cabinet. It’s understood that in the end, the Executive has to ask for the powers. But why hasn’t Paterson presented them with attractive, costed and transparent options on behalf of the Treasury we can all assess?

    ERGNI’s campaign is understandably NI centered. But don’t forget the Conservatives are ideologically in favour of a lower tax, smaller public sector economy; this may not suit NI at this stage. I note the get-out clause of the Assembly acquiring the powers without necessarily using them straight away. There may be other taxation powers worth considering. In the Select Committee hearings, more sceptical expert views were heard which the committee chose not to accept. My feeling is their verdict is partly a reflex of the peace process thinking: if the NI parties really want something they can unite around, we should give it to them if we can, treating them as an exception one more time. The trouble is with tax, unlike say P&J powers, the implications extend throughout the UK. Some English committee members have suppressed their anxieties about the impact on their own regions.

    If implemented, remember that the Azores judgment appears not to allow a recalculation of the block grant to make up any shortfall; some say this would be a once for all settlement so it’s vital to get it right.

    State aid rules may indeed curtail the grants regime. That’s why it’s important to protect the option of state capital spending to build capacity.

    90,000 jobs in 20 years sounds great but such predictions can’t be reliable. So many externals variables are involved. And how much FDI is estimated over the next five years if differential corporation tax were enacted tomorrow?

    As for the Republic, has anybody in the ERGNI group been following the bailout controversy and the crisis the Eurozone? The rest of the zone regards the Republic as a tax haven but doesn’t want to be accused of bringing its house down. It is at least arguable that a slightly higher might be a good trade off for better bailout terms. And is the UK government certain that differential company tax is EU commission proof?

    Finally, I take it that Sammy speaks for an Executive which is in two minds: in favour of principle but wary in practice. And remember the Scottish complication with English regions to come. This one has a long way to run.
    Further lowering of UK-wide corporation tax in time might be more effective in stimulating privae investment.

  • otto

    What does “amortise the concession” mean?

    Why does NI not have the sufficient skills base to staff new plant?

    Says who?

  • When you say “Westminster is in a terrible muddle,” I presume that you are not saying that the Government is in a muddle. It does not bother me if the select committee does not know what it is doing.

    Having re-read the treasury document “re-balancing the Northern Ireland economy” published last March, it is pretty obvious that the Government is on top of its game.

    I note, for example, that it was keen to distinguish Northern Ireland from Scotland. I quote the following passage:

    “Northern Ireland has its own unique set of circumstances, not least a land border with the Republic of Ireland with one of the world’s lowest corporation tax regimes, and the implications of a lower Northern Ireland corporation tax rate need to be examined on their own merits.

    The paper goes on to explain Northern Ireland’s problems in detail. Just to referring to Scotland again, the paper says this about GDP per capita:

    “Currently GVA per capita remains significantly lower than that of most of the other parts of the UK, with GVA per capita in Northern Ireland in 2009 at £15,800, slightly higher than Wales and North East England (£14,800 and £15,600 respectively) but significantly lower than England (£20,400) and Scotland (£19,700).”

    I do not accept that Scotland is a “complication.” I am quite satisfied that is economic differences with Northern Ireland have been considered. The only so-called complication you might have is a political one. So what if Alex Salmond uses his position to highlight another Anglophobic grudge? Remember, the Conservatives have no significant assets north of the border.

    You say this

    “They (the NI Select Committee) rightly bemoaned the fact that no one knows the size of the NI corporation tax take”

    He He He He He

    I quote here from the paper at 3.5

    “The value of corporation tax receipts in Northern Ireland in 2009-10 is estimated at around £465 million, rising to around £685 million by 2015-16

    As Pete would sometimes say ‘read the whole thing here’

    http://www.hm-treasury.gov.uk/d/rebalancing_the_northern_ireland_economy_consultation.pdf

  • Brian Walker

    Before coming to any conclusions it would be better to wait for the results and reaction to the Treasury consultation and reaction after 24 June. My problem is with the range and quality of the debate and the evangelical tone of some of the support.

    What’s so radically different about a land frontier as opposed to a few miles of water unless we’re in the pig smuggling business? I’m as excited as anybody about economic integration but there’s a lot more to do before it becomes a reality.What for instance is the effect on north-south competition for investment of a harmonised CT rate? Does it meant instead that Invest NI should merge quickly with the IDA? Big stuff.

    I also know that if the receipts are less than expected the Treasury will not make up the shortfall. This is a high risk at a time of sluggish recovery and puts a big onus on local business. The Treasury figures for CT receipts seem generous (4B seems more credible than 4A), as do FDI prospects

    Don’t; forget also that partnerships and sole traders are taxed through the income tax system). They make up a big proportion of NI business.

    . But it’s true that a CT cut could have a dynamic effect and a corresponding cut in welfare payments and unemployment. It would be good though wouldn’t it, to know something about the investment plans local industry doubtless have ready to pull out a drawer? Yes it would be nice to think the gains would be greater than the £220m net loss from the block grant but some of us would like to hear more. It really wouldn’t hurt, you know.

  • jthree

    As a corrective to that ‘evangelical tone’.

    http://www.taxresearch.org.uk/Blog/2011/05/26/each-new-job-created-by-corporation-tax-cuts-in-northern-ireland-will-cost-61000/

    There were a couple of things which struck me about the NIAC report.

    1) NIAC seemed to think the legal hurdles were a lot lower than their main legal expert.

    They said they were “confident” the the plans meet the criteria of the Azores judgement.

    But Rosa Greaves, Professor of European Commercial Law at the University of Glasgow, said that two recent cases relating to the Azores ruling have only been ruled on by national courts, not the European Court.

    She said: “The gate was opened but we don’t know how wide,” and “it needs a European Court of Justice decision to be final”.

    2) The bunglers at our local banks who shovelled vast fortunes into wild property bets are going to get a by-ball.

    The committee acknowledged that a cut in the tax would create a form of “rough justice” where banks would experience a windfall gain without creating any new jobs.

    EU law means that any cut could not be applied preferentially to particular sectors, and could not be refused to particular sectors.

    The committee concludes that “such rough justice does not invalidate the wider benefit of adopting a lower rate.”

    They haven’t even raised the possibility of some form of windfall levy on the banks.

    3) They are proposing another by-ball by also taxing unearned income at the low rate. In the Republic unearned income is taxed at a higher rate.

    4) NIAC appeared remarkably credulous about the assurances that a reduced rate would not be abused by large companies. This seems very naive.

    One of the main campaigners for the cut is a tax consultant at a big four accountancy firm. When companies ring him up and ask ‘Where are the loopholes?’ will he just keep mum?

    5) Whatever they come up with Belfast will not come up with a credible rival to the IFSC because it thrives not on the headline rate but on other parts of the code. The IFSC is effectively a treasury operation for multinationals – they use if to suck in money, shake off much of the tax and then spit it back out to other (non-Irish) parts of the business. The Treasury is wise to this:

    ‘The Republic’s corporation tax system differs from the UK’s in respects other than headline corporation tax rates, which may result in companies paying less tax than the headline rate implies. In addition to an entirely different system of reliefs and allowances, significant differences between the corporation tax systems in the UK and the Republic relate to rules governing Controlled Foreign Companies, transfer pricing, thin capitalisation and the taxation of dividends.’

  • Mr Walker got it aright in those first half-dozen words: Westminster is in a terrible muddle.

    Not just with Corporation Tax, but with the whole messy business of devolution. Moreover, Cameron and his merry menage are handing Salmond every gift going. Which Salmond happily accepts.

    The issue has long since gone beyond corporation tax. The whole tax regime is up for grabs. As is the separation of legal powers: hence http://www.bbc.co.uk/news/uk-scotland-scotland-politics-13583705

    Salmond also knows he has a narrow window of opportunity, before the balance of unpopularity swings back. He is cute enough to push every bit of luck in that meanwhile.

    Watch this (growing) space …