The price of rebalancing our economy is well worth paying
If Stormont gains the power to lower our corporation rate, what will the initial expense cost Northern Ireland, asks Eamonn Donaghy, head of tax at KPMG Belfast
After much fanfare, the Treasury consultation process on rebalancing the Northern Ireland economy finally closed on July 8.
Given that the main issue in the consultation process was corporation tax, it is stunning that over 700 responses were received by HM Treasury to the consultation paper. It is clear that this issue has created a significant amount of interest within the business community and indeed the wider community.
Should the Northern Ireland Executive receive the power to vary the rate of corporation tax, and then exercise that power to reduce the corporation tax rate to say 12.5%, there is a requirement under EU legislation for the Northern Ireland Executive to effectively pay for this by means of a reduction in the block grant.
Recent economic studies by the Northern Ireland Economic Reform Group and the Economic Advisory Group have clearly stated that the long-term benefit of reducing corporation tax will be the creation of tens of thousands of jobs over the next two decades. This is obviously a benefit worth trying to obtain.
When the Treasury produced their consultation document, they attempted to estimate what the costs to the Northern Ireland block grant may be. However, it is worth emphasising that the numbers prepared by Treasury were only estimates, but nevertheless, it is worth outlining what these costs might be.
The headline cost is, in simple terms, the amount of corporation tax that companies would save if the corporate tax rate was reduced to 12.5%.
However, this is not the only figure which should be considered. There are also additional costs that may arise as a result of businesses being transferred out of personal ownership into company ownership and converting income tax payments for lower corporation tax payments. This is called tax-motivated incorporation. There is also the impact of companies artificially pushing profits into Northern Ireland as a result of the lower corporation rate.
On the upside however, as lower corporation tax will result in increased economic activity, there will be more people in employment and these individuals will pay more PAYE and national insurance. This additional tax revenue should be capable of being set against the corporation tax losses. Also a very significant saving can be made if the reduced rate of tax only applies to trading profits, thus leaving investment profits subject to the full rate of corporation tax.
When all of the figures contained in the Treasury consultation document are taken together, the picture can become a little clearer. The headline cost could be in the region of £300m and the net impact as low as £145m.
So, where does this leave us?
The current amount of the public expenditure budget over which the Executive has discretion amounts to approximately £10.5bn per annum. If the net cost of corporation tax reduction was £145m, then this would account for 1.4% of the annual public expenditure budget that the Executive can control. In big picture terms, the net cost is not a material amount .
While a reduction in the block grant is not something to be welcomed, as it could lead to a reduction in public expenditure, it should be understood that it does not necessarily mean a reduction in front line public services.
Indeed, the Confederation of British Industry last year indicated that Northern Ireland could reduce public sector spending by up to £2bn without the need for cutting front line services.
The possibility of getting something for nothing would be very attractive, but a reduction in the rate of corporation tax in Northern Ireland cannot be one of them.
It is a requirement of EU legislation that Northern Ireland must effectively pay for its reduction in corporation tax. However, the upfront cost of reducing corporation tax is anticipated to pay for itself many times over.
In effect the upfront initial costs should be seen as an investment into Northern Ireland's future rather than as an irrecoverable cost. If you want to get something worthwhile , then it is worth paying for.
The prize of introducing reduced corporation tax is very significant, and the comparatively modest cost of achieving this is a price well worth paying for.