Corporation tax cut: £300m gamble or golden opportunity for Northern Ireland?
Business leaders voice support for cut in levy
A corporation tax cut is a once-in-a-lifetime opportunity for Northern Ireland, industry experts have said.
However, they also warned a decision to transfer powers to the Executive to vary the tax rate is not without risk.
The Treasury has launched a consultation paper on the issue outlining several options.
One is that the rate could be cut to as low as 12.5% to match the Republic. It currently stands at 28%.
The price for the variation could be a £300m cut in the block grant from Westminster, which advocates of the tax cut say would eventually be made up with income from increased business activity.
Northern Ireland Taxation Committee chair Eamonn Donaghy said it was imperative to attract new investment into the region, and a cut in corporation tax could be key. “This is a once-in-a-lifetime chance to avail of a fresh examination of options for the economy,” he said, following the launch of the Treasury consultation. While we must be mindful of the costs, there is strong evidence that reducing the rate will have huge benefits.”
Among the drawbacks, the paper stated that a fall in corporation tax would have to be paid for by a corresponding fall in the block grant, to the tune of £300m a year.
It also warned that Northern Ireland “would bear the fiscal consequences of devolution” if tax receipts were not as forecast.
The document added: “Given the volatility of corporation tax in a relatively small private sector base like Northern Ireland, this may be a significant risk.”
Economist John Simpson said even if an agreement is reached, many companies might go to the wall in the interim period. ”The process of approving such a reduction here will take years, so it won’t be in effect until 2015, so if businesses can’t survive today’s recession they will be gone before this happens.”
First Minister Peter Robinson said that a fall in tax should make Northern Ireland less dependent on the rest of the UK.
“It is not in the interests of Northern Ireland to be the beggars of the UK,” said Mr Robinson at yesterday’s launch in Lisburn.
The Treasury also said the huge financial loss could be offset by a 6% rise in investment by domestic and foreign companies.
Indeed, domestic investment could increase by between £50 million and £65m in the first year, rising to around £110m by year 10.
Foreign direct investment — taking account of displacement from the rest of the UK to Northern Ireland by companies seeking to lower their costs — would increase by between £105m and £175m in the first year.
Not taking account of displacement by year 10, the estimate is of higher investment of around £310m.
Tax expert Richard Murphy said there were numerous reasons why a tax reduction wouldn’t be the much-sought after panacea many adocates promote.
“The province can’t replicate the lax tax regime of the Republic which refuses to tax large tranches of profit — so Northern Ireland can never compete with Dublin’s current offering,” he said.
A campaign among businessmen and academics for the introduction of devolved powers over corporation tax has been running for many years and received strong support from Sir Tony O'Reilly, the then-chief executive of Independent News and Media (INM), owners of the Belfast Telegraph
By 2014 the main rate of corporation tax for the whole of the UK will drop to 23%.
Options outlined in the Treasury paper include allowing a tax-varying power up or down by 11% from the 23% rate, setting the UK rate in Northern Ireland at 12.5% or 0%, and allowing the Executive to vary it.
Questions and answers
Q What is corporation tax?
A It is the tax paid by companies on their profits. There are two rates, a main rate of 28% — to be cut UK-wide to 23% by 2014, as announced by the Chancellor in the Budget this week — and a small company rate of 20%.
Q What rate of tax do most companies in Northern Ireland pay?
A Small to medium-sized firms account for most companies so most firms here pay tax at 20%. There are no plans to cut the smaller companies’ tax rate
Q Why do business people want a cut in the main rate of corporation tax in Northern Ireland?
A Their argument is that companies will set up in a jurisdiction where they have less tax to pay on their profits. The hope is that, if Northern Ireland had a lower tax rate, companies would set up here, pay less tax and have more profits to invest in their business here, and in the process create jobs and prosperity.
Q The Republic has a low tax rate. What does that mean in practice?
A Historically, it’s meant that more big international companies have come to the Republic than to the UK or other parts of Europe. Because Northern Ireland shares a land border with the Republic, where the main rate of corporation tax is 12.5%, it has frequently lost out on investment by big foreign companies. It’s argued that a lower rate of tax north of the border will level the playing field with the south.
Q How long has this debate about Northern Ireland’s corporation tax been going on?
A This is a debate which has been around the block a few times, to say the least. Some at yesterday’s event could cast their mind back as far as 1981, while First Minister Peter Robinson said he got short-shrift from the Treasury when he looked into cutting the rate as Finance Minister in 2007. Then-Prime Minister Gordon Brown poured cold water on the debate with the Varney Report, which ruled out cutting corporation tax in Northern Ireland.
Q So what has changed since then?
A The Conservative Party, which formed a Government with the Lib Dems last year, is traditionally known as the ‘party of business’. In keeping with that, Secretary of State Owen Paterson vowed to publish a paper looking at how to rebalance Northern Ireland’s economy. He fulfilled that promise yesterday.
Q OK, the paper has been published. What next?
A The paper will be put out to consultation for three months, with business leaders expected to give it the thumbs-up and redouble their demands for a tax cut. Then it will be for the Treasury to say yes or no to letting the Executive cut the rate.