Corporation Tax in Northern Ireland - Northern Ireland Affairs Committee Contents

1  Introduction

1. On 25 May 2010, the Coalition Government published its programme for government which included an undertaking to:

    Continue to promote peace, stability and economic prosperity in Northern Ireland [...] We will work to bring Northern Ireland back into the mainstream of UK politics, including producing a government paper examining potential mechanisms for changing the corporation tax rate in Northern Ireland.[1]

2. On 24 March 2011, HM Treasury, in consultation with the Northern Ireland Executive and the Northern Ireland Office, published the consultation paper Rebalancing the Northern Ireland economy.[2] In his Written Ministerial Statement accompanying the consultation paper, David Gauke MP, the Exchequer Secretary to the Treasury, said that the Government had introduced policies to rebalance the economy across the UK and noted that many key economic policy levers were already devolved to Northern Ireland. In addition, the Treasury's consultation paper discussed particular aspects of the Northern Ireland economy including:

  • The benefits and costs of devolving corporation tax varying powers to the Northern Ireland Executive;
  • Implementation issues; and
  • Other possible tax options[3]


3. We agreed to undertake an inquiry into corporation tax on 27 July 2010, and in September took evidence from Rt Hon Owen Paterson MP, Secretary of State for Northern Ireland, on general matters. He explained his main priority, working with local politicians and the devolved institutions, was the economy; specifically rebalancing the Northern Ireland economy. He suggested that one way to boost the private sector in Northern Ireland could involve devolving the competence to decide the rate of corporation tax to the Executive.[4] He also told us that this would be part of a forthcoming consultation paper:

    I am concentrating my main efforts at the moment on working with the Treasury and with local Ministers. I had a meeting with Sammy Wilson and Arlene Foster a couple of weeks ago on the ideas we put into this Treasury paper on growing the private sector.[5]

4. Since 2008, the Secretary of State had commonly referred to the idea of turning the whole of Northern Ireland into an Enterprise Zone.[6] We decided to invite evidence on the broader issues that might make Northern Ireland a better place for enterprise to flourish. A list of those who provided evidence is at the end of this report. In addition to informal meetings with interested parties in Northern Ireland, we also held meetings in the Republic of Ireland to hear about that country's experience with a low rate of corporation tax.


5. The Northern Ireland economy under-performs in relation to the rest of the UK, and despite recent improvements in several respects, has done so for several years. Northern Ireland has remained close to 80% of the UK average Gross Domestic Product per head for several decades and improvements in employment rates have been offset by declining productivity relative to the rest of the UK.[7] The current Gross Value Added (GVA) per capita in Northern Ireland was £15,795 in 2009: compared to England £20,400, Scotland £19,744, and Wales £14,842.[8] Northern Ireland has the highest rate of economic inactivity: 28.4%, compared to the UK average of 23.4%.[9] Northern Ireland's economic weaknesses have been attributed to a number of unique factors, not least the legacy of over 30 years of conflict, demographic structure, the peripheral location of Northern Ireland, and issues of deprivation and rurality.[10]

Private sector

6. The Secretary of State told us that from his conversations with businesses in Northern Ireland:

    There was a very broad agreement, that Northern Ireland could not continue with such a high preponderance of GDP depending on public spending; according to one report it is 77.6%. During that time I came across some absolutely marvellous, world-class firms. Sadly, there just are not enough of them. It became our very clear policy that we should bring in some radical measures to rebalance the economy.[11]

7. Substantial resources have been directed at the Northern Ireland economy to try to create jobs and attract foreign direct investment (FDI). New jobs have been created, but often in low value-added activities[12] and without being able to narrow the overall productivity gap with the rest of the UK.[13] This is partly attributed to the amount of support the Northern Ireland public sector has received,[14] and while the average salary is higher than in the private sector[15] the public sector does not have the same productivity drivers.[16] The result is an economy that receives public sector spending 25% per capita higher than in England.[17]

8. John Simpson, visiting professor at the University of Ulster, suggested the private sector was not "as miserable as it is sometimes described" and pointed out it provided 70% of the employment in Northern Ireland.[18] There was, however, broad agreement that the private sector in Northern Ireland is dominated by small companies: 94% of Northern Ireland's VAT registered enterprises have fewer than 10 employees; and 10 large companies account for 50% of all Northern Ireland exports.[19] It has the lowest level of business formation and business growth in the UK,[20] and the private sector has greater reliance on low value-added sectors, such as agriculture, while it is under-represented in high productivity sectors such as financial services. Private sector productivity is held back by a lack of basic skills, relatively low levels of enterprise and low levels of research and development.[21]

9. Our witnesses agreed that the Troubles had acted as a serious disincentive for investment, and even now affects the willingness of potential investors to consider Northern Ireland as a location.[22] Victor Hewitt, Director of the Northern Ireland Economic Research Institute, and member of the Northern Ireland Economic Reform Group,[23] told us:

    At the height of the Troubles, we were bringing in less than 100 jobs a year at one stage. So the public sector consciously expanded and that has unbalanced the economy to some degree.[24]

Peter Bunting, Assistant General Secretary, Irish Congress of Trade Unions, agreed:

    We had 40 years of mayhem and conflict, ridiculous stuff, which held us back from developing as an economy. So we lost out for 40 years, and we're playing catch up.[25]

Several witnesses pointed out that the years of unrest had contributed to loss of talent from Northern Ireland. Terence Brannigan, Chairman of CBI Northern Ireland, believed that:

    One of the things that we really, really need to focus on is ensuring that we keep our young people. This is my biggest single fear if we do not do this. I go back to the time when I had just come through my education and, like a lot of my friends and colleagues, left Northern Ireland. Why? Because there was nothing there for them to do in terms of a career. We lost a generation of people.[26]

Aubrey Calderwood, from Capitus investment incentives consultant, agreed:

    I think over the years as well, obviously with the well documented Troubles [...] we definitely have had a brain drain that has led to not so many entrepreneurs being available in Northern Ireland. [...] Some come back, but most do not.[27]

10. Thankfully, Northern Ireland appears to have reached a period of political stability, welcomed by the Secretary of State:

    I think that everyone in the United Kingdom must be delighted that after 40 years of terrible, politically motivated violence, we now have a political process that has delivered an Assembly that has gone its full term. We are now looking forward to a new Assembly Executive that will be under pressure to deliver what voters want, which is all for the good. That is hugely in the interests of the United Kingdom.[28]

11. 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.

The work of Invest Northern Ireland

12. Invest NI is the business development agency for Northern Ireland and, sponsored by the Department of Enterprise, Trade and Investment in the Northern Ireland Executive, aims to help new and existing Northern Ireland businesses compete internationally, and to attract new investment to Northern Ireland. It currently markets Northern Ireland as a destination for foreign investment because of cultural advantages (English speaking, functioning legal system, advanced education system), competitive on costs (low wages and low property prices), and accessible to markets (strong links with US and Europe).[29]

13. Invest NI is able to provide grants to firms wishing to invest in Northern Ireland. Jeremy Fitch, Managing Director, Clients Group and Business International at Invest NI, told us they had paid about £367 million over eight years to attract in, or safeguard, 35,114 jobs—about 2,500 to 4,000 jobs every year at a cost of about £10,500 per job.[30] He argued that for there to be an increase in the number of jobs created, including different and sustainable types of employment, then there needed "to be a paradigm shift of some description".[31]

14. Several witnesses predicted the forthcoming reduction in the ability of Invest NI to offer Selective Financial Assistance [SFA] grants because of restrictions on state aid under EU law. Jeremy Fitch admitted:

    The SFA changes are what keep me awake at night at the moment; that is my big fear. At the moment, the state aid rules allow companies in specific regions within the UK, of which Northern Ireland is one, to offer a contribution towards eligible investment costs. So at the moment for large companies, all of Northern Ireland can offer 30%. On average, we are probably doing about 20%; we are trying to get the best value for taxpayers' money, so we are not using the full 30%, just 20%. From the first of January [2011], that drops for large companies in Belfast to 10% and for the rest of Northern Ireland to 15%. So our armoury for going out to win inward investment is going to be severely damaged.[32]

Victor Hewitt, from NIERG, explained that £100 million a year is currently spent on direct grant aid and once this goes: "That will obviously leave the development agencies with nothing in the quiver."[33] The Independent Review of Economic Policy said that offers of assistance through SFA were associated with 28,000 new jobs, had 15,000 safeguarded jobs, and £2.4 billion of investment between 2002/03 and 2007/08.[34] The Northern Ireland market, in itself, is not large and attracting new FDI is seen as a way to attract high skilled, high wage and sustainable jobs, increase the productivity of the economy, and make a significant dent in the unemployment rates in Northern Ireland.[35]

15. 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.

1   HM Government, The Coalition: our programme for government, 25 May 2010, page 28 Back

2   HM Treasury, Rebalancing the Northern Ireland economy, 24 March 2011. Referred to as the 'Treasury's consultation paper' Back

3   WMS from HM Treasury, Consultation Paper on Rebalancing the Northern Ireland Economy, 24 March 2011 Back

4   Oral evidence taken before the Committee on 8 September 2010, Session 2010-12, HC 442-i, Q1 Back

5   Oral evidence taken before the Committee on 8 September 2010, Session 2010-12, HC 442-i, Q 26 Back

6   For example, Owen Paterson makes commitment on capital funding, 15 October 2010, or Heat on Owen Paterson to reveal his plans to revamp our struggling economy, Belfast Telegraph, 10 February 2011  Back

7   Ev 217 Back

8   HL Deb, 10 March 2011, Col WA 431. Gross Value Added is the difference between the value of goods and services produced and the cost of raw materials and other inputs which are used up in production Back

9   Northern Ireland Economic Outlook, March 2011, See  Back

10   HM Treasury, Rebalancing the Northern Ireland economy, paras 2.2-2.3 Back

11   Q1[ResponsibilitiesoftheSecretaryofStateforNorthernIreland] Back

12   HMTreasury,RebalancingtheNorthernIrelandeconomy,paras2.2-2.3 Back

13   Q3 Back

14   Ev 192 Back

15   Q 17 [Northern Ireland as an Enterprise Zone]. See also Ev 27 Back

16   Q4 Back

17   Q29[ResponsibilitiesoftheSecretaryofStateforNorthernIreland] Back

18   Q261 Back

19   Ev 202. See also Q 195 or Q 236 Back

20   Ev 202 Back

21   Ev 217 Back

22   Q36 Back

23   The Economic Reform Group is small group of economists, accountants and business representatives in Northern Ireland: Eamonn Donaghy, KPMG; Neil Gibson, Oxford Economics Ltd; Dr. Graham Gudgin Centre for Business Research, University of Cambridge; Michael Hall, Ernst and Young; Victor Hewitt, Director ERINI; Sir George Quigley,Chairman, Bombardier-Shorts; and Michael Smyth, University of Ulster. Back

24   Q 4  Back

25   Q 195 Back

26   Q 115 Back

27   Q14[NorthernIrelandasanEnterpriseZone] Back

28   Q 29 [Responsibilities of the Secretary of State for Northern Ireland] Back

29   Q 34  Back

30   Q 44 Back

31   Q 48 Back

32   Q 49 Back

33   Q 12 Back

34   DETI and Invest NI, Independent Review of Economic Policy, September 2009, para E.16  Back

35   Q 30  Back

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Prepared 24 May 2011