Sammy Wilson has warned that he has “no confidence” in the ability of the Secretary of State to deliver on the devolution of corporation tax in Northern Ireland.
In a hard-hitting interview with the Belfast Telegraph, the Finance Minister accused Owen Paterson of backing a Treasury “smash and grab raid” on our block grant — the total subsidy Northern Ireland receives annually from the UK Exchequer — during recent ministerial negotiations.
He described Mr Paterson as unsympathetic and of being “either captured by the views of the Treasury or so taken up with cutting public expenditure that he doesn’t see the bigger picture or the impact here in Northern Ireland”.
Mr Wilson’s decision to lift the lid on corporation tax negotiations and point the finger of blame at Mr Paterson marks a low point in relations between the Secretary of State and local ministers.
The Finance Minister also warned that Prime Minister David Cameron would have to intervene if the situation was to be salvaged.
“I don’t have confidence that he (Owen Paterson) is the kind of man, or the kind of Secretary of State, who will help us to successfully see this through. He is full of enthusiasm and goes around telling the same story, but being enthusiastic is not the same as having the ability to see a project through,” he said.
It is predicted that devolving corporation tax and reducing the rate from the present 24% maximum to the 12.5% charged in the Republic could produce anything between 40,000 and 90,000 jobs within 10 years.
In June a delegation of 60 local businesses went to Westminster with Peter Robinson, the First Minister, to press the case.
It had been predicted that a decision would be reached before the summer, but the last meeting, chaired by Treasury Minister David Gauke, ended in deadlock.
“We met with David Gauke beforehand,” Mr Wilson said.
“We explained to him: ‘Look, David we cannot sign up to the figure that you are producing here, this is unacceptable and there needs to be work done on it. Let’s work out over the summer’.’’
“At the moment we couldn’t afford to say yes,” Mr Wilson added.
To keep within European regulations, and avoid a fine, Westminster cannot subsidise Northern Ireland to reduce taxation locally.
This means that it must take a sum out of our block grant to balance the cost.
Economist John Simpson be
lieves the current Treasury estimate is for a £400m-£450m cut a year. Mr Wilson said the calculation was based on an assumption that 1.5% of UK corporation tax was raised in Northern Ireland.
The Treasury wants to increase this annual charge by twice the rise in UK corporation tax revenues. That might bring it to £700m after 10 years.
“This is the serious debate starting and it is long overdue” Mr Simpson said. “We have always known that the Treasury would be penny-pinching, and, boy, this is penny-pinching in a big way.”
The real sticking point, and the main source of Mr Wilson’s anger, concerns a suggestion by the Executive that the Treasury should give Northern Ireland an allowance for the extra VAT, PAYE and other tax revenues which would be paid to Westminster if the economy here improved. Mr Wilson insisted that Europe would allow this, but that the Treasury had refused.
“This is the way the situation could be alleviated by the Treasury and here again the Secretary of State has come down on the side of the Treasury,” he said.
Both the Northern Ireland Office and the Conservative Party rejected Mr Wilson’s criticisms.
A Tory source said: “The reason that devolving corporation tax is on the political agenda at all in Westminster is almost entirely down to Owen Paterson.
“It was Owen who took this on when many others had lost interest in it.
“He continues to drive this and has taken it much further than anyone ever imagined, including those who wanted to kill it off at the outset. The idea that Owen isn't working for the best interests of the people of Northern Ireland simply does not stack up. Without Owen Paterson this issue, frankly, would never have got off the ground.”
An NIO spokeswoman added: “We really don't think negotiating via the media is going to help us get the best outcome for Northern Ireland. These are important points which form part of the ongoing negotiations within the Ministerial Working Group which meets again in September.”
In the UK, including Northern Ireland, corporation tax is charged at 20% on profits under £300,000 and 24% after that. There will be a maximum rate of 23% in 2014.
In the Republic of Ireland the rate is 12.5%, and this has led to an influx of foreign direct investment, especially from North America. It is argued that devolving the tax to Stormont and reducing it would revive our economy and decrease dependence on public spending. Under European law Northern Ireland must cover the cost of the tax cut, and the precise price has been under discussion with the Treasury for over a year.
Four key sticking points which still need to be resolved
By Liam Clarke
1. Starting cost: This is the amount of corporation tax raised here and deducted from the block grant in the first year that powers are devolved. The Treasury originally bid for 2.5% of total UK revenues from the tax and the Executive asked for 1.1%. They compromised on 1.5%, or £400-£450m a year. The argument arose because it depends on which year you take as your starting point. A lot of our take came from banks and construction and was far higher before 2008 during the boom. Recently banks have been paying no corporation tax here and they probably won’t be writing tax off against past losses for at least a decade.
2. The rate of increase: Since we collect corporation tax locally we could end up collecting more, even if it is charged at a lower rate, if more companies set up here. Mr Paterson calls this “growing the cake”. However, EU rules insist that we must pay some of this increase back to the Treasury. The Treasury wants the charge to rise by twice the rate of growth in corporation tax in the rest of the UK, which could put the annual cost up to £700m in 10 years. It creates the risk that we may not make the target and lose money we need to invest and pay for public services. Besides that, there are plans to reduce our block grant by 4% over the next four years. “We could grow the cake for the Treasury and not even get crumbs,” Mr Wilson said.
3. Transfers: The Treasury is assuming companies operating throughout the UK would exploit the different tax regime by showing profits in Northern Ireland and any losses in Britain. This could theoretically occur with big firms like retail chains and financial institutions. However, it hasn’t happened much between Britain and the Republic thanks to robust enforcement by HMRC. Stormont has offered to pay up to £40m towards enforcement but the Treasury is insisting we also pay £60m towards possible losses.
4. Offsets: The make or break issue. Reducing corporation tax would stimulate economic activity and produce more revenue in taxes that are not devolved. These include Paye, which would rise if more jobs were created and wages went up, VAT paid on sales and National Insurance. All these revenues flow directly to London which also makes a saving on benefits if unemployment is reduced. The Executive wants an allowance, effectively allowing it to keep some of this extra revenue for local use. Mr Wilson says that Europe would allow this but government sources say that is not clear. Both agree this will be the key item for decision in September.
Thorny issue that goes to the very heart of the Union
By Liam Clarke
Corporation tax devolution has long been touted as the great white hope for reviving the Northern Ireland economy and weaning us off the dependence of public funding that mushroomed during the Troubles.
It could be. Certainly, the blame game has started — Sammy Wilson and the Executive are trying to make sure most of the egg lands on Owen Paterson’s face if negotiations fail. Equally, if the situation is retrieved, they want to take the credit for bring his pet project to fruition.
This sort of manoeuvring is second nature to our politicians, and it has worked before — Peter Hain, Peter Mandelson and other Secretaries of State got the same sort of treatment when negotiations came to the crunch point. Local parties try to bypass the Secretary of State to get the last little twist out of the Prime Minster.
Still, there is no denying that things are serious. The sums mentioned by Mr Wilson would be ruinous and we need movement. Yet with so much political capital invested in this project, both the NIO and the Executive will want it to work. They have all said it is the key to recovery, they have spent months on it and, however we shift the blame, they will both end up looking ineffective if it fails.
Lurking in the background is the Scottish question.
As Mr Wilson concedes, the Treasury could afford to be generous with Northern Ireland. We are only small, we have a unique history and swallowing more of the £700m-a-year cost might be a price worth paying if it helped us stand on our own feet.
The precedent set for Scotland may worry the London coalition more. If they give us a good deal, then the cost of doing the same for Scotland would be very high. The population is larger, the corporate sector is larger and the loss of revenue would be proportionally greater.
Scottish living standards are already envied by many Sassenachs. Alex Salmond likes to rub in his achievement of free university fees and nursing home costs for the elderly.
Lower corporation tax could give Scotland the same advantage over deprived north of England constituencies as the Republic currently holds over us.
The other side of the equation is that if David Cameron can show the Scots that he is prepared to devolve really chunky taxation powers to regional assemblies, that could weaken the case for complete independence. When Scotland holds its referendum on the issue, he could hold up Northern Ireland as evidence that the Union can be flexible and accommodating to local interests.
These are big ticket political calculations, and we can expect a white knuckle ride on this issue in September.