Corporation Tax in Northern Ireland - Northern Ireland Affairs Committee Contents

Conclusions and recommendations

The Northern Ireland economy

1.  Largely on account of a long period of terrorist activity, Northern Ireland's economy has underperformed by comparison with the UK as a whole. However, in relatively more peaceful times, taxpayers in the rest of the UK might expect Northern Ireland to improve its economic performance and to take steps to enable it to do so. (Paragraph 11)

2.  We acknowledge the forthcoming reduction in the ability of Invest NI to use Selective Financial Assistance grants to attract foreign direct investment. There is a need to develop other incentives if Invest NI is to continue to attract foreign direct investment and bring new jobs to Northern Ireland. (Paragraph 15)

Arguments for devolving corporation tax

3.  Although there were exceptions, the vast majority of witnesses, particularly those involved in business, who gave evidence to the inquiry or whom we met in Northern Ireland, argued for a reduction in the corporation tax rate in Northern Ireland. Moreover, many of them said that previous policies had not had the desired effect and a significant reduction in corporation tax would be the dramatic change that business in Northern Ireland needed. (Paragraph 20)

4.  We welcome the publication of the Treasury's consultation paper and the debate that is taking place as to how best to support the Northern Ireland economy. In principle, we support the devolution of the power to vary corporation tax to the Northern Ireland Executive. However, we understand that there will be consequences associated with doing this and recognise that there are concerns that need to be addressed before this can take place. (Paragraph 41)

EU rules on state aid and the Azores judgment

5.  We are confident that the proposal to devolve the power to vary corporation tax to Northern Ireland can meet the criteria of the Azores judgment, although it is difficult to know for certain how the ECJ would apply the judgment in a new situation. It is essential that the Northern Ireland Office and the Treasury seek to reduce the risk of legal challenge through detailed and formal discussions with the EU Commission. (Paragraph 56)

6.  The Azores judgment, and the subsequent cases, indicate that the decision for Northern Ireland to have a rate of corporation tax, separate from the rest of the UK, could not be taken at Westminster. The power to vary the corporation tax rate would need to be devolved to the Northern Ireland Executive. Northern Ireland would bear the full financial responsibility for any reduction in tax revenue, and consequently Northern Ireland would not be compensated from HM Treasury for any tax loss. (Paragraph 57)

Total corporation tax revenue in Northern Ireland

7.  The Treasury urgently needs to set up a system which can accurately assess how much corporation tax is collected in Northern Ireland. (Paragraph 66)

Impact upon the block grant

8.  The Northern Ireland Executive needs to know how much corporation tax is raised in Northern Ireland, how the corresponding reduction in the block grant will be calculated, including how the block grant is readjusted in retrospect, and how this is likely to impact upon the total block grant and public expenditure planning now and in the future. (Paragraph 68)

9.  Any method of calculating the reduction in the block grant must strike a balance between many factors, most notably simplicity and accuracy. It must also conform with EU law. The calculation of the reduction in revenue in future years would be complicated by factors such as UK growth and inflation assumptions, the extra business which Northern Ireland would attract, and be adjusted according to the variations in what we know to be a volatile source of income. Furthermore, this may be complicated by any decision of the UK Government to increase or reduce the block grant, or change the Barnett Formula altogether. Any transitional arrangement would make assessing the amount of money going to the Northern Ireland administration, and therefore its own public expenditure planning for the next three to five years difficult. (Paragraph 71)

10.  Possibly the best way of devolving the responsibility for setting the rates of Corporation tax to the Northern Ireland Assembly would be for the Treasury to calculate how much corporation tax is raised in the province; then reduce the block grant by this amount; give the Assembly the power to set its own rate of corporation tax; and allow the Assembly to keep those receipts. This would provide a transparent system which would more readily satisfy the EU, and would also ensure that, if there were to be any increase in the corporation tax take then the Assembly would benefit. This would be the method of transfer we would prefer. (Paragraph 72)

11.  It is essential that the UK Government clarify whether any mechanism can be devised that allows HM Treasury to return to Northern Ireland a share of the revenue raised that is not corporation tax if receipts from other taxes are reasonably clearly related to changes in the corporation tax rate. However, it would be wrong to disguise the complexities this would entail. (Paragraph 75)

Political support and agreement with the Northern Ireland Executive

12.  There appears to be unity among the political parties in Northern Ireland on the devolution of the power to vary corporation tax. The Treasury's consultation paper makes it clear that the research that is necessary before a decision would be taken will require considerable resources and time, and they would be unwilling to divert these resources unless they were confident that the Northern Ireland Executive would use the power. It would be for the Assembly to assess the benefit and cost of changing the corporation tax rate. (Paragraph 80)

Phasing, certainty and the final rate

13.  We conclude that in the event of the power being devolved, the important decisions on detail, such as the rate and speed at which the rate might be varied, would be for the Northern Ireland Executive. From the evidence we have received, we would strongly urge the importance of maintaining the lower rate. (Paragraph 85)

HMRC and the UK tax system

14.  HMRC has been criticised recently for its effectiveness in settling disputes regarding corporation tax. HMRC needs to demonstrate it has the capability to manage a mechanism for administering different corporation tax rates within the UK. (Paragraph 90)

Burden upon business

15.  We agree that the burden on UK businesses overall must not outweigh the gain to Northern Ireland businesses. This is made more important by the probable time delay between lowering the corporation tax rate in Northern Ireland and the consequent realisation of the benefits. The Government have said they will not devolve corporation tax to Northern Ireland if it creates an administrative burden that outweighs the gain. We will pay close attention to the responses to the consultation as to what kind of mechanism might be introduced. (Paragraph 94)

Tax avoidance, tax evasion and brass plating

16.  We have heard expressions of concern about the risk of encouraging brass plating and tax avoidance generally if the corporation tax rate in Northern Ireland is lowered. Our evidence suggests that this risk is sufficiently well mitigated against for it not to present a persuasive argument. (Paragraph 102)

17.  We note that if the corporation tax rate was changed in Northern Ireland, it would have to be a single rate applied across the board. This would mean that companies could receive a windfall gain without increasing economic activity. It would also add to the issues arising from corporation tax volatility. However, we conclude that such rough justice does not invalidate the wider benefit of adopting a lower rate. Indeed, it is important to ensure that companies already operating in Northern Ireland continue to do so in the face of strong competition from elsewhere in the world. (Paragraph 105)

Implications for the UK

18.  We recognise there is value in UK fiscal unity and value in a tax system that is administratively simple to operate, both for HMRC and businesses. We are also aware that the Calman Commission in Scotland and the Holtham Commission in Wales are part of a broader debate around the devolution of tax powers to their respective parts of the UK. However, the situation in Northern Ireland is different from Scotland and Wales. Northern Ireland is the only part of the UK that shares a land border with another sovereign country, and that country has a corporation tax rate of 12.5%. (Paragraph 109)

19.  We are not persuaded that, as a result of a lower corporation tax rate, there would be a significant amount of movement of businesses from other parts of the UK to Northern Ireland. However, there is a risk that investment, either foreign or GB based, will go to Northern Ireland that might otherwise have gone to or remained in other parts of the UK. (Paragraph 115)

Enterprise zones

20.  We recognise the potential in offering targeted incentives on top of corporation tax to incentivise particular sectors. However, we conclude that now is not the time to consider devolving further tax powers to the Northern Ireland Assembly. The complexities of doing so would be likely to stall change. Targeted fiscal incentives should continue to be legislated for and administered on a UK wide basis. (Paragraph 127)

21.  Transport tax rates must not deter businesses from coming to Northern Ireland; any consideration of applying a per plane tax to freight must take into account that businesses could be lost to the Republic of Ireland if this is introduced. (Paragraph 128)

22.  A skilled workforce is essential to take advantage of any expansion in the sectors that Northern Ireland wants to attract. Education and planning are already devolved matters, and the Northern Ireland Assembly must make its own decisions about where and how to invest in skills training, and how to reform its planning system. (Paragraph 135)

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