Corporation Tax: Picking The Wrong Fight

You might notice from time to time that Foster, DETI, OFMDFM et al. have a penchant for announcing jobs…except they tend to announce a certain kind of job; big jobs, high paying jobs, important jobs, graduate jobs. It’s tough to picture the big wigs rolling down the hill to announce a greengrocers expansion or for the opening of a pub (although perhaps that’s another matter entirely). The digital media, financial and media jobs are without a doubt greater net contributors to the NI economy per-employee than a P/T shop assistant of course, but coupling that with the corporation tax debate leaves me feeling more like Stormont really isn’t that bothered about jobs for the every(wo)man.

Tax Cuts, who wants one? Exactly, it’s an easy sell. Form an orderly queue…except those that would join the queue for the corporation tax cut, wouldn’t have to join it themselves, they can afford to send an employee or perhaps a PA…maybe even outsource it to another Tax Cut Queue Management corporation.  Within my industry, hospitality, Pubs of Ulster have campaigned for the powers to be devolved and for our politicians to make the reduction. As far as I’m concerned it’s the wrong fight…whilst plenty of new bars and restaurants have opened up in the last year, the economy hasn’t increased by the same proportion…customers have the same money to share around more premises…or not share as the case often is. A corporation tax cut would reward those who are more profitable by allowing them to keep a larger share of their revenue…this is great! What does that actually mean?

David Gauke, financial secretary to the treasury told a parliament committee that there are around 66,000 corporations in NI. Of which, 50-63% of companies pay corporation tax. In 2010-11, revenue from northern irish corporations paying corp tax was £775m or 6.1% of all tax revenue from NI. Business rates however brought in £524m in revenue for the same period, representing 4.1% of all revenue. Everybody pays business rates. From Allstate, NYSE, Randox, Moy Park right down to the aforementioned greengrocers and pub. And with the Reval15 about to upset the apple cart (aka send businesses to the bankruptcy queue…more of that in a later article), why are we only helping the big ticket items?

If 50-63% of businesses are paying corporation tax, then 37-50% of businesses  are, obviously, not. There are a number of legitimate reasons for this, R&D for example, creative industries and others…ultimately though, the most prevalent reason for a business not paying corporation tax, is that it isn’t made enough revenue to meet the threshold for paying it. These are companies who are at best, stagnating and struggling and at worst, being shored up by owners remortgaging properties to pay the staff, keep the bills at bay and the doors open. If the UK devolves the corporation tax powers to NI, a recent report by PriceWaterhouseCoopers suggested that matching the ROI rate could cost NI around £280m in the hope that this is enough to draw business north (and indeed east…sorry Donegal!) and and assuming that businesses will look at setting up a base in either ROI or NI will chose NI because we’re just so flippin’ awesome why wouldn’t they… With the reduction in the block grant not looking like changing direction anytime soon, is this really the risk to take? The Economic Reform Group report, The Case for a Reduced Rate of Corporation Tax in Northern Ireland suggested that an equalisation between ROI and NI would be the equivalent to a 2% drop in the block grant in itself…again, with the hope that it pays dividends in 10 years time.

Don’t get me wrong, it’s not that I don’t think that business owners should hold on to more of their profit if possible, I just think that we should be looking after as many people as possible with our next financial power play…if the assumption is that this would cost us in the region of £300m…and business rates are £524m…how about we half business rates…ultimately the money is all from the same place, but instead of redirecting it to those already doing well enough to post a profit, we help everybody…those making profits will have more profit by proxy of paying less rates, those struggling to make ends meet will have a bit of help from the government by making those ends less far apart. I just don’t see why, if we can afford to essentially write off this money in the hope of a return in the future…we don’t do it to the benefit of all and not just those doing alright for themselves. I don’t say this as a business man, I’m just an employee. But I have worked in a business that struggled to make ends meet, and it wasn’t that the business didn’t make good money, it was that rent and rates kept sliding up and up and up until there were no more rungs on our ladder. Cut us all some slack please.

 

If corporation tax devolution does go ahead, I imagine Sturgeon & the SNP would sit back and watch rather than continue actively campaigning…they can learn from our rights and wrongs on it; I’m just not sure Northern Ireland is cut out to be a political pioneer. On another note…I oppose the layman opinion of “those eejits up at Stormont, they’re useless”…You can’t tar everyone with the same brush, it just doesn’t work like that. There is definitely something to be said for how backwards our system is, how tough it seems to be to progress the most sensible of motions…the posturing that periodically seems to suggest that direct rule wouldn’t be opposed entirely, “let them make the tough decisions”…perhaps the executive want this decision because it looks like an easy win… Business rates is an everybody wins…THAT’S the easy win.

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  • Kevin Breslin

    I think if you look at large scale businesses say Seagate, Bombardier … they do tend to contract work out to smaller companies, such as catering and cleaning.

  • Belfast Barman(ager)

    valid, but is a corporation tax cut going to benefit the catering and the cleaning companies? only if they are thriving and profitable, what about the catering and cleaning companies that are just about surviving? Why not help all companies out in one swoop… This just seems to be a larger scale version of the subsidies dished out by the executive/invest NI to entice corporations to come here in the first place. Giving a FTSE 500 company financial incentives to locate here is all well and good, but not at the expense of the grassroots companies that shore up the economy across the province who could perhaps do with a bit of a drop in business rates to help the bills ease off

  • D99

    Cutting corporation tax is a negative sum game. Tax competition between governments is an economic example of the classic ‘Prisoner’s Dilemma’ scenario well known to game theorists:

    All countries can generate higher tax revenues by having a high tax on corporate profits.

    However, one country can benefit individually if it can attract businesses away from other jurisdictions by having a lower tax rate.

    But, if one country cuts corporation tax, others will be obliged to match the rate of the “defector”.

    The result is that each government adopts a lower corporate tax rate and all collect less revenue.

    Only the multi-national corporations come out ahead.

    The optimal option for all governments would be an agreement to maintain tax harmonisation. But this never happens.

    In this ‘economic arms race’, the poor suffer at the expense of the few. Reduced taxes fuel inequality by adding to the pressure to cut social expenditure in other areas.

    We are being ‘gamed’ by global companies.

    By cutting Corporation tax we would be ‘playing’ into the hands of self-serving multi-nationals and their armies of well-heeled supporters.

  • notimetoshine

    Really fascinating article. Thank you. In your opinion would a reduction in business rates do more to boost growth? I have always thought it would do more overall to boost jobs and business growth what with the large amount of small businesses on NI. Would a reduction in business rates pay off for the big firms/ make NI more attractive to onward investment?

  • Zeno3

    “there are around 66,000 corporations in NI.”

    Really? I mean that’s one Corporation for every 19 people over the age of 18?

  • Belfast Barman(ager)

    I just checked the directorships of 3 fairly successful people within my industry, 2 of them are directors in 6 companies currently active and 1 is a director in 7.

  • Belfast Barman(ager)

    I manage a bar which is leased, the rent is between 35 & 45k p/a. The rates are between 40 & 50k p/a. And on top of that, reval15 has an increase pencilled in of nearly 300%… If corporation tax cuts would boost the economy, so would business rates reduction. The suggestion being that a business owner who has to pay less out, will invest and try to grow…well they are paying less out no matter which tax is reduced, perhaps with a rates cut, the wealthier companies will have a smaller reduction in their tax bill than if it was corporation tax cut, but with rates, every single business would have that cut…and that seems liked a much more responsible action to me

  • Zeno3

    Yeah, but they must only employ about 9 people each on average.

  • Belfast Barman(ager)

    You don’t need to employ people to be a ltd company. Some limited companies could just be one person. Landlords of HMO’s. Investment groups and plenty of others. Some companies are just existing because other companies need an umbrella company to link them together, one bar group I know of has around 5 pubs, each is their own company, but at last I knew of, there were 9 ltd. companies involved in the business in one way or another

  • D99

    Don’t think there’s much interest in helping the smaller local companies. And don’t forget, many of the big multi-national companies avoid paying tax through transfer pricing anyway. There’s always a convenient tax haven with an even lower rate than we can offer.

    But one thing’s for sure, the big legal and accountancy firms would get a lot of work dealing with the complexity of corporation tax differentials across the UK. Maybe that’s why they’re so keen on the idea of a cut? Come to think of it, that might explain a lot …

  • Zeno3

    “Maybe that’s why they’re so keen on the idea of a cut? Come to think of it, that might explain a lot …”

    There is no maybe. The leader of the Grow NI Lobby Group who are campaigning for the cut is Eamonn Donaghy who is a Partner in KPMG

    http://www.belfasttelegraph.co.uk/business/corporation-tax/heres-hoping-for-a-low-tax-2012-28701196.html

  • notimetoshine

    Wow I can’t believe how high it is! One of the biggest business expenses you would have.

    One thing I noticed when you were referring to the jobs announced by Arlene foster et al is that you catagorize them as well paying graduate etc. What concerns me with this is that an awful lot of invest NI funding goes to call centres and they have the cheek to call a call centre high tech/it jobs. These are awful awful jobs the chimney sweeps of their day, having had extensive experience with one of the biggest call centre firms working here I know they get a clean fortune for insecure, poorly paid jobs. If a corporation tax cut attracts more of those jobs no thanks!

  • D99

    Interesting. Well they’ve certainly successfully lobbied all the local political parties on the issue and got the support of lots of academics and professional economists. But I’d still be amazed if they roll the dice on this – it would take the economy to grow by over a third in ten years just to break even. How do you like those odds?

  • Brian O’Neill

    When you say corporations people think huge companies but a corporation is just a ltd company, which can employ one or even no staff. NI is a small business economy. Government figures show that:

    Over
    three quarters of VAT and/or PAYE registered businesses with a main (or
    registered) address in Northern Ireland had total employment of less
    than five.

    At March 2013, businesses with total employment of
    less than 50 accounted for approximately 98% of all VAT and/or PAYE
    registered businesses in Northern Ireland.

    Businesses with 50-249 employees accounted for 1.5% of the total.

    Businesses with 250+ total employment accounted for 0.3%.

    Businesses with total employment of less than 10 accounted for 89.0% of the Northern Ireland total.

  • Baron Samedi

    Great Article Belfast Barman(ager)!

    As you rightly say, small businesses, the businesses that
    often give a city its character, struggle to make profit and cannot, comfortably,
    develop their business towards profitability.

    I think that the reasons for this go pretty deep. The development
    of an economic culture that believes businesses should enrich their
    shareholders rather than work with their customers has a lot to answer for! Small
    local businesses don’t fit that model.

    Stormont ministers will need to open their minds to a
    variety of economic stimulation tools to encourage and develop local business. At
    present Stormont’s only source of controllable income comes from Rates. The
    drive to collect has surpassed all reason! But, at present, without other tools
    such as corporation tax powers, the government can’t afford to manipulate business
    rates.

    How beneficial would it be to an effective government to
    have a full range of regional economic tools available to them? But can our

    government be
    effective? Again I agree with you that it’s unfair to tar all ministers with
    the same brush, but we have a situation where good economic policy can be
    blocked if it comes out of the wrong mouth. They aren’t joined up, and that’s ineffective!
    But then, that’s up to us, the public. We need to think about who we vote for!

    There are some crazy and varied figures bandied out about
    the effect of the devolution of Tax powers on the block grant. I really believe
    that the transitional arrangements can and will be effectively negotiated. Our politicians
    tend to get these things organised when the Americans come over to see the
    latest peace deal signed up!

    I totally agree with your analysis of the so called “successes”
    of Arlene Foster’s office. These large corporations are given large amounts of
    our public money to lever them in to Northern Ireland. They might stay for the
    obligatory 5 years. These guys come in and create high value jobs. It’s a bit
    of a problem when local business cannot develop to service the resultant
    demand. They won’t be long noticing our stagnation. As has happened before and
    will happen again. Off they’ll go to somewhere more interesting!

    The pub trade, which I am also part of, has been experiencing dramatic changes for
    some time now. In keeping with the desire to service global shareholders,
    breweries are no longer interested in serious investment in their customers and
    trading partners. They demand an annual price rise worldwide to ensure
    profit/dividend growth. In a country where wage levels are lower than any other
    Euopean region and where growth is non-existent, it has not been possible to
    pass that price rise along.

    What would provoke a wide self-sustaining demand for local
    employment? The stimulation of local business growth would.

    Your figures provide a good illustration of the problems
    faced by many pubs. Even if you have a good pub, making profit is a problem.
    With no profit you can’t invest in growth. If you can’t invest, banks will not
    give you a loan. Stagnation.

    Something needs to be done. One of the areas with the
    biggest potential for growth is in tourism and as a result, hospitality. People
    come from all round the world to see Irish Pubs. If we can’t develop our
    offering, let’s face it, they’re all heading for Dublin!

    Samedi

  • M McCullagh

    Peter Robinson on Corporation Tax – It is to the benefit of everybody that we are able to pay our way in the world and that we are less of a burden on the UK Treasury. All that the Northern Ireland Administration need to be sure of is that the cost that there will be to our block grant, because of the Azores ruling, is not such that it sets back the public sector functions that we have to carry out and that need to be carried out at the front level of service. If there is a reduction in our block grant, that will clearly have an impact elsewhere. The money has to come from somewhere. Someone has to do with less. We have to be sure that the boost that we will get to our economy from having corporation tax lowered will be better than the fall that might take place from any loss that might occur as a result of a reduction in spending.

    http://www.niassembly.gov.uk/Assembly-Business/Official-Report/Reports-11-12/02-July-2012/

  • Belfast Barman(ager)

    Big bet

  • Zeno3

    The chancellor has announced that any decision on devolving corporation tax to Northern Ireland will be dependent on the outcome of the all-party talks.

    brilliant………….. lol

  • Old Mortality

    A reduction in business rates would be certainly be helpful in the same way as lower energy tariffs. Are business rates here, like energy costs, significantly higher than elsewhere? If not, they do not deter inward investment. The point of lower corporation tax is not to have more pubs and restaurants which will only boost exports to the extent that they are frequented by non-residents

  • Belfast Barman(ager)

    So it’s a no then!

  • Zeno3

    I hope so

  • Eugene McConville
  • delphindelphin

    Well worth a read – thanks for that Eugene.