Corporation tax: Stormont urged to ensure trade-off with Treasury does not end up costing us
Theresa Villiers, the Secretary of State, is to be quizzed about the costs and timetable for devolving corporation tax to Northern Ireland over the coming weeks.
She was due to address business leaders at Kelvatek in Lisburn today as senior politicians and economists warned of work still to be done to ensure the cost to our block grant is reasonable.
It is a carefully chosen location. Kelvatek was the venue where, in 2011 Owen Paterson, Ms Villiers' predecessor, launched a consultation on the devolution of the business levy.
Mr Paterson, a prominent supporter of the change, said: "It is clear from the case with the Republic of Ireland that if you reduce the tax you grow businesses so you get more wages, and more income tax is paid." Asked if we should get a share of increased revenues in taxes like income tax and VAT if the economy improved, he replied: "Yes. It is a tiny investment of £200m-£300m out of the £20bn plus which is spent in Northern Ireland each year."
Eamonn Donaghy, senior tax partner at KPMG, estimated that Northern Ireland would show a profit five years after corporation tax was devolved.
However, now there are fears that the Treasury may deduct more money from our block grant than Stormont can afford unless there is careful and effective negotiation by the local parties.
Former Finance Minister Sammy Wilson has previously argued that devolving corporation tax could be a "rip off" but now believes it is feasible. Mr Wilson explained that when he was Finance Minister, before June 2013, the plan had been to reduce corporation tax to 12.5% to compete with the Republic's rate, or even 10% to undercut it.
The idea is that more firms will be attracted in, the economy will boom and corporation tax receipts will actually go up.
He believes that this is now more important than ever because EU rules are forcing Stormont to phase out grants previously used to encourage foreign investors. EU rules also specify that Stormont must compensate the Treasury for any fall in tax revenue. Mr Wilson said the Treasury was planning to increase the amount it deducted each year so that, if we aren't careful, any benefits could be wiped out.
"They are building a formula in which they will make assumptions about what happens to corporation tax revenue over a period of time," Mr Wilson said.
"It's complex, but basically they are assuming corporation tax revenue would rise in line with gross domestic product and then they would make deductions based on that."
Esmond Birnie, chief Northern Ireland economist at PWC, stressed that once the Executive assumed the power to levy corporation tax, it should not vary the rate until absolutely sure of the costs.
"If the Executive is deciding whether to use its new powers, it needs to be informed by an accurate evaluation of the costs and benefits. In order to work out what the costs are, these are some of the things that will have to be absolutely clear," he said.
Pros and cons of a cut to the business levy
Q. So, what is corporation tax?
A. Corporation tax is a levy imposed on the profits made by businesses which trade within the European Union and was introduced by the Finance Act 1965, modelling the income tax system. Its application is recognised as very complex.
Q. What is today's rate and what are politicians proposing to cut it to?
A. UK-wide the rate is 21%, but it is set to reduce to 20% in April. Campaigners here want it slashed to somewhere closer to the rate in the Republic of Ireland - 12.5%, which is one of the lowest in Europe.
Q. Why should corporation tax be cut?
A. It is argued a reduction would attract more foreign multi-national investment and help rebalance the economy by providing a catalyst to growth among a private sector suffering low wages, poor productivity and low export levels.
Q. Who are the most ardent campaigners for a tax cut?
A. Northern Ireland's political parties, business organisations, educationalists and major employers believe it would usher in tens of thousands of new jobs and help the economy expand by 14% by 2030.
Q. What are the possible pitfalls of a fall in the tax?
A. Northern Ireland could lose hundreds of millions of pounds from our block grant.