Corporation Tax Powers Could Make NI More Productive

The UK Treasury and Government have been persuaded that devolved authority for corporation tax rate setting is desirable in Northern Ireland but, importantly, it is doable.

Much of the local backroom effort has come from Professor Neil Gibson and his colleagues in the Ulster University Centre for Economic Policy.

Prof Gibson said: “This journey started with good research, bringing in all of the expertise, testing that this idea could change the game, affect the UK’s public finances and come up with a better economic outcome.

“We have set a precedent, costing a lot of money, saying to the Government, ‘Trust us to generate more revenue so that we will not be costing the Exchequer so much in the future’.”

The UK legislation is now being amended. It will mean that the Northern Ireland Assembly will be able to decide what rate of corporation tax to apply. All the other UK rules on company taxation will continue to apply.

Present plans are that, after April 1 2017, corporation tax liability on local trading activity could be levied at 12.5%. For most companies, if they have a tax return based on the year ending March 2018, it will give rise to a changed and lower tax bill payable in late 2018.

Professor Gibson argues that the full change should be introduced as quickly as possible. While there is some debate about whether to make the change to the 12.5% rate in one single step or possibly to phase it in, Professor Gibson believes the balance of advantage is in favour of making one single step change.

He said: “There has been a long campaign – this is the first real potential game changer to increase the scale of the private sector.

“We still have to have some conversations to finalise about costs – whether about costs today or costs in the future – and whether we have cost certainty and whether any allowance is envisaged to rebate any of the costs (if the scheme ends up generating lower costs than forecast).”

The negotiations over cost remain critical and not finally determined.

Whatever the price and how it is determined, the complementary action will be steps by the Northern Ireland Executive to offset the net reduction of almost £200m in funding available for the local budget.

The draft legislation on the tax rate changes shows that the Treasury has tried to avoid artificial abuse of the new arrangements. Profit shifting, by transfer pricing or by organisational changes, will be monitored, and non-trading profits – for example, from property – will not be eligible.

A particular concern is the lack of clarity in the treatment of back office activities. The Treasury retains discretion to make case-by-case assessments. In practice, some aspects of existing businesses may be disappointed.

Because of the risks of possible distortion, many financial businesses will not be eligible for the local tax rate. Banks, investment funds and insurance businesses, in particular, will be excluded. There is a special interest in the way in which businesses will be classified in the new tax environment. All SMEs (businesses employing up to 250 people) will be subject to a test that 75% of their employment, or employment costs, must be in Northern Ireland.

Larger businesses will be asked to convince the tax authorities, presumably with documents, of the proportion of their trading profits accruing in Northern Ireland. For them, for corporate tax purposes, they will be asked to segregate their accounts into two parts.

But will the tax rate change have a significant effect? Prof Gibson, while recognising the uncertainties of this type of forecast, remains optimistic.

“The impact of introducing, in a single step, the 12.5% tax rate will act to incentivise extra inward investment, increase employment and, importantly, generate a structural change in business activity linked to higher productivity,” he said.

“Overall, business performance should improve, possibly in an average of about £3,000 per employee, which will be seen in additional profits, additional investment and possible improved employee earnings.”

The challenge is now on us to deliver this change.