Scottish referendum: Focus on devolved tax powers issue whatever Scottish result
This week the people in Scotland will make a critical decision on their own well-being.
Whether the Scots vote ‘yes’ or ‘no’, the debate on devolution affecting Scotland, Wales and Northern Ireland will take on new dimensions. Up front decisions are expected on devolving corporation tax. Will Westminster approve the change? Will the local Executive live with the costs and benefits? Is there clarity on which businesses will be eligible for the lower tax rate and what the qualifying criteria will be?
In the new political environment the UK Treasury will be taking more careful account of the internal fiscal balance between London and each of the devolved parliaments. Northern Ireland will be asking for a clear decision in principle, along with organisational details, on the devolution of powers to set the rate of corporation tax, here. Any tax revenue forgone, from lower rates of company taxation, will come out of the Northern Ireland budget.
The expectation is that Simon Hamilton, as Finance Minister, will take the lead on action by the Executive. In that, he will follow up on the actions by the Treasury in London in giving approval for the necessary Westminster legislation.
At this stage, Simon Hamilton, who is committed to the tax change, has presumably already agreed the detail of how the devolved tax powers might operate.
Treasury ministers await the approval of the Prime Minister and Chancellor who have remained silent until the Scottish referendum is over.
To date there has been surprisingly little official information on the form and detail of the steps to implement the tax rate change or of the qualifying conditions for businesses to be eligible for the Northern Ireland rate.
From the perspective of the Treasury, the conditions for the devolution of corporation tax rests on the agreement that the change should be cost neutral to the Treasury. Northern Ireland would pay the added costs for the administration by HMRC of a separate tax rate structure and would accept an adjustment to the block grant which would be reduced by the tax revenue forgone.
The cost neutrality of the tax changes must also be linked to the evidence that the Executive is delivering responsible policies in its wider budget.
That would normally be an unnecessary qualification. However, the current budgetary imbalance partly caused by the Treasury penalties because of failure to implement welfare reform may give rise to tensions between Stormont and the Treasury whether in public or private.
The Treasury will be considering the next steps for corporation tax changes at the same time as the Executive is facing the October monitoring round and trying to balance near-impossible reallocations.
Ministers will need to persuade the Treasury that the Executive will be fiscally responsible.
In any comparative analysis of public sector finance in Northern Ireland, the Treasury is well aware that Northern Ireland already enjoys the lowest domestic fiscal charges in the UK and spending levels that are over 20% higher than the UK average.
The combination of relatively low household rates, the absence of water charges, and (for social housing) favourable rental charges alongside block grant transfers of several billion pounds means the Treasury has a critical eye on the financing of reduced rates of corporation tax.
Simon Hamilton will need clear Executive support as he persuades the Treasury that the Executive can balance a reduced budget when a large proportion of corporation tax revenue is removed.
Then there are sensitive practical questions. Will all businesses in Northern Ireland qualify for the tax rate reduction?
Alternatively, will it only be allowed where a business is separately registered in Northern Ireland? Also, will the reduced tax rate apply where a local business has subsidiary activity outside Northern Ireland?
Will the banks qualify and, if so, will they be asked to register stand-alone financial results for the province alone?
The serious decision-making is only now being recognised.
- John Simpson’s company report to return next week