Delay on corporation tax change not the answer
Published 26/04/2011 | 08:00
The Northern Ireland Assembly will soon ask the Westminster Government to approve legislation that will add company taxation to the list of devolved responsibilities at Stormont. If the Treasury officials set a demanding timetable, the legislation might be ready for implementation in 2013.
The controversy about corporation tax has moved on from opposition to the basic principle. Tensions are more about conditions attaching to the change and the costs which will fall on the Executive budget as revenue from Westminster is reduced.
The Assembly election should be followed by clarity on the arithmetic and consequential changes in budget processes both in 2013 and the years that follow. After reading five party political manifestos, the current evidence is neither consensual nor detailed.
Each of the main political parties seems to have opted for caution. By phasing the reduction in the rate of corporation tax after 2013-14, an immediate large loss of current revenue can be avoided.
A phased reduction postpones the heavier part of the adjustment process. It also gives more time for a positive response of foreign direct investment (FDI) to the increasing tax benefit. The timing may be important. Too long a delay risks eroding the incentive effect. One of the parties suggest possibly 10 years: that seems too cautious.
There are other options.
One option that would be easier on the Stormont budget would be NOT to reduce the basic rate of corporation tax but, instead, to introduce a generous scale of allowances for spending on capital, R&D, training and marketing which could only be claimed for business activities in Northern Ireland. This way, new investors could possibly be assured, for early years, of a nil tax liability.
Another option, implicit in the manifesto of the UUP, is that instead of having to reduce Government current spending (on the loss of tax revenue) Northern Ireland might make up some, or all, of the lost revenue by increasing the level of rates on businesses that would enjoy a big tax reduction. New FDI would be incentivised by lower corporate taxation and might be awarded a five-year partial rates exemption as well.