Why 12.5% tax doesn’t go low enough
Unusually and exceptionally, Northern Ireland is about to make critical decisions on company taxation and make these changes in a deal agreed with the UK Treasury.
Commitments are being made that tend to both overstate the significance of the tax rate change to 12.5% and understate other aspects of policy that are increasingly relevant.
The change in the corporation tax rate, applied only to trading activities based in Northern Ireland, looked attractive when the standard UK rate was 20% and more.
Now the future prospect of a UK move to 15% means that the merits of the current Northern Ireland proposal should be re-assessed.
The change to a 12.5% tax rate in NI no longer looks dramatic. Having persuaded the Treasury to allow NI to make this change and for Stormont to pay the differential cost in reduced tax revenue, the relative incentive effect to attract investment has been reduced. Additionally, the argument that faced with reduced company tax bills, businesses will have additional funds which could be used to increase investment, is now eroded.
It was always a doubtful argument since such a decision is a choice between paying dividends to shareholders and capital spending where the outcome is, at best, uncertain. The case for a shift to a lower corporation tax rate may still be valid but is less compelling.
In the new Brexit environment, fresh ideas should now be on the agenda. The search for fresh ideas should be open ended and include both a review of the application by Government and local government of fiscal type incentives as well as a close critical review of the components of operating and capital costs to ask questions about efficiency, productivity and the costs of business services.
To maximise the Northern Ireland benefit from tax or fiscal concessions, now is the opportunity to widen the discretionary rules defining eligibility for tax and other fiscal concessions. In principle, reduced corporation tax should only apply to businesses doing verifiable trading business in, or from, Northern Ireland.
By definition certain activities such as banking, insurance, and investment in property transactions are not eligible.
When businesses trade exclusively from a NI base but are headquartered outside NI (registered in Great Britain, Isle of Man or Virgin Islands) arguably, in order to qualify they should be asked to produce (and register) audited trading accounts for business conducted in NI.
NI should ensure that corporation tax concessions are verifiably justified. Perhaps more fundamentally from a NI perspective, stronger efforts to improve the structure of operating and capital costs in NI are overdue.
No longer can the argument be repeated as a truism that NI is a demonstrably competitive cost base for growing business.
There is evidence of some aspects of costs and efficiency that are attractive but, too often ignored, the evidence on labour cost and efficiency, energy costs and aspects of infrastructure costs, place NI too high on the costs spectrum compared with competing regions.
Unhappily, NI cannot rely on claims of a comprehensively well-educated, skilled, labour force nor a well-established efficient cost base.
The urgent need to drive down competitive costs needs to be a priority in the forthcoming Programme for Government.
In anticipation of possibly increased UK fiscal independence, after Brexit, now would be the time to broaden the scope for fiscal discretion by Stormont.
Enhanced capital allowances and changes in the tax allowances for property deals with international investors should now be on the agenda.
Finally, the modest ambitions encapsulated in the draft Programme for Government must be challenged.
The Programme is lightweight on forward targets.
The jobs target is to "realise an employment rate of 70% by 2021". This translates into less than 10,000 extra jobs in the next five years.
Did senior politicians not mention a possible 50,000 during the election?
The draft PfG merits close scrutiny and constructive challenges.