Corporation tax rate move can no longer be certainty
Analysis & Company Report
Incentivising an increased flow of new jobs to Northern Ireland is a compelling ambition for the incoming devolved Government.
During the recent election campaign there was less emphasis on the methods that might be used to attract more employment than might have been expected. The politics of criticism of past Government decision-making was less about job creation than recrimination about the Renewable Heat Incentive (RHI).
The inherited emphasis on attracting foreign direct investment (FDI) was presented tersely through reliance on the possible impact of introducing local corporation tax at 12.5%.
The assumption that the corporation tax change was assured and also that it would be effective should now be questioned. The rationale for the 12.5% NI corporate tax bid has changed.
First, the presumption that the Treasury will permit a change to 12.5% is yet to be confirmed. The legislative arrangements include a conditional feature which asks whether NI has demonstrated a stable, functioning devolved budget. The absence of an agreed devolved Government and the absence of firm budget proposals for 2017-18 would give the Treasury an argument that NI is not ready for this responsibility.
If the reduced corporation tax is to be effective from April 2018, for the tax year ending after April 1, 2018, the political decision-making is now urgent. The public sector administrative work has presumably been done, but the contemporaneous work in, and for, businesses will need to start. Alongside questions about Treasury preparations, there are other dimensions that should be considered. Because of the consequences of Brexit, this agenda is potentially more flexible than was at first envisaged.
Across the UK and particularly in NI, Brexit may mean a release from the common EC housekeeping rules restricting the scale of state aid. The range of options to attract FDI might now become much wider.
Because final firm decisions on corporation tax are still awaited, the reduced corporation tax rate option could now be reconsidered. First, the proportionate leverage of a reduced differential with the UK rate has become less attractive.
Second, since Brexit opens the way to a different agenda, that wider options agenda merits serious consideration.
A weakness in seeking to use corporation tax differences has always been that lower corporation tax rates may attract some new investors but, for businesses already based in Northern Ireland, the low tax rates would, in part at least, deflect some of the reduced tax revenue into higher profit distributions to shareholders. If, as an alternative, Northern Ireland devised a scheme of more generous tax allowances against additional committed investment spending, the incentive effect for business expansion could be stronger. Such a scheme would presumably need the approval of the UK Treasury and, if carefully designed, might be as acceptable as the current corporation tax proposals.
Alternatively, NI might develop schemes that are strongly correlated to offsetting some of the employer costs of specific forms of skills training, well targeted and generous, tackling skills and training in high value-added functions.
Critical to a review of policies and tactics to secure additional FDI is an appreciation of the strains and benefits of a post-Brexit region. It is understandable that there is considerable uncertainty in the business world about the financial, trading and political impact of the Brexit settlement. The CBI has reviewed the possibilities and, with evidence, points to risky and uncertain outcomes.
There are emerging pointers to problems for the Republic's economy in the food processing sector. In contrast, for some other sectors, the Republic anticipates becoming a more attractive location for investors in preference to the UK, including NI. The wider agenda sets a new challenge for Invest NI.
Will it give a lead to a fresh debate?