3 Implementation issues|
42. Our evidence could be read as leading to a conclusion
that allowing the Northern Ireland Executive to have control over
the level of corporation tax would be a "win-win" situation;
devolution might be strengthened by allowing Northern Ireland
greater control of its own finances and, as the Secretary of State
said, the taxpayers of Great Britain might not have to provide
as much financial support for Northern Ireland as they do currently:
Your [English] constituents are contributing
to a massively higher rate of public spending in Northern Ireland,
25% more than your guys and my guys get. [...] I think we have
a very valid case that our English constituents will gain.
However, the consequences of any fiscal change are
never as clear cut as that. And in any event, the means to that
end are far from straightforward. The trade unions, for example,
have expressed their concerns as to whether it will be effective
EU rules on state aid and the
43. There are precedents where an EU state has devolved
the power to vary corporation tax and other taxes to a 'region'
within its own jurisdiction, most significantly in the case of
the Azores regionislands off the west coast of Portugalwhich
were allowed by the national government the power to vary national
corporation tax (and income tax and VAT).
Taxation remains a matter for individual Member states, but fiscal
policy must be exercised consistently with EU law, and in the
case of corporation tax with regard to state aid rules designed
to avoid distortion of competition.
44. The EU Commission investigated the Portuguese
measure to ensure the rules of the EU Treaty had been applied.
Professor Rosa Greaves, Professor of European Commercial Law at
the University of Glasgow, explained
As far as the Commission was concerned, the measure
involved a reduction applicable solely in the Azores territory
in the rate of tax that had been established by national legislation
and applied to the rest of the Portuguese territory. Therefore,
the Commission concluded that the tax reduction was selective
in nature and thus a state aid.
45. The tax measure in the Azores was caught by state
aid rules because it selectively applied to businesses in one
geographic part of the country.
The European Court of Justice (ECJ) judgment accepted that there
was devolution within some Member States, and set out three conditions
where these measures would be compatible with state aid rules:
- Institutional autonomy: the
infra-state authority must have from the constitutional point
of view a political and administrative status separate from the
- Procedural autonomy: the decision must have been
taken without the possibility for the central government to intervene
with regard to its content; and
- Financial responsibility: the reduction of the
national tax in the region must not be offset by aid or subsidies
from other regions or central government.
46. Professor Greaves explained why the situation
in the Azores did not meet these criteria:
In the Portuguese situation, there was a constitutional
clause of solidarity. Again the court has said solidarity as a
principle in the constitution is fine, but in the Portuguese case
was connected to financial compensation to the Azorean Government
if they actually got it wrong and they were short of money to
deliver the services.
47. The reduction of the tax burden by the Azores
authorities was inextricably linked to addressing the inequalities
of the Azores region, and this was dependent on a budgetary transfer
managed by the central government.
The Basque and Gibraltar cases
48. The Azores judgment has been applied in two other
situations, in the Basque region of Spain (September 2008)
and in Gibraltar (December 2008).
49. In the Gibraltar case, the Lower Court accepted
that the UK provides financial support to the Government of Gibraltar,
but this support was to enable the UK to fulfil its international
obligations, for example for the defence of Gibraltar. Gibraltar
already had its own autonomous tax jurisdiction and the Court
did not see a causal link between the financial support provided
by the UK and the tax revenue foregone by Gibraltar.
50. In the Basque region, a trade union and two neighbouring
autonomous communities brought an action in the Spanish courts
for an annulment of the tax legislation. The Spanish court
asked the ECJ whether, in light of the Azores judgment,
the setting of the corporation tax rate in the Basque Provinces
satisfied the criteria of selectivity and consequently constituted
a state aid. Again, Professor Greaves explained the relevance:
They [the ECJ] repeated the Azorean mantra and
made it very clear that, in this particular case, where there
was a procedural autonomy or an economic and financial autonomy
or an institutional autonomy, it was a matter for the trial judge
to decide on the facts. When it went back to Spain, it was the
Supreme Court of the Basque country that then applied the ruling
to the dispute, and they ruled that the Basque country had sufficient
institutional, procedural and financial independence.
51. Professor Greaves noted that the Court was concerned
about a causal link between the tax measure and any compensation
from the national government to the region. She also pointed out
that there may be many reasons why a national government may wish
to transfer money to a region, and raised questions as to where
the burden of proof is to demonstrate that the transfer of the
money was directly because there had been a loss of revenue to
the autonomous region.
In the Basque case, the ECJ considered that it was for the national
court to verify whether, taking into account the methodology and
economic data available, if the Spanish State would be providing
compensation to the Basque province as a consequence of the tax
Code of Conduct for Business Taxation
52. A proposal to reduce the general corporation
tax rate in circumstances such as Northern Ireland would need
to satisfy the code of conduct for business taxation.
The code is not legally binding.
Mr Phillip Kermode, Taxation and Customs Union Directorate General,
EU Commission, explained the difference between the Code of Conduct
and State aid rules:
State aid rules are set by the Treaty. The Code
of Conduct is an arrangement between the Member States of the
Union meeting in the Council. It does not concern the state aid
rules per se; it has its own set of rules. It came about because
of concerns about harmful tax practices, which were effectively
ring fenced regimesthe use of lower rates to attract business.
53. The State aid rules are designed to reduce distortion
in the EU. However, distortion already occurs between states because
neighbouring countries can have different corporation tax rates,
and fair competition is not helped by one state having a corporation
tax rate that is significantly different and essentially designed
to distort competition.
It could be argued that if Northern Ireland had a rate of 12.5%
then it would reduce distortion. The other EU country that would
be affected most by Northern Ireland having a lower corporation
tax would be the Republic of Ireland, and politicians and business
people in the Republic of Ireland have told us that they would
not resent Northern Ireland having a rate of 12.5%. Indeed, the
Irish Government supports this change.
We asked Mr Kermode that if the country most affected by Northern
Ireland lowering its corporation tax was not afraid of the competition,
then on whose behalf would the EU Commission be acting? He answered:
The answer to that is the Commission is obliged
to stick up for the Treaty. When it comes to state aid, the Commission
has to implement the rules of the Treaty that apply to this particular
area. It's clear that the Irish experience with the 12.5% has
been perceived as extremely positive. [...] I don't think the
Commission has any hidden agenda on this. I think the problem
is a legal problem. Once the Treaties are in place and the Commission
has an obligation, well then it must fulfil that obligation. Again,
I think that the issue is one that should be exploredthat
is the whole question of the boundaries of the Azores casein
the case where you have a clear view of what you want to do.
54. We note that in the Basque case it was left to
the national court to interpret whether the tax measure qualified.
Professor Greaves said it was difficult to give a firm answer
to how the Azores could be applied in a new situation, in particular
with regard to the third criterion on financial autonomy, because
the two subsequent cases have not been ruled upon by the ECJin
the case of Gibraltar it was the lower court and in the case of
the Basques it was the national court. Professor Greaves told
us that the lack of clarity means "the gate was opened but
we don't know how wide,"
and "it needs a European Court of Justice decision to be
asked Mr Kermode if he thought a proposal to devolve corporation
tax to Northern Ireland could change how EU law is interpreted.
He thought such a consequence should not be ruled out.
55. The Secretary of State for Northern Ireland said
he was confident that if the Government decided to proceed further,
it would do so in accordance with the criteria laid down in Azores
judgment. We asked
the Exchequer Secretary if he was in negotiations with the European
Commission. He said: "we have informally met with the European
Commission". When asked how many meetings had taken place,
Just the one meeting. [...] This is at an informal
level. As I say, this is still very much developing as a policy.
We are at the consultation stage. As it becomes more detailed
then there will be further discussions with the European Commission,
and then ultimately we would take this to the Commission as a
pretty well-developed policy, assuming we go down this route,
for the Commission to confirm that we are compliant with the Azores
56. 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.
57. 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.
THE FISCAL IMPLICATIONS FOR NORTHERN
58. It is important that the Northern Ireland Executive
and the Northern Ireland Assembly understand the implications
of the decision to devolve corporation tax. If the tax reduction
were successful and investment in Northern Ireland increased above
expectations, then Northern Ireland could receiveon top
of the increased investment and, potentially, jobsmore
revenue that it would otherwise have done via the block grant.
If the tax reduction did not lead to the anticipated increase
in investment, thenin addition to a shortfall in investment
and expected jobsNorthern Ireland would receive less revenue
and would have to make decisions with a smaller budget. Any reduction
in the budget could have an impact upon the resources available
to spend on other priorities for the Northern Ireland economy.
The Northern Ireland Finance Minister, Sammy Wilson MP MLA, told
My biggest reservation at present is that I do
not know what price tag is coming with this. At a time when we
have taken a £4 billion hit on our budget for the next four
years, it would be counter-productive if the price tag were so
high that it displaced even more jobs in the public sector, and
prevented us from doing some of the infrastructure work or some
of the work that Arlene [Foster] is successfully doing to attract
other firms into Northern Ireland.
59. It was acknowledged by all the witnesses, including
the proponents of the reduction in corporation tax,
that lowering corporation tax is not risk free. The risk in volatile
corporation tax revenue would be borne by the Northern Ireland
Executive in the good years and bad years. A recent report from
PriceWaterhouseCoopers said that matching the rate in the Republic,
i.e. 12.5%, "could cost Northern Ireland around £280
million with no certainty of an equivalent uplift in new FDI",
although it is difficult to estimate this figure for reasons we
come onto. Dr Esmond Birnie balanced the arguments:
the fact that in four years' time the Executive
in Stormont will have £1.4 billion less to spend across 12
departments, taking both current spending and capital spending
together, to ask them to take out a further £200 million
is a big ask. However, the contrary view would be one of, and
I know it's easy to say this and much harder to do it, it's the
classic dilemma of taking butter today to have jam tomorrow. To
the extent that reducing corporation tax does lead to accelerated
growth in the private sector, then it leads to benefits, but benefits
10 years down the line, not an upfront benefit to compensate for
the pain of the Spending Review. That would really be a dilemma,
a political decision, for the Executive to make. Do they want
butter now in the hope of getting jam in six to 10 years time?
60. The Treasury's consultation paper described this
as "a significant risk"
for the Executive in bearing the financial consequences of devolved
Corporation Tax rates and "there may be issues of affordability
in respect of this option".
The Exchequer Secretary told us: "there are consequences,
Some might be positive; some might be negative for the Northern
Ireland Executive if corporation tax does not behave in the way
that is predicted".
The Secretary of State, on the other hand, assured us that in
his view: "Emphatically it is not a gamble. A gamble is doing
nothing." We asked Mr Gauke if he saw the lowering of corporation
tax as a gamble. He replied:
I think "gamble" has a necessarily
pejorative tone to it, but there are clearly risks that are involved
in any particular decision. The point that the Secretary of State
made in his evidence: there are also risks in doing nothing. That
is the decision that the Northern Ireland Executive will have
to make and question what the biggest risk is; what is, to use
your words, the biggest "gamble"?
61. In addition to the benefits being uncertain,
it might take some time for Northern Ireland to feel the benefits,
if they came at all. The Secretary of State has said he thought
it would take 25 years to fully rebalance the economy,
but David Gauke believed some benefits might be felt sooner.
TOTAL CORPORATION TAX REVENUE IN
62. It would not necessarily be straightforward to
work out how to transfer the risk from the UK Government to the
Northern Ireland Executive. The Treasury's consultation paper
noted that HMRC does not "currently hold accurate data on
the size of the corporate tax base in Northern Ireland".
David Gauke did tell the Committee that there are around 66,000
companies in Northern Ireland, and between 50% and 63% of those
companies pay corporation tax.
Using tax liabilities of companies with a Northern Ireland postcode,
the Treasury estimated the value of corporation tax receipts in
Northern Ireland to be around £465 million in 2009-10, and
that this could rise to around £685 million by 2015-16.
63. The previous Government commissioned Sir David
Varney, former Chairman of HMRC, to carry out a review of tax
policy in Northern Ireland, including consideration of the case
for reducing corporation tax in Northern Ireland.
Sir David estimated that a reduction in the corporation tax rate
in Northern Ireland to 12.5% would result in around £300
million a year lost in revenue.
The Economic Reform Group report, The Case for a Reduced Rate
of Corporation Tax in Northern Ireland, estimated the initial
annual loss of revenue from reducing corporation tax rate to 12.5%
would be near £215 million per year,
or the equivalent to a reduction of 2% in the block grant.
64. If the Government decided to proceed further
with devolution of tax setting powers, then the Treasury has said
it would start to monitor Northern Ireland corporation tax receipts.
David Gauke noted that if there was a decision to "go down
this route, in the years ahead as we move towards implementing
this and, indeed, even after we implement this [...] we would
be able to see exactly where the profits were coming fromwe
could start to adjust our calculations".
He drew attention to the process of devolving a proportion of
income tax revenue to Scotland, which is to involve a transitional
period whereby forecasts would be compared with actual revenue
and adjustments made.
65. Corporation tax revenue, according to the Exchequer
Secretary, is quite volatile.
Mike Williams, Director, Business and Indirect Tax, HM Treasury,
told the Committee:
of the four big sources of Government revenue,
corporation tax is pretty clearly the hardest to predict. It varies
more; it is harder to [produce] a forecast three years into the
future that will prove accurate. Whereas, if you are forecasting
income tax, national insurance or VAT, in the nature of things
you are not going to get it exactly right, but you are more likely
to get it right than you would tend to get right with corporation
This phenomenon has significant repercussions for
the method of calculating the resulting deduction in the block
grant, and consequently for the stable planning of future expenditure
in Northern Ireland.
66. The Treasury urgently needs to set up a system
which can accurately assess how much corporation tax is collected
in Northern Ireland.
IMPACT UPON THE BLOCK GRANT
67. Both the Secretary of State for Northern Ireland
and the Exchequer Secretary reiterated that, if the power was
devolved, it would be for the Northern Ireland Assembly to decide
whether to reduce the corporation tax rate. We cannot expect the
Northern Ireland Executive to make a decision as to whether they
would lower the rate without more detailed information on the
likely implications for their revenue.
68. 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.
69. Mr Alan Trench, a senior research fellow at the
Constitution Unit, University College London, told us that calculating
the reduction in the block grant would not necessarily be straightforward.
He summarised the Holtham Commission methodology for calculating
a reduction in the block grant if corporation tax was to be devolved
- own base deduction (OBD): the deduction from
the block grant is indexed to the assessed growth in the devolved
- indexed deduction (ID): the initial deduction
is indexed to an external variable such as the relevant UK tax
- proportionate deduction (PD): the grant is reduced
by a given percentage; the initial deduction therefore grows at
the same rate as the grant itself; and
- fixed real deduction (FRD): the grant is reduced
by an agreed sum which is then indexed to inflation; i.e. the
present value of tax receipts is equated to a real annuity which
is deducted from the grant.
Mr Trench also noted that the method that carried
the least risk, OBD, was most likely to be contrary to EU rules,
while the method that related more closely to decisions that
would be devolved and more in accord with the requirements of
EU law, but would carry greater risk to the devolved administration.
70. This is another aspect of the policy that has
not been decided. David Gauke said:
Some of this [...] is to be determined and might
well depend upon whether there is a transitional arrangement and
so on. I think, though, if we were looking at the steady state
arrangement, for every x% of corporation tax, £y
million would be reduced from the block grant. That assessmentwhat
is y, for these purposes; what the reduction in the block
grant would bewould be something that would be made
scientifically with an appropriate methodology, with the best
interests of getting the most accurate number possible.
The Secretary of State commented:
I do not think we would go through an immensely
complex legislative and administrative exercise if they [NIE]
were not actually going to do it. Obviously we have to get agreement
with the Executive on the exact manner in which the exercise would
go about [...] there is an awful lot of detail to be sorted out,
and obviously that has to be run past the European Commission.
There is no point going to legislate if they are not going to
seriously do it.
71. 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.
72. 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.
Total tax revenue
73. The Northern Ireland Economic Reform Group model
suggested that while the total tax revenue in Northern Ireland
would initially be reduced, the lower rate would attract an increasing
amount of foreign direct investment and consequently income tax
and VAT revenue would go up. Its model suggested that while it
would take twenty years for corporation tax revenue to rise back
to the present level, the shortfall in total tax revenue
would end after six years because of the extra income tax, VAT
etc. There is
a major problem, however, as any increase in income tax and VAT
would revert to HM Treasury. It has been suggested that a mechanism
could be developed that would enable Northern Ireland to benefit
from the increase in such taxes.The
Treasury's consultation paper speculated that:
If corporate income increased this should in
turn lead to higher consumption, which might be expected to increase
revenue from VAT and excise duties. National insurance contributions
and income tax revenue may also increase as greater corporate
earnings were distributed to labour via higher wages and employment.
These taxes are not devolved and would accrue to the UK Exchequer.
However, indirect tax effects could be considered carefully when
calculating the adjustment to the block grant as long as doing
so complied with the Azores criteria and the UK fiscal framework.
74. If this proposal was carried through, revenue
raised in Northern Ireland would be collected by HMRC on a UK
wide basis, then reimbursed to the Northern Ireland Executive,
according to some pre-agreed formula between Northern Ireland
and HM Treasury necessitating another layer of administration.
The Secretary of State expressed doubt that this would work,
and there are likely to be questions about how any such mechanism
would conform to the third criterion of the Azores judgment relating
to financial responsibility.
75. 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.
Political support and agreement
with the Northern Ireland Executive
76. The Secretary of State described the production
of the Treasury's consultation paper as "a team effort: the
First Minister, Deputy First Minister, Sammy Wilson [Finance Minister]
and Arlene Foster [Enterprise Minister] have all been closely
involved in the drafting."
David Gauke said:
I am very pleased that we were able to complete
that [consultation] paper with strong cooperation, involving the
Treasury, the Northern Ireland Office and the Northern Ireland
Executive. I was very pleased to attend the launch on 24 March
with representatives from the five leading parties in Northern
Ireland, where it struck me that there was considerable appetite
to explore this area.
77. We asked the Secretary of State if he thought
the political support would remain once the debate moved beyond
"12.5% corporation tax" into some of the more detailed
implementation aspects. He said:
Yes, I think quite a lot of this has to be resolved
before it is transferred. I think it is recognised that, if there
is sufficient political will and leadership, the broad principle
of establishing a lower rate as a step change in galvanising the
private sector in Northern Ireland is probably worth some people
not getting everything they would like through. Obviously there
will be a debate amongst the members of the Executive.
78. Other witnesses pointed to the importance of
political stability in securing peace and further economic growth.
Jeremy Fitch, from Invest NI, said that since the Troubles ended
there had been some years of economic growth, it had felt "like
a big dark cloud has lifted". He also pointed out the support
from the US Secretary of State, Hillary Clinton, and Declan Kelly,
the former special US economic envoy to Northern Ireland, had
been "absolutely fantastic".
He was under no illusion that the US Administration was interested
in supporting Northern Ireland was because they wanted to help
secure the peace process, and see inward investment from the US
as important to cementing that particular process.
79. We heard views that the stable political situation
was valuable. Mark MacGann, from New York Stock Exchange Technologies,
told us that he saw it as "an enormous positive" and
they viewed "the relationship with the Prime Minister, the
Taoiseach of the Republic of Ireland based in Dublin, and the
First Minister of the Northern Ireland Executive as equal in terms
of a foreign company coming in."
80. 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.
PHASING, CERTAINTY AND THE FINAL
A phased reduction
81. One of the constant messages we received through
this inquiry is that investment decisions are commonly made years
in advance, and the need for certainty is paramount. The value
of 12.5% to the Republic of Ireland is a belief among business
and investors that it will not change and they can make long term
decisions in that knowledge. The Secretary of State suggested
that the issue of affordability can be ameliorated by phasing
in the reduction, and his preferred option was to reduce the rate
by 2.5% each year,
in a manner similar to the process whereby the UK Government is
reducing corporation tax by 1% a year. The Treasury's consultation
paper estimated that such a reduction would lead to a reduction
in the block grant of £60 to £90 million per year, which
is around 0.5% of a £12 billion block grant.
Mr Paterson described this as "a very modest risk for a potentially
He recognised that a decision on matters such as phasing would
be made in Northern Ireland.
The Finance Minister, Sammy Wilson, agreed on the value of a phased
there probably are good grounds for phasing it
in, in so far as you probably want to prepare the ground, to first
highlight the fact that this is going to be available. [...] I
would also like to think that if we phased it in that way, the
cost could be gradually introduced into our budget, so that we
could make the adjustments over a period of time. That would be
much easier than taking a big hit all at once.
82. The value of a 12.5% rate to the Republic of
Ireland has been reinforced by the tenacity with which it has
protected it even during the recent negotiations for economic
support from the EU. Several witnesses told us that anyone considering
investing in Northern Ireland would want to know that Northern
Ireland would keep their lower rate with similar reliability.
Eamonn Donaghy, Head of Tax, KPMG Belfast; Chair, of the Tax Committee,
Institute of Chartered Accountants, and member of the NIERG believed
The introduction of a 12.5% rate, whether it
happened immediately or whether it happened over, say, a phased
period of two or three years, is probably not as important as
knowing that that is going to be there for a long period of time.
I think the commitment to a low rate of tax today, tomorrow and
well into the future is what international business will want
Roger Pollen, from the Federation of Small Business,
agreed and when asked what industrialists outside Northern Ireland
thought about low corporation tax, responded:
The answer has come back loud and clear that
if there was anything that suggested it was other than a long-term
commitment, they just wouldn't entertain it. It has to have stability
and that's why it has to have a degree of cross-party support,
and support that takes it beyond the turn of a single Assembly.
It has to be seen to be a structural change.
Trading and non-trading income
83. While the Republic of Ireland has had a headline
rate of 12.5% since 2003, it has had a rate of 25% on non-trading
income. The Treasury's
consultation paper suggests that around 25 per cent of corporation
tax receipts are from non-trading income and excluding non-trading
profits could potentially reduce tax take up to £85 million.
It could also add significantly to compliance costs, both for
business and for the tax collection authorities.
If Northern Ireland were to have a low rate on non-trading profits
there is a risk that it would encourage 'brass plating'where
businesses move their address to a low tax jurisdiction without
moving any meaningful economic activity. Eamonn Donaghy said:
I think we could distinguish between trading
profits and non-trading profits and, to be very clear, this [campaign
for a 12.5% rate] is aimed at trying to attract companies that
are going to create employment and trading activity, as opposed
to being some form of tax haven in which non-trading profits can
be sheltered. It is very much a focus on trying to create economic
activity and therefore jobs in Northern Ireland.
On this matter, the Secretary of State for Northern
Ireland told us:
I think that is a question for the Executive
to explore with businesses and with foreign investors. My personal
opinion is that the wider the tax benefit, the more people we
will collect. So the more people who will gain from this, the
more we will help local businesses and the wider we cast the net
for foreign investors.
84. There would need to be a balance struck between
introducing a rate reduction that is administratively simple for
HMRC and business and ensure that it does not result in a huge
shock to the Northern Ireland budget. The Treasury's consultation
paper said that excluding non-trading profits could cost up to
£85 million in revenue, and also add significantly to compliance
costs, both for business, HMRC and "could restrict the benefit
to groups in particular industries".
85. 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
HMRC and the UK tax system
BURDEN UPON HMRC
86. If the power to vary corporation tax was devolved
to Northern Ireland, corporation tax would continue to be collected
by HMRC. Brendan Morris, Chair of the Northern Ireland Branch,
Chartered Institute of Taxation, said he saw no reason to deviate
from using fundamental UK principles in terms of computing tax
please note paragraph 73 above.
87. There is an administrative cost which would be
borne by the tax authority.
HMRC does not breakdown administration costs on a regional basis,
but admits that corporation tax cost £340 million to administer
in 2008-9 on a UK wide basis, and that just under 70 per cent
of that related to compliance activity.
If corporation tax was devolved then the additional administration
costs associated with the operation of the system would need to
be met by the Northern Ireland Executive.
This is the case with regard to the administration of the Scottish
income tax rate in Scotland.
We also note a recent Public Accounts Committee Report which criticised
HMRC for a lack of transparency over how it resolved corporation
tax disputes, particularly with large and complex cases.
88. We asked Mr Gauke if he thought it would be necessary
to increase resources in Northern Ireland to combat any tax evasion
issues that arise. He said:
I do not want to necessarily put it in terms
of more staff, but you clearly need to improve capability. [...]
clearly HMRC would need the capability to ensure that those businesses
that operate in Northern Ireland and the mainland do not artificially
shift their profits.
89. In addition to greater information around likely
revenue, it is also vital that the Northern Ireland administration
are fully aware of additional implications and costs arising to
businesses that operate in Northern Ireland and to HMRC as a result.
Any additional costs would be borne by the Northern Ireland administration.
90. 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.
BURDEN UPON BUSINESS
91. John Whiting, Chartered Institute of Taxation
and the Office of Tax Simplification, pointed out that the burden
for HMRC would be transparent and quantifiable, but the burden
upon businesses would be more problematic:
There are of course two areas of costs. There
is, as it were, the overt cost of the tax authority, HMRC Northern
Ireland branch. There are the covert and more hidden costs, which
is the company that has to calculate it and that has to carry
out some extra calculations and has to perhaps go through extra
routines; maybe has to do an extra return. I suspect that would
have to be seen as a cost to the company and of course it would
be a negative; only a tiny one in the great scheme of things,
but the extra bureaucracy would be a negative. Of course, one
of the things I think you would have to think about in any move
to this lower rate is to keep it as simple as possible and to
get quite pragmatic, perhaps, in terms of what returns the company
that had activities across the whole of the UK had to do so it
did not, for example, have to do endless schedules proving to
the pound how much was and was not done in Northern Ireland versus
the rest of the UK.
92. The Treasury's consultation paper speculated
that if there were to be a different rate in Northern Ireland
from the rest of the UK, then companies which operate in Northern
Ireland and across the rest of the UK which could be asked to
"separately apportion income and expenditure between activity
in Northern Ireland and activity in the rest of the UK (and also
between types of activity if a reduced rate was limited to trading
It estimated that this burden could cost £50 million. The
burden would apply not only to businesses in Northern Ireland,
but possibly also to businesses throughout the UK that had a presence
in Northern Ireland.
93. However, when we asked the Secretary of State
if any of the businesses he had spoken to in Northern Ireland
had raised the issue of an increased administrative or financial
burden upon them due to a lower tax rate, he said: "No, honestly,
no one has raised that once".
In the section on Implementation Issues, the Treasury's consultation
4.56 The Government is committed to achieving
simplicity in the tax system. It will only provide a separate
rate of corporation tax in Northern Ireland if additional compliance
burdens can be shown to be manageable and justified by overall
economic benefits to most of the companies affected.
94. 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.
TAX AVOIDANCE, TAX EVASION AND BRASS
95. We heard concerns that a low corporation tax
rate in Northern Ireland would lead to problems relating to tax
evasion and in particular the problem of 'brass plating'. The
Irish Congress of Trade Unions raised concerns around the broader
tax regime in the Republic of Ireland in comparison to the UK.
In particular, they pointed out that the Republic of Ireland had
no controlled foreign company legislation,
poor regulation of how companies make internal loans between subsidiaries
to take advantage tax benefits in each jurisdiction, and a lack
of transparency as to tax payments.
All these give Ireland a competitive advantage over Northern Ireland
when trying to attract foreign direct investment. The ICTU Report
quoted the Irish Revenue Commissioners as describing companies
treating Ireland as a tax haven or a flag of convenience, and
suggests that Ireland "offers the opportunity to avoid the
filing of accounts for public inspection without any such fuss."
If this situation does exist in the Republic of Ireland, we do
not wish to see it repeated in Northern Ireland. The Treasury's
consultation paper admits as much:
4.55 The Government would need to consider appropriate
and proportionate revenue protection safeguards such as transfer
pricing to prevent businesses from artificially attributing a
greater share of their taxable profits to Northern Ireland.
96. We asked other witnesses how difficult it would
be to introduce such 'appropriate and proportionate revenue protection
safeguards'. Eamonn Donaghy accepted there might be some attempts
at 'brass plating'
but he thought:
A lot of the legislation that we would need already
exists. I think appropriate additional legislation can be introduced,
and the self-policing mechanism of having additional reporting
requirementsonly for those companies that wish to claim
it, so we are not adding red tape to anybody that does not want
to claim thisis a means of trying to police this concept
of getting something for nothing.
Moreover, Terence Brannigan did not think this was
a huge concern:
Every time we have talked about corporation tax
that has been one of the concerns. Our experience has been that
it hasn't happened very much [and] when it started to happen,
rules and regulations were introduced.
He suggested that eligibility might be identified
according to establishing the headcount of those companies trying
to claim the lower rate. Importantly he said he wanted simple
and straightforward ways of addressing the problem:
What you don't want is a regulatory system that
has to be blown out of proportion in order to manage that kind
of thing. There are reasonably simple, straightforward mechanisms
that you can introduce, and head count is one of them.
97. The Holtham Commission, which investigated the
possibility of devolving certain taxes to Wales, found that many
countries, including the USA, had mechanisms for dealing with
how companies claimed for differential rates between regions.
Holtham suggested the simplest method was to allocate liability
according to the proportion of payroll at a site, as long as the
payroll matched the location of the employees.
98. John Whiting said that there was an ongoing debate
within HM Treasury, prompted by the devolution of tax powers to
Scotland, around whether the UK should move to a more territorial
basis of taxation. He also pointed out that transfer pricing was
a very time-consuming and complex exercise which can "drag
on for many, many years."
99. Solutions which seek to address such tax avoidance
should, ideally, be straightforward to understand and implement,
and provide a reasonable degree of certainty to both taxpayer
and Government. While it is not straightforward,
the Chartered Institute of Taxation said they think the current
HMRC anti-avoidance measures and Controlled Foreign Companies
legislation would be sufficient to manage any increase in aggressive
Other witnesses suggested options to limit abuse of the system.
100. We further note that the Exchequer Secretary
announced in December 2010 that he would appoint Graham Aaronson,
a legal expert on tax loopholes, to lead a study into a General
Anti Avoidance Rule (GAAR). Mr Gauke has said he is "fully
committed" to a clampdown on tax avoidance and introduced
measures "expected to raise more than £2 billion and
protect a further £5 billion by 2015" and "[...]
groups of companies will be banned from using intra-group loans
or derivatives to reduce their corporation tax bill."
101. In addition, the consultation considered changing
the rules governing transfer pricing for SMEs to "protect
Exchequer revenue from avoidance". This may place an additional
burden upon SMEs:
4.58 Depending on what the NIE decided on the
operation of the regime, additional administration costs associated
with the operation of the regime would need to be met by the NIE.
There is currently an exemption from transfer pricing rules for
small and medium-sized enterprises within the UK. To protect Exchequer
revenue from avoidance following the introduction of a differential
corporation tax rate within the UK, the Government might need
to consider removing this exemption.
102. 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.
Dead weight and windfall gains
103. Several witnesses suggested that the Government
should explore ways of retrieving the windfall tax gain paid to
certain sectors, notably the utility companies and the banks.
However, EU state aid rules are designed to avoid any selective
advantage that may result in distortion of competition, which
means that any reduction in corporation tax must be applied at
the same rate to all companies eligible within Northern Ireland.
It could not be applied preferentially to particular sectors,
and could not be refused to particular sectorsincluding
those who do nothing to increase economic activity. Dr Esmond
Birnie, PricewaterhouseCoopers, told us:
the problem with a blanket reduction in corporation
tax is that everyone gets it, and economists would say there'd
be a lot of dead weightin other words, firms that weren't
adding much to wealth creation, or innovation, or exports, would
get it like everyone else. [...] we run into the European rules
about not favouring particular sectors, so it does seem that we
are constrained; you have to have a rate across the board.
104. The Treasury's consultation paper also notes
that un-incorporated business might be encouraged to become incorporated
to benefit from the lower tax rate:
Tax motivated incorporation [...] would increase
as the corporation tax rate falls and the differential between
income tax and corporation tax rates increases. An increase in
TMI results in higher corporation tax receipts although this will
be more than offset by falls in income tax and NICs receipts and
therefore result in a cost additional to the direct cost 
John Whiting mentioned this as a likely consequence
of lowering corporation tax, that sole traders would incorporate
to take advantage of the lower rate so it would bring more companies
within the tax base of Northern Ireland.
105. 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.
Implications for the UK
106. The Government acknowledged it supports decentralisation
of power from Westminster and devolution of corporation tax should
be seen in that context. The introduction to the Treasury's consultation
paper recognises that this debate also takes place elsewhere in
The issue of separate corporation tax rates for
Scotland and Wales has been considered by the Calman and Holtham
Commissions respectively. The Calman Commission's report [...]
recommended against a separate rate of corporation tax for Scotland,
on the grounds that a separate rate could distort competition
within the UK, and that the required legislation would be likely
to create significant administrative burdens. The Holtham Commission's
report [...] recommended that the Welsh Assembly Government should
seek discussion with the UK Government and other devolved governments
on the feasibility of a separate rate. The report noted a number
of legal and implementation issues and the possibility that the
fiscal consequences of a separate rate could introduce volatility
into the Welsh Assembly budget.
The Treasury's consultation paper continued:
Experience, especially from the implementation
of the Calman Commission's recommendations on tax devolution,
suggests that the complexities associated with devolving a separate
rate of corporation tax to the Northern Ireland Assembly mean
this would take several years to implement.
107. We note the ongoing discussion in Scotland and
Wales around the devolution of tax raising powers, and the cost
of administering such mechanisms, and that there is not a united
view as to the merits of devolving corporation tax to different
parts of the UK. For example, CBI Scotland do not support a separate
rate for Scotland.
108. A number of concerns have been expressed about
the setting of different levels of tax across the UK, yet council
tax is set at different levels between local authorities. Some
concerns have been expressed as to why just Northern Ireland should
have the power to vary corporation tax rates and not, for example,
the north west of England. The Government could not devolve the
power to vary corporation tax to an English region because of
EU rules on State aid and the criteria laid down in the Azores
109. 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%.
110. We heard concerns that a lower rate of corporation
tax could lead to a loss of investment into parts of England,
Wales and Scotland. Sir David Varney concluded that if Northern
Ireland lowered corporation tax rate to 12.5%, one of the consequences
would be a significant displacement of capital and profits from
the rest of the UK, near £2.2 billion over a ten years.
However, Terence Brannigan, CBI, said he did not think there would
be a shift to Northern Ireland from other disadvantaged areas
of the UK as relocation of existing operations is:
an exceptionally difficult, costly, time-consuming
and risky business [and] secondly, if that were going to happen,
you would probably have seen a wholesale shift into the Republic
of Ireland from the UK [or] you would have seen a major shift
from the North of Ireland down the road, down the A1 to Dublin
and down to Cork and across to Limerick, and of course we haven't
111. Victor Hewitt, from the Economic Research Institute
and the Economic Reform Group, accepted there would be "an
element of displacement" but it was not the intention.
Similarly the Secretary of State was confident it would not be
I think the paper does acknowledge there will
be some movement, but Northern Ireland is not a very big place.
There are 1.8 million people there, and there is a limit to the
number of businesses that will want to up sticks and move. They
will be well embedded in other parts of the UK, their markets
are there, their workforces are there [...] So I think there will
be a modest movement but there is movement the whole time within
the economy. I do not think it is something we should be too alarmed
112. There is also a concern that FDI to the UK would
preferentially go to Northern Ireland rather than England, Scotland
or Wales. Indeed, the Treasury's consultation paper estimated
that around 12.5% of the FDI attracted to Northern Ireland as
a result of the lower corporation tax would be investment that
would have gone elsewhere in the UK.
113. Eamonn Donaghy, of NIERG, argued that as a result
of the lower rate in the Republic of Ireland there "has been
some displacement from GB and the UK to the Republic of Ireland"
but it had not been significant nor led to a large amount of jobs
going from GB to the Republic of Ireland. He thought that if a
firm wanted to move from the north east of England to the Republic
of Ireland for tax reasons, they would be prepared to move to
Singapore or Estonia.
114. At a time of economic difficulty in the Republic
of Ireland and the United Kingdom, this is a sensitive subject
that would need to be handled with care. For example, while we
heard doubts that a large number of financial services' employers
would migrate from Canary Wharf to Belfast, it may be that some
might go to Belfast rather than the International Financial Services
Centre in Dublin.
115. 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.
88 Q 31 [Responsibilities of the Secretary of State
for Northern Ireland] Back
Richard Murphy, 2010, Lowering Northern Ireland's Corporation
Tax: Pot of Gold or Fool's Gold? ICTUNI Back
Portugal v Commission (C-88/03)  ECR I-7115;  3 CMLR
Greaves, Rosa, 2009, Autonomous regions, taxation and EC state-aid
rules, 34 European Law Review, p785 Back
Q 344 Back
Q 345 Back
Joined Cases C-428/06 to C-436/06. The Gibraltar case is being
appealed to the European Court of Justice. Professor Greaves said
she expected it to confirm what the Lower Court has stated. Back
Cases T-211/04 and T-215/04 Back
Q 345 Back
The Tribunal Superior de Justicia de la Comunidad Autonoma del
Pais Vasco. Back
Q 358 Back
Qq 346-351 Back
Ev 219 Back
Q 354 Back
Q 382 Back
Q 271 Back
We met the Irish Ambassador to the UK and politicians in Dublin
before the General Election in February 2011 Back
Q 402 Back
Q 344 Back
Q 358 Back
Qq 380-381 Back
Q 32 Back
Qq 49-50 Back
Q 128 Back
Q 106 Back
Cut in corporation tax 'could cost NI £280m' PwC says, 7
January 2011 www.bbc.co.uk/ Back
Q 229 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.62 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.67
Q 30 [Rebalancing the Northern Ireland economy] Back
Q 24 [Responsibilities of the Secretary of State for Northern
Q 41 [Rebalancing the Northern Ireland economy] Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.33 Back
Q 60 [Rebalancing the Northern Ireland economy] Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.35 Back
HM Treasury, Review of Tax Policy in Northern Ireland, December
See www.hm-treasury.gov.uk/media/1/3/varney171207.pdf Back
Ibid, Executive Summary, page 4 Back
Economic Reform Group, The Case for a Reduced Rate of Corporation
Tax in Northern Ireland, May 2010. The NIERG model assumed a starting
point of 28%, Back
NIA Deb, 11 May 2010 [Ms McCann] Back
Q 18 [Rebalancing the Northern Ireland economy] Back
Q 15 [Rebalancing the Northern Ireland economy] Back
Q 30 [Rebalancing the Northern Ireland economy] Back
Q 19 [Rebalancing the Northern Ireland economy] Back
Ev w11 Back
Independent Commission on Funding and Finance for Wales, 2009,
Funding Devolved Government in Wales: Barnett & Beyond, First
Report to the Welsh Assembly Government. and Independent Commission
on Funding and Finance for Wales, 2010, Final Report: Fairness
and Accountability-A New Funding Settlement for Wales. Back
Ev w11 Back
Q 26 [Rebalancing the Northern Ireland economy] Back
Q 18 [Responsibilities of the Secretary of State for Northern
Economic Reform Group, The Case for a Reduced Rate of Corporation
Tax in Northern Ireland, May 2010 Back
PricewaterhouseCoopers, Corporation Tax Game Changer or Game Over,
January 2011 Back
HM Treasury, Para 4.44 Back
Qq 47-48 Back
Q 1 [Responsibilities of the Secretary of State for Northern Ireland] Back
Q 1 [Rebalancing the Northern Ireland economy] Back
Q 61 Back
Note Declan Kelly resigned on 11 May 2010. See www.state.gov/secretary/rm/2011/05/162984.htm
Q 37 Back
Q 252 Back
Q 22 [Responsibilities of the Secretary of State for Northern
HM Treasury, Rebalancing the Northern Ireland Economy, page 38 Back
Q 12 Back
Q 44 [Responsibilities of the Secretary of State for Northern
Q 136 Back
Q 9 Back
Q 324 Back
Trading income applies to that earned from economic activity,
for example, buying and selling goods with a view to making a
profit or surplus, providing services. Non-trading income is passive
in nature, e.g. arising from investments in money, securities
and property. Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.67 Back
Q 11 Back
Q 58 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.8 Back
Q 175 Back
Q 69 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.51 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.59.
See also Q 40 [Rebalancing the Northern Ireland economy] Back
Q 74 Back
PAC, 18th Report of Session 2010-11, HM Revenue and Customs' 2009-10
Accounts, HC 502. See also Oral evidence to the Treasury Committee,
Administration and Effectiveness of HM Revenue & Customs,
11 May 2011, Qq 391-423 Back
Q 39 [Rebalancing the Northern Ireland economy] Back
Q 74 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.54 Back
Q 50 Back
HM Treasury, Rebalancing the Northern Ireland economy, paras
4.55 - 4.56 Back
Rules controlling what a high tax jurisdiction can claim from
a company that has already paid tax in a lower tax jurisdiction Back
Richard Murphy, 2010, Lowering Northern Ireland's Corporation
Tax: Pot of Gold or Fool's Gold? ICTUNI Back
Ibid., page 13 Back
HM Treasury, Rebalancing the Northern Ireland economy, paras
Q 30 Back
Q 20 and Q 30 Back
Q 113 Back
Q 113 Back
Independent Commission on Funding and Finance for Wales, Fairness
and accountability: a new funding settlement for Wales. July 2010,
Final Report, Summary, para 7.6 Back
Q 80 Back
Ev 202 Back
Ev 192. The purpose of the CFC legislation is to prevent UK companies
from avoiding UK tax by diverting income to subsidiaries in low
tax countries. A CFC is a company which is not resident in the
UK (but which is controlled by individuals or companies who are)
and which is subject to a level of taxation less than three quarters
of what it would have paid had it been resident in the UK. Back
Ev 202 Back
Exchequer Secretary to the Treasury David Gauke 'fully committed'
to tax clampdown', The Daily Telegraph, 7 December 2010. See also
HM Treasury, Rebalancing the Northern Ireland economy, para 4.58 Back
See Q 18 or Q 59 or Q 65 Back
Q 218 Back
Q 39 Back
Q 56 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 1.11 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.1
Oral evidence to the Scottish Affairs Committee, Supporting Scotland's
Economy, 26 January 2011, Qq129-131 Back
HM Treasury, The Varney Review of Tax Policy in Northern Ireland,
December 2007 Back
Q 111 Back
Q 30 Back
Q 57 Back
HM Treasury, Rebalancing the Northern Ireland economy, para 4.19 Back
Q 30 Back