Agenda item

             The Committee approved, subject to the strengthening therein of the Council’s comments on its support for a reduction in the rate of Corporation Tax in Northern Ireland, the undernoted response to the aforementioned consultation being undertaken by HM Treasury:

 

      “Is there a need to rebalance the Northern Ireland economy by strengthening the private sector over the longer term and to increase economic growth and promote significant new investment?

 

      The UK government has invested heavily in growing the private sector in Northern Ireland for some 30 years especially since the introduction of the EU Structural Funds in 1995 with over £4billion allocated to economic development over that period. However it is clear that that investment, while necessary, has contributed to a structural imbalance in the economy.  The upshot is that the regional economy is now seen as being dependent on the public sector, with a private sector whose potential for growth, innovation and exports needs to be further boosted^[1].

 

      Going forward, it is clear that there will be less public funding available and therefore an alternative approach is essential. 

 

      In this regard, cities – and Belfast in particular – can play a significant role in meeting this challenge.  In the current Regional Development Strategy (RDS) 10 year review, it is noted that the new RDS is being prepared in a very different economic context to its predecessor. The consultation document describes ‘how cities and urban areas will come to the fore and will be the drivers for economic development. The main spatial considerations shaping future growth are the importance of Belfast and Derry with a network of key service centres...’ (para 2.59).  Belfast currently provides employment for 108,000 in-commuters from neighbouring districts – over half of all those employed in the city^[2].  It is also home to two-thirds of Northern Ireland’s service sector FDI (by value) and 75% of total NI service sector exports originate from Belfast.

 

      Cities therefore have the potential to make the greatest contribution to the required economic growth and efforts to grow the private sector should consequently be focused here.   

 

      Where is there most scope for increasing productivity, reducing labour market inactivity and increasing growth?

 

      The focus should be on developing both ‘soft’ and ‘hard’ economic infrastructure.

 

      In our response to the Northern Ireland Executive’s consultation on ‘Priorities for Sustainable Growth and Prosperity’, we suggested that addressing the skills challenges was fundamental to addressing the challenges of productivity growth, labour market inactivity and economic growth. 

 

      We referred to a report undertaken on behalf of Belfast City Council in 2008 which found that over half of net new jobs in Belfast over next decade will require graduate qualifications while less than 1 in 7 will require no qualifications.  A similar report undertaken at Northern Ireland level sought to forecast future skills needs up to the period 2020 – the period of this strategy^[3].  This report noted that, if Northern Ireland had equivalent UK concentrations in sectors, the following could be achieved:

 

·         12,000 more people in employment with sub-degree, degree and post-graduate qualifications

·         30,000 more managers and 20,000 more professionals

·         4,000 more STEM degree holders

·         7,000 more creative and arts degree holders in the workforce.

 

      In order to achieve the targets set within the existing Programme for Government (PfG), it suggested that growth would require uplift in skill levels across the workforce, particularly at graduate and post graduate level.   The current funding challenges around university education will place additional pressure on achieving this target.

 

      The report concluded that there was an absence of a clear sectoral roadmap for the economic future of the region. We consider that this is an important element in maximising economic growth: identifying key sectors where the region can compete globally and putting place the support services (skills, infrastructure) to allow these to be addressed. 

 

      The economic inactivity challenge remains the most stubborn of all challenges and has not been impacted to any significant degree, even during the period of economic growth, prior to 2008.  The report suggests that welfare reform has the potential to impact positively on this challenge.  However, we would contend that careful consideration needs to be given to managing the short-term difficulties that this may create, particularly in some geographical areas of the city of Belfast and other large conurbations.  It may be appropriate to look at introducing some flexibility or innovation in the benefit regime, as has happened in other countries i.e. phasing out of benefits over a period, allowing people to retain some benefits while they are training for employment.  The ultimate objective is to help those who can work to find employment – and therefore make a positive contribution to the economy – but this process needs to be carefully managed.

 

      How could a reduction in the rate of corporation tax in Northern Ireland support additional investment, higher growth rates and increased employment in the Northern Ireland economy?

 

      HM Treasury has concluded that a reduced corporation tax could play a significant role in helping to rebalance the NI economy in the long term by encouraging foreign and direct investment and indigenous private sector growth.

 

      The prevailing rate of corporation tax on trading profits in the RoI is 12.5% which, some commentators have argued undermines NI’s ability to attract and sustain inward investment and has given the RoI a distinct economic advantage in this respect. However, HM Treasury advises caution in assuming that a lower corporation tax would have the same effect in NI as it has had in the RoI.  This point is echoed in the Northern Ireland Affairs Committee’s report on the Corporation Tax proposals, from May 2011.

 

      A recent report by PricewaterhouseCoopers^[4] (PwC), found ‘no evidence’ that the Irish Republic's low corporation tax, had, by itself attracted high levels of foreign direct investment. PwC’s own research suggests that a variety of factors, of which low corporation tax was only one, contributed to the so-called ‘Celtic Tiger’ economy meanwhile a reduction the NI rate to the levels being called for could have a negative impact on tax revenues that in turn could lead to a cut in the NI ‘block grant’ by as much as £280million per annum. PwC takes the view that an attractive tax regime, with world-class infrastructure and skills, and an efficient planning system make a better offering to inward investors.

 

      The Northern Ireland Affairs Committee report on this issue suggests that ‘much of the evidence to the Committee has suggested lowering the corporation rate would be advantageous but would not be effective in isolation^[5]’.  In this regard, corporation tax could be effective if it was part of a basket of investments and incentives geared towards improving productivity and creating economic growth.

 

      What are the views on the estimated costs impacts on tax receipts arising from a lower corporation tax rate in Northern Ireland?

 

      HM Treasury offers some scenarios but cannot provide a definitive analysis of the cost to NIE’s block grant. Assuming additional investment and business growth arising from a 12.5% reduction in corporation tax it is estimated that an extra £10?20million could be raised in tax revenue per annum with a corresponding increase in excise duties of up to £55million per annum as a result of rising demand for consumption if goods and services.  If this is the case, this is a positive development, and the Northern Ireland Executive will need to put in place a framework in which these monies are reinvested in activities to promote further economic growth.

 

      It is acknowledged that the sums used in the consultation are indicative and that there is no precise figure available on current corporation tax contributions from Northern Ireland companies.  The Northern Ireland Committee report suggests that ‘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^[6]’.  Reducing the level of corporation tax and the financial impact of that requires solid baseline information as a starting point for making calculations on the potential impacts.

 

      What are the risks to the Northern Ireland Executive arising from a devolved corporation tax rate?

 

      The greatest risk would come about if a cut fails to bring about a net increase in new business investment.  In this scenario, the revenue shortfall will have to be found from the NI ‘block grant’ or from savings/additional revenues elsewhere. In order to mitigate this risk, the Northern Ireland Executive will have to put in place a comprehensive enterprise-focused programme for government in which all relevant departments are working towards common goals and targets. 

 

      There is also potentially a risk of displacement, where a GB based company decides to relocate to NI to take advantage of a ‘softer’ tax regime at the expense of another deprived part of the UK. In both scenarios, the risk management lies with the Northern Ireland Executive so measures would need to be put in place to deal with this. 

 

      There is also a potential risk of ‘transfer pricing’ strategies where multi-plant companies attribute a greater share of their profits to NI to avoid tax that would other be payable to the UK Exchequer.  In this scenario, the Northern Ireland Executive and Exchequer would need to work closely together to ensure that this does not occur. 

 

      What are the potential compliance costs and administrative burdens for business arising from a devolved corporation tax rate in Northern Ireland?

 

      As with any new process, there will be start-up costs for the new tax regime, operating costs and auditing expenses that would have to be covered from any revenue collected.

 

      It is noted that calculating this costs is a difficult task but that any costs would have to be borne by the Northern Ireland Executive.  We would recommend that the system put in place is sufficiently resourced to ensure a smooth transfer and to simplify the system for businesses from the outset.

 

      What approach should be taken to adjust the block grant arising from a devolved corporation tax rate in Northern Ireland?

 

      As identified above, we consider that it is important for the Treasury to make an assessment of the corporation tax ‘take’ from Northern Ireland at present in order to identify the scale of the cut from the block grant. 

 

      Once this information is available, responsibility can then be given to the Northern Ireland Executive to give the Assembly the power to set its own rate of corporation tax; and allow the Assembly to keep those receipts. 

 

      There are various ways in which the new rate can be introduced – either as a one-off change at a certain point in time or by a phased approach over a number of years. 

 

      What are the views on the balance of potential costs and benefits of a reduced corporation tax rate in Northern Ireland?

 

      If effective rebalancing of the economy is achieved and there is a net increase in new foreign and direct investment and a growth in indigenous firms, then the loss of tax yields may be offset.

 

      Alternatively if the recession continues and other global factors continue to chip away at Northern Ireland’s competitiveness, the reduction in the block grant could be punitive with a corresponding impact on productivity, living standards and public services.

 

      Given that the Northern Ireland Executive will bear the risks should receipts be lower than anticipated, it is critical that accurate calculations of the current contribution to the Exchequer from corporation tax in Northern Ireland are established as a baseline.  This will allow informed decision making about the level of any new rate as well as the method of introduction.

 

      However, at this stage, there is still some further work to be done to determine whether the introduction of such a measure is practical and, indeed, possible.  If that is the case, we consider that there is merit in exploring the potential of varying the corporation tax as a possible tool for enhancing the region’s economic competitiveness on a global scale - but only if it is accompanied by a range of wider supporting measures. 

 

      What are the views on the merits of a deferred implementation of a rate reduction in Northern Ireland and its potential impact on investment decisions?

 

      As previously noted, it may take some time for the practicalities around the establishment of this system to be put in place.  As such, we consider that there is likely to be some lead in time from announcement to introduction.  We would suggest that it is important that sufficient resources are allocated at this stage and therefore do not see that the system could come into place with immediate effect in any case.  However the deferral would potentially be short term.

 

      If this was the case, this may not impact too negatively on investment decisions, given that they generally take some time to come to fruition.  There is a need for balance in this and we would suggest that a deferral period, if introduced, would be time-bound and of a relatively short duration. 

 

      What are the views on the extent to which a phased reduction in the rate of corporation tax in Northern Ireland could support a rebalancing of the economy while allowing the costs of the reduction to be more effectively managed?

 

      The consultation identifies the relative merits of a phased approach in terms of allowing gradual adjustments to the regime and managing the impact on the overall Northern Ireland Executive. This approach appears to have popular political support and may reduce the perceived risks arising from a reduction in the block grant. 

 

      However the central issue for the potential investors and for existing businesses appears to be the consideration that, once introduced, the measure should have some degree of certainty as to its longevity.  This is critical for future economic stability and can not only help secure new business but also encourage repeat investments by existing companies. 

 

      What are the views on the impact that restricting any reduction in corporation tax receipts to trading income only would have on the aim of rebalancing the Northern Ireland economy and the value for money of a corporation tax reduction?

 

      The consultation notes that proceeding along the lines of Republic of Ireland i.e. only trading income is subject to the reduced corporation tax (12.5%) with non-trading income (e.g. interest on investments) taxed at 25%, would lead to a scenario where  up to £85m per annum in revenue receipts might be foregone.

 

      If a differentiated approach were to be taken, consideration would need to be given to introducing regulations to prevent or restrict losses being transferred between trading and non-trading income and thereby avoid ‘brass plating’, where businesses move to a lower cost location without any significant economic benefit accruing to that area.

 

      While the final decision on the detail of the policy would rest with the Northern Ireland Executive, we would urge that any policy introduced in straightforward for the businesses to understand and that it is based on embedding companies within the locality and adding value to the local economy.

 

      What are the views on whether there are other options to offset the cost to the NIE of a reduction in the rate of corporation tax that would be consistent with the overall aim of rebalancing the Northern Ireland economy?

 

      The proposal that a reduction in corporation tax could be resourced by reducing other fiscal incentives e.g. R&D credits, would potentially have a counter-effect and may outweigh the benefits that a reduction in corporation tax might bring about.  This development would not be consistent with efforts to rebalancing the economy as this is precisely the type of activity that the government wishes to encourage more of.

 

      What are the views on extent to which changes to R&D tax credits, annual investment allowance, training credits or a national insurance holiday could provide feasible, effective, affordable and value for money support for the rebalancing of the Northern Ireland economy.

 

      As identified above, the UK government is already considering measures to enhance the uptake of R&D among businesses and this development can be a welcome support measure to encourage greater innovation, particularly for small businesses.

 

      However it is our view that there is no need for a change to the taxation system to allow this to happen.  It is, rather, an issue of promoting the uptake of such incentives, and this can be done by encouraging greater collaboration between the research communities and local businesses.

 

      We have already noted that we consider that investment in skills development is central to the successful deliver of an ambitious economic vision for Northern Ireland’s economic growth.  However consideration will have to be given as to whether this is done by fiscal incentives or by re-configuring the education and training systems to support greater work-based learning and to re-orientate the systems to underpin the current and future growth of the economy.”