UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 558-iv

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Northern Ireland Affairs Committee

Corporation Tax in Northern Ireland

Wednesday 24 November 2010

Mr Tony McManus and Mr mark Macgann

Mr John Simpson

Evidence heard in Public Questions 240-293

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Northern Ireland Affairs Committee

on Wednesday 24 November 2010

Members present:

Mr Laurence Robertson (Chair)

Mr Joe Benton

Oliver Colvile

Kate Hoey

Lady Hermon

Naomi Long

David Simpson

Mel Stride

Gavin Williamson

________________

Examination of Witnesses

Witnesses: Mr Tony McManus, Global Head of Enterprise Software and Head of Operations in Belfast, NYSE Technologies, and Mr Mark MacGann, Senior Vice President, Head of European Government Affairs and Public Advocacy, NYSE Euronext, gave evidence.

Q240 Chair: Thank you very much for coming to our Committee. As you know, we’re conducting an inquiry into the relative levels of corporation tax between the United Kingdom and Ireland, and the effect that the difference has on Northern Ireland, so we’re very glad that you’re able to join us today. Could I ask you just briefly to introduce yourselves and, if you’d like, to tell us a little bit about what your organisation does and how it does it? We’d be very glad to hear that.

Mark MacGann: Thank you very much, and thank you to the honourable members of the Committee. My name is Mark MacGann and I’m the senior Vice President and Head of Government Affairs for NYSE Euronext, which is the New York Stock Exchange Euronext, which I’ll explain in a moment. With me today is Tony McManus who is the Head of Operations for NYSE Technologies, which is probably about one-third of our business and the core of this activity is in Northern Ireland-in Belfast-and Tony will, if you wish, explain a little bit more about our Northern Ireland operations a little bit later during the proceedings.

NYSE Euronext was born in 2007 through the merger of the New York Stock Exchange with Euronext, which is the Stock Exchanges of Paris, Amsterdam, Brussels, Lisbon and last, but certainly not least, LIFFE, the London International Financial Futures Exchange, which is the second largest derivatives exchange in the world. So we are a global operator of capital markets, both in what we call cash equities-stocks-and derivatives. Our technology business, which is now flourishing-we expect to be approximately €1 billion within about five years-is the third part of that activity.

While many parts of the financial infrastructure and the financial system were shaken or, perhaps, failed during the crisis of the past three years, it’s worth noting that the capital markets-the stock market-including, of course, our colleagues at the London Stock Exchange, functioned normally and properly. As the Governor of the Bank of England reminded us this morning, this is the core of the financial system both here in the United Kingdom and also globally. We did not cease trading for a single minute. So, we are very proud to operate in the largest group of stock exchanges in the world and we are very grateful and humbled by the invitation to speak at this Committee today.

Chair: Thank you very much. Did you want to add anything, Mr McManus?

Tony McManus: Sure. I hope that some of the success and that ability to keep on trading was due to the technology that we’re building in Belfast.

Chair: Good.

Q241 Lady Hermon: How many people do you actually employ in Belfast and Northern Ireland at the moment?

Tony McManus: At the minute we’re just hitting about 220, but that has grown from about 140 since March of last year, so we’ve had about 50% growth in about nine months.

Mark MacGann: And we expect to reach about 400 people in the foreseeable future.

Q242 Lady Hermon: And are those people locally recruited in Northern Ireland?

Tony McManus: Yes. I would guess probably more than 98%. What we’ve done is we’ve brought people over to the Belfast office where we need very particular expertise that we didn’t have available to us in the local market, primarily some veterans, for want of a better term, within the Exchange. But that’s one or two individuals, rather than any significant number.

Chair: We’d like to discuss with you why you decided to locate to Northern Ireland. Oliver, would you like to start?

Q243 Oliver Colvile: What was the process that you went through when you decided to locate generally, and at what stage would the corporation tax have become an important issue to you?

Tony McManus: I think it’s very important to set the context. There was a company operating out of Belfast called Wombat Financial Software, which was really operating in the major financial centres-New York and London primarily, but also in Asia and continental Europe. Wombat Financial Software had its offices in central Belfast with, again, the vast majority of people working out of that office, and it was acquired by the New York Stock Exchange in early 2008. So, at the beginning of the exercise there was the hook, if you like, that created the original relationship. Running in tandem, and parallel to that, the Exchange- to go back to some of Mark’s earlier points-was looking at diversifying its portfolio and hence growing its technology business, and so was looking at centres globally that could potentially service that need. So the correlation of an acquisition of a local company with the Exchange wanting to become a significant technology vendor really got the process running. Then there was a process of due diligence across various centres when finally the decision to move to Belfast was taken.

If you think about what the primary drivers of that are, it’s the sort of things that we very often hear: very high quality graduates in the local market; much lower operating costs, of course; very strong relationships with local government and with Invest Northern Ireland; and of course, geographically, a very good location-close to London, close to Paris, direct flights to New York. When you add all that up-the relationships, the resources and infrastructure that’s available, the fact that there was an existing arrangement there due to the acquisition of Wombat Financial Software-Belfast and Northern Ireland very much came out at the top of the table.

Q244 Lady Hermon: So did the corporation tax feature at all in that calculation?

Tony McManus: I would think not.

Mark MacGann: I don’t want to disappoint the Committee-

Lady Hermon: Oh, we’re not.

Mark MacGann: -but it was not very high up on the list. If you look at, first, Ireland-both Northern Ireland and the Republic of Ireland-it is renowned in the United States for the quality of its workforce. So I think, like other companies-and I think 55% of foreign direct investment south of the border comes from the United States-the primary reason, usually, is talent. The talent of the people was certainly a primary motivator for us, along with: the acquisition of Wombat and the continuous investment subsequent to that acquisition in 2008; the quality of the graduates from Queen’s University and the University of Ulster; and the very strong support from the Northern Ireland Executive and Invest Northern Ireland in particular. I would say that it was a factor that was taken into consideration, but it was certainly not a prime motivator for us.

Q245 Mel Stride: Was it the location of the acquisition target, really, that drove you to make that move? If they had been based in the Republic, for example, you might have been inclined to go there.

Mark MacGann: I think, to be very candid, it was the excellence at Wombat, which was a domestic company. When it was founded back in 2004 it was five people. So, it has grown from five to 400 people in a very short period of time. It was first of all, the excellence of that particular company that, to be perfectly honest, happened to be located in Northern Ireland. It’s when we identified the company and the value we thought it would create in our exchange group that we realised that Northern Ireland had much more to offer than just-no disrespect-the five people in Wombat. I think that our motivation to invest has been proven by the quality of the output and the fact that, if you look at the technology that we are creating there and what we’re doing with that, we are now primary vendors of exchange trading technology to many of the largest stock exchanges in the world and many of the largest investment banks. For example, just last week, the Warsaw Stock Exchange became privatised and went to the market with its IPO, and is now running on NYSE technology primarily coming out of Belfast.

Chair: Interesting.

Q246 Oliver Colvile: You’re obviously a very strong player, and for you to have moved has been a very good thing as far as Northern Ireland is concerned as well. Do you have a feeling as to why other people with whom you work in Northern Ireland might have relocated to Northern Ireland?

Mark MacGann: We are familiar with the financial services sector in the United Kingdom. If you take the United Kingdom of Great Britain and Northern Ireland, this is our largest location outside the United States. We have roughly 3,200 people worldwide; approximately half of those are in Europe and I would say over 50% of the European contingent is in London and in Belfast. I think we’re a major player here and also in the City of London, but if you look at the composition of the financial services industry in Great Britain, it’s not located purely in the City of London. Many jobs have been created in Manchester, in Liverpool, in Birmingham by some of the largest banks and associate financial services companies. I think we would probably be motivated to invest even more in Northern Ireland if this decentralisation of financial services activity were to make it across the Irish Sea. Particularly south of the border, of course, it has been a motivating factor, but I’m not sure to what extent it’s the case with our colleagues in Northern Ireland.

Tony McManus: One of the things I believe, being a local, is that there is potentially a real opportunity for Northern Ireland at the minute if we can create the right kind of business environment. We have Citigroup making major investments, New York Stock Exchange, of course, indigenous companies like First Derivatives growing quite rapidly and we’ve other financial technology vendors like Fidessa moving in. I’ve always taken the view that this could be a momentum-building exercise and, as the word starts to get out that there’s a pool of talent, not just coming out of the university with the right technology skills but with financial capital markets industry experience, and also that other firms have taken that step and succeeded, and are growing as a consequence, there could be a snowball effect when momentum starts to build. Back to the context of the meeting, I think it’s very important that the right business environment exists in order for that to happen.

Chair: That’s encouraging.

Q247 David Simpson: Gentlemen, as you know, the Chairman has outlined that we have had a long discussion on the whole issue of corporation tax. Certainly, the target of 400 jobs within Northern Ireland-as a businessman myself in the area-is very welcome. It is very welcome indeed in these economic times. I find it-not "amazing"; that’s the wrong word-but strange that the corporation tax issue didn’t really feature for the location of your company into Northern Ireland. I find it strange because we have spoken to quite number of organisations. The Federation of Small Businesses, I think, made a comment-they weren’t here, but we spoke to the CBI and Invest Northern Ireland. I mention Invest Northern Ireland because the guy who gave evidence was adamant that corporation tax was, if not the main tool that would be in their armoury if they had it, one of the main components to attract business to Northern Ireland. I find it amazing that it really wasn’t a consideration. I’m glad to hear that the skills and the people of Northern Ireland, of course, are the bigger attraction-the skills side was good-which we know we have. What other countries across Europe, or wherever, did you look at before finally deciding on Northern Ireland?

Tony McManus: Just a couple of points on that. I think it’s important to understand that the NYSE Euronext Centre of Excellence in Belfast is a cost centre, so the operating costs were much more important for us than the corporation tax.

David Simpson: Sorry for cutting across you, but do you think that if your company had been a processing or manufacturing company, the corporation tax issue could have been different or the attitude might have been different?

Mark MacGann: It’s important to know that Northern Ireland and thus the United Kingdom is only one of five countries in Europe where we have a significant presence. I just looked at a comparison of the standard corporate tax rate in the other countries. When we acquired Wombat and invested in Northern Ireland, of course, the rate in the United Kingdom at the time was 28%. At that time and still today it’s 33% in France, which is our main centre in Europe outside the United Kingdom, 34% in Belgium, 25% in Netherlands and 25% in Portugal. So, I would hate you to get the message that we’re indifferent to the level of corporation tax. I think there’s no reason why bringing down the level of corporation tax shouldn’t have the positive benefits that it has clearly had south of the border, where the Irish Government has, again, recently insisted that it’s the cornerstone of their industrial policy. Coming from south of the border, having left it during the last depression in the mid-1980s, I can fully comprehend that. It is clearly a motivating factor for foreign direct investment.

As you know, France has always been critical of the Republic of Ireland for what it terms predatory tax policy because of corporation tax; in the current negotiations with the European Union on the bailout, France and Germany are putting tremendous pressure on Dublin to raise its corporation tax. In the details of the budget it has just published this afternoon, it has made many changes, but has been resistant to raising this level. Many economists believe that, under the hypothesis that the Republic of Ireland was forced to raise its corporation tax level, those companies, or that capital, wouldn’t move to France or Germany; they would probably relocate-especially the American companies-to Switzerland, where one can negotiate corporation tax rates as low as 6%, or to Luxembourg, or to other perhaps fiscally advantageous countries.

I think that for countries to say that it ought not to be a driver of industrial and economic policy, that would be missing a trick. Clearly, there has been tax competition in the European Union for the past 20 years and I think, notwithstanding the current crisis, that will continue. So, we are certainly not indifferent; we certainly share the views of Invest Northern Ireland and of the CBI that a lower rate of corporation tax would be a fairly substantial driver for further investment in Northern Ireland, which has, as you know better than I do, a particularly serious problem with the ratio of public sector to private sector.

Chair: You mentioned Invest Northern Ireland-in fact, you’ve mentioned them once or twice now. I wonder if we can look at their role a little bit closer now.

Q248 Mel Stride: Welcome, thank you for coming to see us and congratulations on the business success in Northern Ireland, which I’m sure the whole Committee welcomes. Just so that I’m clear, it seems that, for what we’re discussing here- an inquiry into corporation tax and the effect it might have on inward investment into Northern Ireland-you’re a rather atypical witness, in a sense. Firstly, you were led to Northern Ireland primarily by an acquisition target, which could have been somewhere else. That was a prime driver for why you came to Northern Ireland. Secondly, as I understand it, you’re running, basically, a cost centre rather than a profit centre. Therefore, issues of tax are clearly less relevant to the decisions that you took. That said, could you tell us a little bit about your interaction with Invest NI and at what stage they got involved with you? Presumably you obviously started getting involved in the deal; did they then come to you and what sort of discussions and incentives were they looking at?

Tony McManus: Firstly, it is really important to point out that, although the acquisition took the New York Stock Exchange to Belfast, that only introduced the initial relationship. It would’ve been very easy for the New York Stock Exchange to have acquired Wombat Financial Software and left it at that. There has been significant growth and diversification of the technology that we deliver out of Belfast since that acquisition. So the first stage was the acquisition. The subsequent stage was to grow our technology centre of excellence in Belfast. Clearly, the first was a factor in the decision, but it was by no means a foregone conclusion; there were other locations in the mix.

The relationship with Invest Northern Ireland goes right back to the very early days of Wombat Financial Software. Wombat Financial Software actually grew out of a relationship between a chap from Glenavy in Northern Ireland and an Australian gentleman in New York. When they realised they were on to something, they decided to grow the company out of Belfast. So, Invest Northern Ireland were involved in the very earliest days of that relationship, then not only helped build Wombat Financial Software through grants and funding but remained involved with the New York Stock Exchange post the acquisition, and have remained very close partners ever since.

Q249 Mel Stride: So in terms of expanding the business going forward, Invest NI would typically stay close to those companies such as yours that have come in.

Tony McManus: Yes.

Mel Stride: What kind of incentives and things are they suggesting that they might be able to do to help you with your future development?

Tony McManus: It has really been twofold. It’s primarily financial, but it’s also in terms of helping us grow the skills base that we need. They’ve made very good introductions into the Department of Education and Learning, for example, in order to enable us to get graduates coming out of Queen’s University and the University of Ulster up to the level of skills that we need for the very directed focus around capital market and financial services. So there has been close collaboration on that front as well as financial. Another element to it, which is somewhat new and has come out of the woodwork this year, is around R&D, so we’ve also kicked off, for the first time, really significant investment into technology R&D. We’re working with Queen’s University, University of Ulster, Invest Northern Ireland and, of course, the other capital markets technology folks in Northern Ireland: the group that I mentioned previously-First Derivatives out of Newry, Citigroup, Fidessa and of course ourselves.

Q250 Mel Stride: You have this cost centre in Northern Ireland. I’m just intrigued as to how you might make some kind of tax benefit at some point or somewhere across the company, across the group.

Tony McManus: If you think about it, our profit centres exist where capital markets activity exists. One of the things that you could absolutely foresee is-obviously this would be in the longer term-that if a capital markets or financial services market spun up in Northern Ireland as a consequence of advantageous business environment and reduced corporate tax, then of course suddenly we have a captive audience on our doorstep. That could certainly change things for us, but I think that something of that nature would be required. Other than that, we would probably require a tax specialist to come and tell you whether there’s some other means of looking at that, but certainly I wouldn’t be qualified to comment on that.

Q251 Gavin Williamson: Certainly. You touched a little bit on the influencing factors on the growth of the business because obviously it has grown quite spectacularly and, I hope, going to grow again. What other organisation other than Invest Northern Ireland have been supporting you in that growth and the development of the company from a Government perspective or an educational perspective. You mentioned Queen’s; are there any others?

Tony McManus: Yes. We have very tight ties with the local universities. In fact, on Monday, I was in attendance at the Industry Advisory Board, where we work very closely with Queen’s University to ensure that the curriculum, particularly in the engineering and computer science department, maps directly onto our requirements. It wasn’t just ourselves; there were other representatives from other businesses there as well, so there’s a very close collaboration in that respect. To refer again to the R&D element, both the University of Ulster in their campus up at Magee and Queen’s University are helping us get that whole function off the ground, to be honest, so there’s that. The other element is, of course, we get a lot of support from the First Minister and Deputy First Minister. There is a good working and personal relationship now between Duncan Niederauer, our group CEO, and the First Minister, Deputy First Minister and Enterprise Minister. Obviously, I think that those relationships and those ties have been key factors in the decision to grow the operation in Northern Ireland.

Q252 Lady Hermon: So how would you actually describe having a devolved Administration at Stormont: an incentive, a benefit, an advantage? You’ve touched on it several times in some of the answers that you have given, but I would like you to elaborate.

Mark MacGann: I think, viewed from the global, international level and the very top of our company, we would view it as an enormous positive.

Lady Hermon: An enormous positive?

Mark MacGann: Yes. An enormous positive. And I can see that, for example-again like in most companies, the decision making is consensus-based, but it’s taken by one person at the top. I ought to tread carefully politically, but he views 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 and working with local Government and local investors as well, in order to make an economic investment and to grow. It would be remiss of me if I didn’t invite the members of this Select Committee-every year, we do an Irish day at the New York Stock Exchange on the floor-to ring the bell in March of next year, to encourage not us, but other US-based companies to invest in Ireland. No distinction north of the border/south of the border because both economies and both parts of that island have a lot to offer. I would say that, again, if you will allow me to put the obvious politics aside, we view it as a tremendous positive because it allows us to talk/agree/negotiate with the democratic elected representatives on the ground.

Q253 Gavin Williamson: I know both these factors are massively important to any business, but if you have to single one out as having the most important edge in terms of whether you’re investing extra money in order to expand the operation-and I know this is slightly odd with your company-as business people, what do you think is more important: corporation tax or the people?

Tony McManus: I think it depends on the nature of the business. For us, I always viewed it as a three-stage process. There was the hook, which was the acquisition. That’s what created the initial relationship. There’s then the second phase, which is does Northern Ireland check all the boxes in terms of infrastructure, communications, people, resources, etc? Then the last one is, who is going to go in and close the deal? I think that the relationship with Invest Northern Ireland and the Executive was absolutely critical in that. I think that that model could be rolled out and could happen in other instances and bring investment in: what’s the hook; what’s going to get the FDI companies interested in the first instance? Does Northern Ireland check all the boxes? I think it does. Finally, how are we going to close the deal?

Mark MacGann: That’s what attracted us to Northern Ireland; that’s what attracted us to Wombat, but I think what kept us in Northern Ireland was primarily the talent. It’s the people, and we would encourage the honourable Members, which I’m sure you’re doing, not to look at this issue of corporation tax in isolation. Infrastructure is tremendously important; education is a very determining factor for how we’re going grow our business and how we’re going to diversify from the technology base in Belfast.

Tony McManus: Certainly, the assumption has to be that if it is going to cost significantly less money to do business in Northern Ireland, then that’s going to be attractive. It’s going to come down, I would have thought, to whether the Exchequer can afford it or not.

Q254 Lady Hermon: I’m just curious about one aspect, and it came to light in Northern Ireland in a completely different context, and that was over the Presbyterian Mutual Society. Who actually regulates your business or organisation? Is it DETI, because you’re established in Belfast, or is it the Financial Services Authority? PMS seemed to fall between two stools at one stage. You’re not comparable with the PMS; I’m just intrigued just to see who actually regulates your business in Northern Ireland and was that instrumental or one of the factors that you took into account when increasing business there?

Tony McManus: All the regulation of our business comes internally. My assumption is-I’m not sure I really know the exact answer-that it’s the FSA, which would then come in through the main group.

Mark MacGann: Well, for our business in Northern Ireland, which of course is not a capital markets trading business, so it doesn’t operate exchanges, it’s not the FSA. Here in London, of course, it’s the FSA. The operation of financial markets is a very regulated industry.

Lady Hermon: It is.

Mark MacGann: Within that industry we’re a hyper-regulated company because of the integration of Euronext-so France, Netherlands, etc-which took place 10 years ago. We are regulated on a daily basis by five regulators: the FSA and its counterparts in Paris, Amsterdam, Brussels and Lisbon. Of course, our activity in Northern Ireland is a technology business, which is not subject to capital markets regulation.

Lady Hermon: Thank you. That’s very helpful.

Q255 Mr Benton: I think the questions I was going to put to you have been covered in your replies to other members, but I’d like to go back, for a moment, to one of your earlier answers about local employment figures; the people you employ locally. We’ve had, on previous witness occasions, only one incident I think of direct opposition- from the Assistant General Secretary of ICTU. One of the points that he made was about the purpose of the inquiry, and our raison d’etre, being the corporation tax. I take on board the point you were making before and I certainly won’t get lost just solely on the corporation tax because it’s very clear that are other factors governing the wellbeing and the wealth, if you like, of Northern Ireland and also generating the healthiest economy. I still think it’s a factor that one of the yardsticks by which you would measure that is the extent of local employment; it has to figure in it.

While we want to see companies and firms profit, develop and benefit Northern Ireland, one of the things I think one has to keep in mind is the effects of reducing corporation tax. Uppermost, certainly, in my mind is the factor of job creation and the number of local people. I wondered if you could be a little bit more specific about the recruitment of local labour. What percentage, in fact, of your workforce is there? Really and truthfully, what I’d also like you to give an indication of is at what level would you consider corporation tax, even now that you’re well-established in Belfast, best to be of benefit to you?

Tony McManus: In terms of the demographics of our workforce, it should be known that virtually everyone who works in the company is of graduate level and above; almost all are graduates of Queen’s University and University of Ulster, and native Northern Irelanders. As I’ve said previously, a very small number-fewer than 10 in a workforce of over 200 and growing, as Mark says, to a target of about 400-come from locations outside Northern Ireland, so it’s very heavily weighted towards the local population. One of the things we do grapple with is, of course, what’s the availability of skilled resources should suddenly there be a surge in activity in Northern Ireland, particularly around financial services and technology? In other words, how do we cope with the situation when it suddenly gets more competitive to get the very best resources available? I’ve always been of the opinion that we would welcome that because although the landscape is certainly more competitive in terms of the availability of resources, the overall health of the economy and the local skills force is very much in our favour. So, although we might take a short-term hit if someone was to make a major investment and try and hire 400 or 500 people similar to the profile of candidates that we’re after, we would still be very supportive of that. In fact, we very often do; we speak to people who are considering investing in Northern Ireland with Invest Northern Ireland to help with the pitch, so to speak.

Mark MacGann: I would add, if I may, that in our view at the end of the day jobs come from entrepreneurs. If there is to be a recovery-which for the time being in the markets in which we operate is a jobless recovery, if there is a recovery-it is going to be driven in Europe, and in Northern Ireland in particular, primarily by small and medium-sized enterprises. So, we need to incentivise, we need to encourage entrepreneurship. I would just convey our view to the Committee that punitive tax rates, including excessively high levels of corporation tax, would certainly not encourage such entrepreneurship and therefore job creation.

Q256 David Simpson: Why do you say it will be driven by SMEs?

Tony McManus: Because if you look at the large multinationals, and we see this also in the United States, people have had a very tough time. Right now, we’re seeing the health of balance sheets being progressively restored in the larger public companies, but there is enormous reticence and hesitation to create new jobs and to hire. We think that’s going to remain the case for the foreseeable future, given the lack of economic certainty or given the difficult outlook that we have. A good measure for us, of course, is the companies that do their IPOs and that come to the stock market to raise capital and to finance their growth. We’re seeing that 90% of the IPOs that we’ve seen in 2010 have taken place outside Europe. If we look to France, for example, there have been very few large IPOs on the Paris Bourse and the Paris Stock Exchange, but we’ve seen significant IPOs from small and medium enterprises that have to come to the stock market to finance their growth because the banks simply aren’t lending. We think that the banks are going to be excessively cautious for the foreseeable future, so the unique source of additional finance is to come to the market and raise capital. With the right preparation and education to try and reassure investors and to try and regain confidence in the markets, SMEs are showing that they’re willing to go down that road. I think that the London Stock Exchange would tell you a very similar story: there’s much more growth in IPOs in the small and medium-sized companies rather than the large companies.

Q257 Naomi Long: You’re very welcome; it’s good to have you at the Committee. A bit has been made, I suppose, of the fact that your business and the model that drove you to invest in Northern Ireland was slightly atypical, but it resonates actually with some evidence we took last week from Esmond Birnie, because we asked him to give us three things that we could do in terms of the economy that would help. The first one that he said was to offer incentives to encourage research and development, which is why there was such a strong acquisition target in the first place with Wombat-it had been a really strong research and development activity. The other thing that he mentioned was to try and encourage clustering of sectors. The third, he said, was something along the lines of the low corporation tax, but not as a standalone tax package; there needed to be more to it than just that.

I’m just interested in terms of your own experience, in whether or not Northern Ireland has the capacity to attract and, more specifically, to retain a cluster of financial services, given that many of the businesses that they’ve attracted of late in that sector have been, like your own business, cost centres. If the cost shifts, the business is actually quite mobile in terms of being able to go elsewhere. So, in terms of attraction and retention of those businesses, do you think that that clustering effect is possible?

Tony McManus: It goes back to the point I made earlier: it’s not only possible; it’s highly likely. There is no doubt in my mind that when investors of a similar nature to ourselves, or who are operating in capital markets, come to Northern Ireland to consider investing, when they’re speaking to ourselves or speaking to Citigroup and companies of that nature, it definitely has an impact. I’d be very surprised if it doesn’t. I’ve noticed that at lunches, meetings and whatever I’ve had with these individuals, who are really now starting to take this seriously. I would expect to see some further investments of similar companies in the coming months. I believe that, similar to what has been seen in Dublin around financial services and technology outside financial services, this kind of momentum effect, and hence clustering, does seem to happen, so I would expect there to be some more. As I said, it goes back to what I said previously: in order for that to happen, there has to be a positive business environment, including things like tax rates that enable this to happen, in order for this snowball to get rolling and to get growing.

Again, on Mark’s earlier point, it’s also vitally important that the correct resources are made available to those companies, particularly if retention is going to be important. I don’t mean resources just in terms of people; I mean in terms of training and even simple things like the availability of a direct flight between New York and Belfast. These are very important factors, so it’s important that the Executive, the Committee, local business, Invest Northern Ireland and all the stakeholders look at what all those factors are and make sure that all the bases are covered.

Mark MacGann: The nature of our business has been transformed. You no longer have women and men on the trading floors buying and selling stocks; everything now takes place on computers and very high-powered servers. I would insist on the issue of infrastructure policy as being also critical. We have just migrated all of our data centres across the European Union to one location. The good news is it’s in the United Kingdom; bad news is it’s not in Northern Ireland; it’s in Basildon in Essex. You have several football field-size servers, and the quality of the telecommunications infrastructure and links to London are really important there. So, in terms of expanding to a broader financial services presence in Northern Ireland, infrastructure policy would also be a major factor.

Q258 Naomi Long: Just on that: you say that clustering is possible and you set out some of the conditions that you need. You need the staff and you need the linkages, both the physical infrastructure but also the technological infrastructure, to make that possible. Is it possible, if you’ve all those other pieces in place, to do it without touching corporation tax at all?

Mark MacGann: I would proffer the view that it depends on the taxation rates of close neighbours that have similarly attractive education infrastructure and other policies, and come back to the issue of competition with other Member States of the European Union and other regions.

Tony McManus: I think would be difficult to have a really significant step change without it. It has already been stated that our investment might have been somewhat atypical. Then, all you’re really going to attract is those atypical-type investments. I think if you want to get the mainstream type of FDI, you really do need the preferential tax rates as well.

Naomi Long: Thank you.

Q259 Gavin Williamson: I’ve always been a great believer that businesses invest on a whole range of different things and it’s very rarely just one thing. When you are actually looking at investing, in terms of as a cost centre as you have done, is the actual cost-because tax is many things; it’s not just corporation tax, but there’s the tax of employing people-an important consideration when you’re considering investing, through National Insurance and other forms of taxation?

Mark MacGann: The straight answer there is it is fundamentally important. We have somewhat of a mixed experience in Europe ranging from Belgium, for example, where income tax levels and social security costs are extremely high and the top rate of income tax for professionals is between 55% and 60% plus social security contributions. So, when one wants to incentivise the workforce and very much a base of intellectual capital, it becomes extremely difficult. So, of course, it’s not just the corporation tax policy, but the broader public policy on taxation that is important. I would say that the United Kingdom right now, unless I’m mistaken and I don’t think I am, is probably that country in Europe with the lowest rate of income tax compared with Belgium, France, Portugal and the Netherlands.

Q260 Oliver Colvile: Last week we had a riveting conversation with Richard Murphy, who didn’t approve of the thrust of my argument. However, about two weeks ago there was a television programme on Channel 4 that talked about what had gone on in Hong Kong, as to how they had actually cut not only corporation tax but a whole series of other taxes, and they had just seen mammoth growth immediately. What’s your view about that because ultimately, at the end of the day, one of the things we have to do here in Britain is, rather than selling into Europe-which is important obviously-to sell to China, India and so on? That is much more important. How do you think that that could actually be achieved?

Mark MacGann: Again, Hong Kong is an isolated example. However, I would say that we have seen other examples-and I’m sure that Invest Northern Ireland and the CBI have given these examples to you either in oral or written evidence-in Europe with the Basque region, with the Azores and Portugal. When the political courage is necessary-I do understand that it takes a considerable amount of political courage to allocate, or designate more favourable tax conditions in one region of the nation-it clearly does give results. We’re comparing apples and pears to some extent, if you allow me, between Hong Kong and Northern Ireland-two extremely different regions-but at the same time, if the courageous step is taken for a substantial decrease in corporate taxation, one sees the evidence from other parts of the world and other parts of Europe that it has been largely beneficial. Again, not in isolation from other policies.

Chair: Okay. We’re just about at the time to say thank you very much for the evidence you’ve given us; very useful indeed. Thank you for coming.

Examination of Witnesses

Witnesses: Mr John Simpson, Part-time Consultant, Visiting Professor at the University of Ulster, and a regular writer on the Northern Ireland economy, gave evidence.

Q261 Chair: Mr Simpson, thank you very much for joining us. Perhaps you’d like to give us a very brief background to your work, and I think you wanted to make a short opening statement. You’re very welcome.

John Simpson: Thanks for the invitation, and if I may just make a short settingthescene statement since you kindly invited me and you didn’t insist that I had to write something down in advance to test my literary skills, which would have been very defective. However, might I say that I have been listening to the discussion-not just here, but in Northern Ireland-about corporation tax for some time now and I am not entirely in sympathy with the strong apostles who are trying to convert the entire community to a simplistic step. My own belief is that the business community is now almost in a hypnotised state heading in a one-track direction without realising some of the side effects of what they wish for. I hope that, as time goes by, you may test me on that.

I am not against the thought that businesses would enjoy a situation where corporation tax was lower. If your Committee was just debating whether Northern Ireland would be better off with lower corporation tax, the short answer would be yes, as would other regions of the United Kingdom. But actually, I suspect that you’re debating the consequences of giving Northern Ireland authority to levy its own rate of corporation tax. I think that comes in two steps. One, does your Committee wish the regional Administration, Stormont, to have that devolved responsibility? Second, how might that devolved Administration use that responsibility? I would respectfully suggest that your deliberations today would be misplaced if you were actually debating whether Northern Ireland would now implement 12.5% corporation tax. I would like to persuade you that if it is to be devolved, then we have another debate about the way we use that devolved authority as it comes into existence and the legislative constraints and the European constraints that would come with that.

I hope that I read your agenda correctly when I talk to you about whether to devolve corporation tax rather than how it might actually be used if it was in place. For example, I listened to your previous witnesses and I have every sympathy with every argument they made, whether they be a cost centre or a profit centre. If I was in their position, I would have given you those answers, but if I was administering the economy of Northern Ireland with a mixture of Government and business I would have said, "Is this a benefit this that they might have that was costless to the rest of the society in Northern Ireland?" If the devolution of corporation tax goes through the Barnett formula, as I understand it might do, and if the consequence is, therefore, that Northern Ireland should rearrange its funding to replace or to displace-whichever way round it is-the money that would otherwise be available, then the argument of your previous witness is one side of the argument, but it’s not traded off with, "What is the cost?"

If I can make a further point: if corporation tax is devolved and we have clients like those you’ve just been hearing-very persuasive-what proportion of the cost of devolution would actually go to encouraging new investment? As I understand it, if corporation tax is devolved across the board, 90% or more of the benefit would go to businesses that are already in Northern Ireland who don’t need to do anything except what they’re doing today, and many of them are doing it reasonably profitably. So, I ask whether your Committee could consider-and it’s difficult-devolving corporation tax in a way in which the impact will not be generalised and lost, but might be specific. The danger at the moment is that the use of the corporation tax will lead to huge deadweight effects in terms of the Northern Ireland economy, and it would be a great pity if we couldn’t be more selective. I want to come back to that.

So the context, Chairman, is how do we think this through in terms of growing the Northern Ireland economy? That’s on everybody’s agenda at the moment; we want to grow it, but it only needs the Northern Ireland private sector to grow at 2% to 3% a year to correct the degree of imbalance. Your Committee might have heard arguments that the public sector is too large in Northern Ireland and the private sector is too small. Factual statement: the private sector in Northern Ireland provides 70% of the employment; the public sector, 30%. There is a big private sector. It is not as miserable as it is sometimes described. Therefore, we underestimate the degree of change we might bring about if we began to talk about a faster rate of growth in the private sector: raising productivity, getting new firms-all part of the same process.

I was listening the other day to a debate on the Northern Ireland economy and corporation tax in another political setting, and, in order to use the evidence of an expert whose judgment I respect, I was listening to Professor Fitzgerald from Dublin, who was asked the question, "Would Northern Ireland benefit from a corporation tax change as in the Republic?" His answer, quite quickly and quite straightforwardly was, "Northern Ireland is not yet at the stage where it is ready to have that change. We haven’t done the other things that need to stiffen the economy, and if we rely on corporation tax on its own, it won’t be enough." That was essentially the point he was making.

Can I just turn then, before I finish, to the application of the policy if it comes to Northern Ireland; the opportunity cost? The witnesses you’ve just been hearing were answering questions about, "Well, wouldn’t lower corporation tax have been helpful?" or "Would it be helpful in the future?" I don’t buy the distinction much between cost centres and profit centres, although I do understand what was being said. Let me put it this way: on the assumption that their labour costs are a very large part of their total cost because they’re emphasising the use of skilled labour, the equivalent of corporation tax for them at 12.5% would be something the same as 4% greater efficiency in the cost of labour. If their labour costs in Northern Ireland happen to be more than 4% lower than elsewhere then if that was the trade-off, they would be just as well off. Of course, the advantage of the island of Ireland-north and south-has been labour costs; educated labour to the level that they are speaking of; be careful against assuming that they are going to employ postgraduates or PhDs in very large numbers. They are going to employ graduates; they are going to require skills, but they are not necessarily in the top rank. They are there to get the work processed in very large volumes.

If I come back to the applications of policy, you are debating what should happen in Northern Ireland. Some of you will have read already the arguments produced by the Treasury under Sir David Varney two or three years ago. The Varney Report is perfectly acceptable to me in terms of its intellectual content, and it did say a number of useful things, but Varney took the Treasury advice and said, effectively, that corporation tax being devolved was administratively too difficult or, alternatively, there was a hint in it I think that corporation tax devolved would have so many potential distortions or loopholes-I’ll use only the term "brass name plates" as an argument. Whatever your Committee might decide and then the Chancellor might decide about corporation tax, it will need to be very carefully worded, first to avoid capacity for distortions of that kind and then-and it’s something of the opposite side of the equation-to satisfy the European requirements that we don’t distort competition policy. Chairman, your Committee is faced with making a recommendation on an issue that is much more complex than just: wouldn’t it be nice for companies in Northern Ireland to have lower corporation tax?

Q262 Chair: That’s why we’re having lots of witnesses, including, eventually, some from the European Commission when we can get round to that. Although you say the private sector isn’t as small as perhaps is made out-there might be good reasons for it; 40 years of terrorism being the biggest-you would accept that it does underperform and has done for a long time compared with the rest of the UK.

John Simpson: In general, yes, I agree with you, Chairman. However, I wouldn’t overstate it. I review the fortunes of the largest 250 private companies in Northern Ireland each year and what has happened is that their performances now and their profitability has generally been not bad at all. Therefore, to think of a private sector, and the smaller end of it, as being in some way crippled or trading at a disadvantage-I don’t buy that argument.

Chair: Okay. Perhaps my colleagues can ask some more questions.

Q263 Lady Hermon: John, it is delightful to see you in front of us this afternoon. Thank you. Could I just ask you to reflect? It’s not that long ago that an article was published in the Belfast Telegraph-it was 26 October-by your good self, and written extremely well; for those of us who are not economists, we can understand these things. There was in fact a sentence that I would just like you to elaborate on and I’m quoting from that, and that is, "A favourable corporation tax system, alone"-in terms of Northern Ireland-"cannot compensate fully for the other weaknesses." Would you elaborate on two things: the other weaknesses that you would identify in Northern Ireland, and have identified for some period of time, and the fact that you have said that a favourable corporation tax in itself "alone" wouldn’t help matters? What do you see as those other factors that would, to quote you from earlier, "stiffen the economy in Northern Ireland"?

John Simpson: The line has to be drawn here between the responsibility of this august body meeting in this august Parliament, and another Parliament meeting on a hill not too far away and when I’m referring to the others, I am of course referring to the devolved responsibilities that are already in the house on the hill. The first one that I would mention-and I say it with caution-is that I don’t think yet we have created a society in which we have sufficient political cohesion and sufficient assurance in the business community that the political system is likely to produce coherent answers in terms of major problems.

Take, for example, the issue of the budget to be settled now for the regional context. The very fact that that becomes so contentious, in contrast-for example, I’ve been reading today-with the Scottish Government’s announcements, shows that we don’t quite have political coherence as good as we would like. Secondly, we don’t actually have our people development as much as we’d like. All the evidence is, despite the strength of the two universities in the right places-and it’s not across the whole board-and despite the achievements of the teenagers, we are very much lacking in terms of what I will call the further education dimension to what we do. We have skills shortages occurring as soon as the economy begins to pick up. We are not ahead of the game. Thirdly, in terms of the other factors, I would mention infrastructure. We do still badly need a coherent infrastructure plan and, to use the word in another context, we need a coherent planning system that answers questions on planning without more than three months’ delay. You know that there are several projects in Northern Ireland that at the moment we’re arguing about-we are throwing away economic development.

Q264 Lady Hermon: So those are some of the weaknesses that you’ve identified. The second part of the question was how would we stiffen the economy? If corporation tax were to be lowered and I hope that you will have an opportunity to elaborate on the fact that you fervently believe, as I understand it, that in fact it’s not a matter of reducing it as far as the Republic of Ireland; you have suggested, in fact, in one of your articles that reducing it to 19% might do the trick, so to speak. What are the other packages of events or circumstances that must be improved in Northern Ireland along with corporation tax if it were to be reduced?

John Simpson: I don’t know how to be specific enough to answer your question, but I will start at the general level. We don’t have the thrust of a coherent economic development strategy to which all the key stakeholders are signed up. There is nothing like sitting down with the business representatives to hear them saying what they think the Executive should do. Even between themselves, they’re arguing about it. There is then the problem that the Executive, for the moment, faced with a prospectus from several of the business organisations separately, doesn’t answer them. There isn’t a debate taking place to give a coherent economic strategy across Northern Ireland. This is part of the political weakness of the fact that we’re dealing with a compulsory five-party coalition.

To go beyond that, you see we have a programme for Government; you can find the right words. However, again I come back to my two favourite areas for criticism: one is planning in sense of town and county planning, where I think we’re woeful, but the other is having an ambition for what we do for the rising generation. If you ask how many people we expect to go through further education at particular qualification levels next year and how that compares with last year, you will not be able to get an answer. If you read the Scottish document, you will see that they have a total: 35,000 more students will do this, that and the other thing next year. Our Department of Employment isn’t capable of delivering that statement. They don’t want to think that way.

Chair: We’d love to get into that argument; it’s perhaps slightly beyond the remit of the Committee, but I think we understand what you mean by an overall economic strategy. This inquiry really I suppose forms a part of that, but we’ll take your point.

Q265 Mel Stride: Welcome. Thank you for coming to see us. Three questions, if I may. First, if we had devolved the power to alter corporation tax rates-so imagine that’s the world we’re in now.

John Simpson: That’s done.

Mel Stride: Under the Azores judgment, any lowering will have a cost to the problems of Northern Ireland. The first question: what would you do? Could you talk us around this argument, perhaps 19%, etc, and where you would invest, rather than lowering the opportunity cost? Where would you put the money saved? Would it be in education, skills, infrastructure and so on? Secondly, do you have any feel for what the cost of going all the way down to 12.5% might be in the short term? There are various suggestions and I would be interested to hear yours. Thirdly, a very specific point: you made a very interesting point in your opening remarks about the fact that companies should take into account productivity rates in the labour force as being a counterbalance for perhaps lower corporation tax rates. That, if you are entirely rational, must surely be what companies will do, but do you believe that corporations are rational in that sense and do you not accept that this headline rate of corporation tax is something that, perhaps irrationally, companies actually are still drawn to when, perhaps, they might not be otherwise? Sorry, there are a few questions there, but I thought I’d get them all out on the table.

John Simpson: I’m absolutely sure that companies think about the structure of their costs. I’m absolutely sure they have something in their private thinking about how their labour costs and particular skills compare in one place compare with another, how their raw material costs compare, how the transport costs compare and how taxation compares. All of that will go into the decision on whether or not to locate to Northern Ireland or south of the border, or wherever it might be.

Q266 Mel Stride: Just on that specific point though, what I’m sensing is that these companies, when they look at the various options around the world, one of the early things they do is shortlist. That shortlisting process often focuses on things like the headline corporation tax rate rather than the other detail that you’re referring to.

John Simpson: It will of course include the tax rate, but I think that I would try to persuade you that they would put the tax rate down the list because high on the list would be, "What will it cost to get the skills we want? What is the labour market like?" They’re not going to go to an area where they can’t get the skills, but equally if the skills are available at a price that compares favourably with elsewhere, then that is part of the argument, let it be said, for some of the locations in Northern Ireland compared with England-Northern Ireland versus the south-east of England. It’s a factor. So, I would put that into the equation higher up than your question implies.

Then, the first part of your question-I’ve forgotten the middle one-was about the so-called 19%. When I think about how accidental the use of the number 19 was, I now begin to see the consequences. Nevertheless, the principle was an interesting one. If authority to levy corporation tax was devolved, the question would be: should Northern Ireland go for the 12.5% or are there other ways of using it to create more profitable businesses? The short answer to that is, in theory there are. We could, in theory, make R&D expenditure 100% tax deductible; we could make training expenditure 100% tax deductible; we could make market expenditure 100% tax deductible. We could, in fact, envisage a situation where we used the tax deductions to make a new business virtually tax free for a pretty long period, and that would answer my problem of how we avoid using the reduction of corporation tax to benefit people who don’t need this. This is the displacement effect or the deadweight effect. There are a lot of businesses in Northern Ireland that are making good profits; do I want to lower their corporation tax? I don’t mind them having a lower rate, but I don’t want to lower their corporation tax if I can keep that money to use it to get new business.

I’ve forgotten your middle point.

Q267 Mel Stride: It was just simply: did you have any estimate yourself as to what you think it might cost in the short term?

John Simpson: I’m working on about a couple of hundred million.

Mel Stride: A couple of hundred million.

John Simpson: Through the Barnett formula, but the Treasury no doubt will do something much more mathematical.

Chair: They’re going to report in due course. We’re trying to get that report from them as soon as we can.

Q268 David Simpson: John, you’re very welcome. Especially when you’ve a name like that, you should be all right.

John Simpson: Should we declare we’re not related?

David Simpson: Yes, I think we should, just in case. I also noted in the research papers they’ve credited a lot of comments to me, so I’m very pleased because I think I should be sitting at the other end of the table if that was the case. John, you are very welcome, and I have to say that we’ve had a lot of economists at home; we have a lot of meetings with economists. As I said to Esmond Birnie last week: put 20 economists into a room and you’ll not get an agreement among one of them. I have to say though, you are well respected in Northern Ireland, not only for your TV appearances, but certainly for your knowledge and your experience over the years as an economist.

A lot of the points that I wanted to touch on have already been mentioned. We can talk from now to this time next year about what benefit corporation tax will be, what it will not be or whatever, but in all your years of experience-and I’m not making you too old now-given a blank piece of paper, from 1 to 10, where would you put corporation tax and what would you put above it?

John Simpson: Forgive me for not jumping in with a quick answer.

David Simpson: No, we don’t want a quick one.

John Simpson: If the corporation tax were available singly, on its own, at no cost-yes, let’s have it.

David Simpson: That’s right.

John Simpson: But if it’s available at a cost, let’s study it, and if it’s a question of you’re going to deprive Northern Ireland of say £200 million for other forms of expenditure, how would we justify spending it on just a lower rate? Can you target the way in which you use it? Now, I acknowledge that when you talk to the European Commission officials about targeting the change, they will have constraints that they want you to accept, but I’m trying to encourage you to push them around the edges and see what you can get. If corporation tax was on its own, I would still put skills, the cost of people with skills and the other costs of operating in Northern Ireland higher on the list. Bearing in mind tax on profits: suppose your profits are £10 in every £100 of turnaround, that’s high. Suppose the tax is 25%, so it’s a quarter of 10: 2.5. You’re talking there, in terms of the total cost structure, of a small element of the total; your wage bill will be £40 of that £100; your raw materials could be £20 or £30 or £40 depending on the type of industry; your transport costs will be a certain figure-so, with corporation tax as a simple mathematical sum, altering it is small.

David Simpson: But you still haven’t told us from 1 to 10-in the middle?

John Simpson: It’s 6 or 7.

David Simpson: 6 or 7. Okay.

Chair: You can drive material costs down anyway. That’s nothing to do with the corporation tax rates.

John Simpson: Chairman, material costs ought to be even, if you’re in one national territory or one national trading area, yes.

Q269 Chair: The other point is that skills, of course, are hugely important and we heard that very eloquently expressed earlier, but a higher skilled workforce is a more expensive workforce. So, don’t you have to counter that in some other way?

John Simpson: Yes, the more we can make our labour force more highly skilled, the better.

Chair: But they’re also more expensive.

John Simpson: Yes, but the idea being that you can get greater return from pushing the skills up. Don’t forget Northern Ireland has operated in my lifetime consistently at something like 15% to 20% lower GVA per head. Every effort to lift Northern Ireland higher in the league table hasn’t produced a change.

Q270 Oliver Colvile: One of the big issues for anybody running a business is making sure that there is a significant amount of certainty as far as planning is concerned because what you don’t want is suddenly to find that you’ve made some decisions, and someone ends up by pulling the plug on it and changing the whole story. Then we all sit there. Having run a business, I have to tell you I am somewhat aware of all that. One of the things that the British Government is doing in the United Kingdom is to introduce corporation changes and reductions in a phased manner. Do you think if we were to recommend-because that’s all we’re doing here-that the Treasury actually allow the Northern Ireland Assembly to have powers about corporation tax, that they might actually consider that as a way of doing things? One of the lessons that I think I’ve learnt from you today is that the corporation tax just appears, at this stage of the game, to be one club in the golf bag and actually you need to do significantly more stuff. It would be helpful at this stage if you could talk a little bit about employment regulation too and whether you that having an impact on all this today.

John Simpson: I appreciate the one club metaphor, and I’ve argued that with my colleagues, saying that to argue corporation tax on its own is actually not to describe what the game should be at all. Would Northern Ireland, given the authority, choose to phase in a change? I’m not sure. This takes me back, and I didn’t answer the earlier point, to the so-called 19%. What I was arguing with 19% was that a small difference within the United Kingdom might have a disproportionate impact. Colleagues argue "Go for it," for lowering corporation tax in Northern Ireland, to which my answer is, if there are companies in England-if that’s a separate territory still-that are motivated by tax rates, they might be motivated to come to Northern Ireland for a 19% rate because that’s going a bit ahead of where the Treasury is going. That was the reason for introducing 19%; to say the incentive doesn’t have to be to go to 12.5%.

Q271 Mr Benton: Good afternoon, Mr Simpson. I was very interested in that latter point, and your earlier remarks, because one of my concerns has been, representing the sort of constituency I do, which is Merseyside-and there are other deprived areas such as the ones in the north-east-whether the next step would be the regional governments and so on and so forth. I was interested in your remarks when you talked about the negative points to devolving corporation tax powers-variations all over the place and whether devolving such powers would really have beneficial effects. One of my concerns throughout this inquiry has been that, given the desire of everybody as far as I can see to try and help Northern Ireland bring about a healthy economy, increase jobs and so on, if this was granted, people, not just from my area and the north-east, would have every justification in the world to apply for the same rate. That would be morally indisputable. You’d have to give recognition to this. Could you elaborate a bit more on what you’ve done so far about the dangers of that?

John Simpson: I accept your line of thinking, Sir, and the conclusion it points to. I come at it from this direction: if the Irish hadn’t gone to 12.5%, so much lower than any neighbouring country, we might not have been here today. If the international bailout for the Irish currently being negotiated had said, "You must put your company tax up," you would probably have called off today’s meeting-well, I’m not sure about that. However, the spirit of a European Union where there is fair competition isn’t helped by one state having a corporation tax rate that is designed to distort competition. It is not just marginally different; it’s significantly different. I well understand why the Germans and the French were saying what they were saying in Dublin last week; I’m just surprised that they didn’t win the argument. So, the spirit of your question is fine. One of the interesting things is-I’ll come back on your question-I’ve been watching what’s being said in Edinburgh. If the corporation tax argument has weight, and it does have some, though I’m doubting how strong, I would have expected to see the Scottish Parliament discussing the same issues. The Scottish Government is at the moment facing the prospect of introducing the recommendations of the Calman Commission, and if you go back and read the papers where they have debated what they should be doing to help Scotland, in the early days-probably 18 months/two years ago-they got no papers suggesting that Scotland should go for a lower corporation tax rate. In fact, I read the paper from the Scottish CBI and, quite remarkably, it was not mentioned. They were much more interested in personal tax rates and, of course, the Calman Commission is going down that road, although the minority Government in Scotland doesn’t like it. Has that confused matters a bit?

Q272 David Simpson: John, on that point, and taking what you said previously about the blank piece of paper, 6 or 7 or whatever it would be, why is it then that the Republic of Ireland is so adamant that 12.5% corporation tax is paramount, and they won their argument?

John Simpson: You’ve put that in two phrases, but it’s the same question. The short answer is they moved to 12.5% from a situation where after they joined the European Community they had a 10% company taxation for companies on the export proportion of their turnover, and they had a normal-I can’t remember what the figure was-say, 25% company taxation for what they were doing in indigenous business. The European Commission said, "No, that’s distorting; you must go for one." The Irish Government at the time went for 12.5%. They were allowed to do it and of course it has now become a very symbolic thing for them that, even under the Lisbon Treaty, the Commission has no right to alter.

Why did they do it? One argument, which I find credible, was that they were in a position where the marginal incentive to get in-flowing investment was much higher than any incentive to do more for home industry. The arrival of new investment was a much greater proportion compared with domestic investment than in other countries. Therefore, the more they could make this a very strong incentive for an inflow of investment, the better it worked for them. This was the argument I heard at the time.

Q273 David Simpson: But then the other point is that, while they have the 12.5% corporation tax for inward investment or whatever, those that, I understand, are exporting can be as low as zero corporation tax in the Republic. Is that right?

John Simpson: That would not be my understanding for it just as a straightforward profit and loss account. There might be some other provisions that they can claim.

Q274 Chair: If I may say so, you’ve made a very persuasive argument for the 12.5% or the retention of it. Doesn’t that give some justification to our inquiry?

John Simpson: Of course it does, yes. The European Commission and the International Monetary Fund have given your inquiry purpose.

Chair: We were in Dublin two weeks ago now, I think, and they were absolutely determined they were not going to change it. Joe, Gavin, who has left now, and I were in the British Irish parliamentary assembly just a couple of days ago and it isn’t just a sovereignty issue-they’ve given their currency up, for goodness’ sake, so this would be a small step-but they are absolutely determined they need to keep that.

John Simpson: They actually do believe that it’s a very powerful economic incentive, yes.

Q275 Naomi Long: Just on that point, one of the arguments that we’ve heard in the Committee when we have asked this question is that essentially this is totemic for the Irish Republic; their belief in it is almost greater than its actual effect. Their commitment to it is distorted on that basis. That’s one argument, but the other side of the argument has been that to some degree their belief in it isn’t entirely misplaced, in that it is a huge advert for the Irish Republic for foreign direct investment. I suppose the question that we’re trying to answer is, given our land border with somewhere that has a much reduced rate of corporation tax, given the fact that we’re trying to make Northern Ireland more competitive for foreign direct investment-some people who would shock you came in and said we should reduce to 10% because actually having the advantage over Ireland would be much better than being equal-but is there not an argument for having it up in lights that Northern Ireland is as competitive, for foreign direct investment headline figures just to say, "Look at us; we can do it too." Okay, you have to get everything else right; no one has come in and said it’s the only thing, but there has been a significant number of people who have said that as a way of flagging up we’re competitive and we’re serious about bringing business in, it would work, and that that’s why the Irish Republic are clinging to it because to shift it would almost be an admission that they’re not out there fighting for that investment any more.

John Simpson: I wouldn’t wish to argue against your flow of argument there at all. That’s it precisely. It is that you can display it, and they’ve displayed it around the world and they add the phrase, I believe, "This is one of the lowest, if not the lowest rate in Western Europe." That they’re using as a selling point. Also, they’ll give the selling point that they would expect their labour costs to be lower than some of the more developed European countries. That will be there, but it’s not advertised. The short answer, then for Northern Ireland is yes, there’s no escaping the fact that we need something to give a similar push and this is why I was searching for the 19% model, or the model that said, "We will have a different set of allowances that has an even better effect." I’m not particularly inclined to the view we should go for 10% to compare with 12.5%; that seems to me to be a beggar my neighbour rush to the bottom, if that’s a mixed metaphor. Nevertheless, something is needed and I would like you to find a method of doing it so that it isn’t actually very expensive in terms of the results. I worry about only a small part of this £200 million being applied to attracting new investment. When they get their profits back again, Chairman, the thought of giving the Northern Ireland banks 60% or 70% of the benefits of the reduction in corporation tax rather worries me.

Chair: Your argument does assume though there won’t be a pickup in the tax take over a period of time.

Q276 Naomi Long: Chairman, that was one thing I was going to come on to in comparison. You’ve mentioned obviously the problem with windfall gains for companies that continue to do what they do now and they benefit, and also brass-plating and others might come to that. The assumption is that this £200 million reduction is a recurrent reduction. In the Republic, when they reduced to 12.5%, revenue on corporation tax in 2002 was €4.8 billion. They changed in 2003 to the new regime: in 2003 it was €5.2 billion, and it peaked in 2006 at €6.7 billion. I’m not saying it was the only thing that changed, but the reality is that they increased foreign direct investment, they increased profitability of those companies and, therefore, they actually increased the amount of money they brought in through taxation. Is there not an argument that Northern Ireland could do the same? They might have to take a hit in the first year in the £200 million, but if you’re able to grow profitability and grow additional companies and attract new investment, you could essentially not be in that situation in a year, two years, or three years’ time.

John Simpson: I admire your optimism.

Naomi Long: I’m simply putting a question.

Chair: There is evidence to support the argument.

John Simpson: The evidence, as I have been able to read what other people have been saying, I think ultimately becomes a subjective judgment as to whether the flow of international business, particularly across the North Atlantic or from other places, would be the same in 2011 and 2012 as it was in 2004 and 2005. I think there is reason to doubt that the search of businesses to locate in Ireland, north or south, was much stronger in that period than it is likely to be in the next four or five years. Hence, I don’t mind you being optimistic that this could eventually pay its way. I just wouldn’t like to go to the bank and ask for the overdraft on the basis that I would be repaying it in three years’ time.

Q277 Naomi Long: So, the others who have given evidence, for example, and have suggested that the payback period on this could be anything from 10 to 20 years.

John Simpson: More likely.

Naomi Long: But you do think there is a payback period?

John Simpson: There will be some payback of course, but I reserve the position and I’ll come back to you in 20 years to debate whether or not we got all of it.

Naomi Long: With the benefit of hindsight? Absolutely. That’s what we’d like to do, too.

Q278 Mel Stride: I just want to come back quickly to the Republic vociferously defending its 12.5% corporation rate and the implications of that. One could argue, as has been suggested, that this means that it works and that’s why they want to defend it. Equally, could one not argue, just to take your argument a bit further, that actually we’ve ended up in a position where it is totemic? It sends a very strong signal to the markets and there is a huge downside if they step back from it, which of course is not a factor when you’re considering going down to 12.5% from where you are at the moment. My second supplementary point would be: is it not also the case that Ireland, having occupied that space in terms of getting there and defending that position, and having been so well known over decades for having been a low tax position, that space is not actually open to Northern Ireland in the same way. If you were to drop the rate, you’re a "me, too"; you’re playing catch-up and it’s a rather different situation. I’d value comments on those two thoughts.

John Simpson: You’re right on both counts. The position has been occupied. You don’t have the unique advantage since you are number two. By definition, it’s not unique any more. Equally, having gone to 12.5%, if I were in Brian Lenihan’s position with his tax rates, never mind his political position today, I would utterly say, "Don’t push me around now; you will disturb something that is now serving us well. Maybe you could’ve argued some years ago we shouldn’t have gone that low, but we did. We have it. It would look very odd in the face of an economic crisis if we now had to retreat on that particular point."

Q279 Lady Hermon: It’s a real sign of sovereignty.

John Simpson: Yes.

Lady Hermon: It’s something retained of our national sovereignty that we will keep our corporation tax.

Q280 Oliver Colvile: But there is a package, Mr Simpson, of other activities as well, which the Southern Irish Government now has to bring into play. My understanding is that VAT is going to rise to 24% and so on. Do you think that the package of other activities will make Southern Ireland look less competitive against Northern Ireland? What do you think the impact is going to be?

John Simpson: The Irish Government now, for some months, if not longer will be living with a very large international question mark over the stability, the survival and the regeneration of the economy. There’s no reason why their economy shouldn’t regenerate, but the international markets looking at the Republic of Ireland today are saying the Irish Government is in a very unstable position. The level of borrowing to cover not the Government’s debt but the consequences in the banking community has come up more strongly than anyone outside the Dublin Government had imagined in terms of the risks of bank failure. Once you start putting that in the international press, people stand back and say, "Oh."

Oliver Colvile: "We’re not going there."

John Simpson: Well, let them prove themselves and come out of this first before we do anything, in case it gets worse.

Q281 Oliver Colvile: So is it fair to say then that Northern Ireland actually has a window of opportunity to maximise its ability to be more attractive.

John Simpson: It’s one of those occasions when we’re all Irish, unfortunately.

Oliver Colvile: I’d like them to come to Plymouth because I desperately need more investment to Plymouth. That sounds lovely. So if only we got that.

Q282 Kate Hoey: My problem is that, in a sense, the argument now has changed, even in the last week, particularly because we have a coalition Government now that is looking to lower corporation tax throughout the United Kingdom, admittedly over a period of time and we’re not bringing it down to your 19%. With the particular state of what’s happening in the Republic of Ireland-and I’m disappointed that there wasn’t some more levers put up, given the situation of us helping to bail them out-are we in a situation now where actually all this fervour, argument and discussion about corporation tax in Northern Ireland is not as relevant now and that we could be taking up the point of the whole question of it’s our opportunity in Northern Ireland?

John Simpson: I think your point can be answered by saying we’re not sure now quite how much the strengths of the argument have changed. However, it’s still possible that if corporation tax authority was devolved, it might be used in constructive ways. Today, I’m uncertain about using it for 12.5%, but others will argue other options. By the time the Treasury allows it to go through Westminster and become a new devolved subject, can we have permission please to review the landscape and decide how to use it? If we just choose not to use it, it won’t cost a penny. So, you can create a potential part of the economic armoury.

Q283 Kate Hoey: But how long afterwards is it going to be that, if Northern Ireland is given the opportunity to do that, Scotland will want it, Wales will want it, parts of my London-why shouldn’t London-will want it? The whole thing opens up and Northern Ireland then is being treated very, very differently from the rest of the United Kingdom, and that is something that I personally don’t support.

John Simpson: But that is precisely why we’re in the room.

Kate Hoey: Exactly.

John Simpson: And if I was the MP for south of the Thames anywhere, I think I would say that as well. It’s still Bermondsey, is it?

Kate Hoey: No, Vauxhall.

Q284 Chair: You might make that argument if you live south of the Thames, but with absolutely great respect to Members of Parliament from Scotland, Wales and Northern Ireland, I get letters, and other English MPs get letters saying, "Why is the spending per capita in Scotland, Wales and Northern Ireland so much more than it is in Tewkesbury?" Now, if I were to forward you those emails, how would you advise me to respond?

John Simpson: I would put on my Northern Ireland hat and say, "Social need, dear constituent."

Lady Hermon: Add to that 40 years of violence that Northern Ireland had to endure, which Tewkesbury didn’t.

John Simpson: Indeed.

Lady Hermon: And I wouldn’t wish it on Tewkesbury.

Q285 Chair: Indeed, but if we’re moving forward, if we’re saying that’s coming to an end, and we have to start the economy going again, how would you then respond?

John Simpson: Chairman, there is a level of this debate that I think you’re moving towards, that actually the financial relationships that govern Scotland, Wales and Northern Ireland are, at the moment, relatively generous, by any standard, to Northern Ireland. If Northern Ireland is to be as productive a part of the United Kingdom, with the skills and the ability to produce value added in a peacetime set of circumstances, the challenge should be thrown down to Northern Ireland, "Now get on and do it." My colleagues from Northern Ireland will forgive me if I’m at this stage a bit pushy. We are inclined to argue that somehow or other we’re in a position where we badly need this public sector the size it is; "We’re not ready for the pain." We’ll never be ready for the pain. Get on and do it now.

Q286 Naomi Long: Just on that specific point, you might be surprised to know that I don’t necessarily disagree with what your saying in terms of trying to find ways of turning the economy around that are constructive rather than always encouraging people in Northern Ireland to see themselves as reliant, because I believe that seeing ourselves as reliant is part of the problem; we need to change the culture and the aspirations in Northern Ireland so people don’t believe that reliance is an option. I don’t disagree with you in terms of the culture change; I maybe disagree with you in terms of how quickly you can do it. But is this not a case of invest to save? Essentially, what this is doing is providing a potential spur to the local economy; a potential investment. The quid pro quo is it has to be paid out of what we already get, so we’re actually not asking people for more. It’s not that on this occasion we would be coming saying, "Please sir, can we have some more?" We’re actually saying, "Give us the freedom to do what we want with what we already have." I feel that’s a completely different cultural approach to changing the economy in Northern Ireland from our previous approach, which generally, I have to say, has been, "We need more" because we have not been in a position, I think, until this point to have this kind of conversation. To me, it almost answers your point that it’s not about reliance; it’s about saying, "Given what we have, can we do something different with it to make a change?"

Q287 Lady Hermon: Could I just double check another piece of your evidence, John? It’s twice I think that in fact you’ve mentioned this, and I think it is a very important point to the Committee: if the ability to the reduce corporation tax were in fact devolved to the Assembly and then the Assembly were to decide, "Well, actually, we won’t cut it to 12.5%, we might go 19%, but on top of that we will do additional things like the 100% no tax if it’s R&D investment, retraining and all that." That I find very attractive. However, while I might find that very attractive, could we just double check with you would that be compatible with EU legislation on State aids, on the Azores judgment and those technical things that they must take account of?

John Simpson: At this stage, I become even more an amateur than the professionals sitting around the table.

Lady Hermon: Never, John, no.

John Simpson: My understanding, as a lay reader of the Azores judgment is that if it were a territorial responsibility of the Northern Ireland Administration, the particular quirks of the way in which we administered would be our business.

Lady Hermon: As long as it goes right across the board.

John Simpson: As long as it’s applied uniformly within Northern Ireland. We wouldn’t be allowed to apply corporation tax in Northern Ireland on the basis we’re to give 12.5% to new inward investors, but existing businesses will stay with the 28% or whatever it is. It has to be the same rate right across the board.

Lady Hermon: Thank you. That is really very helpful as well.

Mel Stride: Just on that point: that would include the R&D credits and tax breaks?

John Simpson: Everybody would have to have the same R&D rules, but not all of them would use them.

Q288 Mel Stride: You’re saying that you are antipathetic-if that’s the right word-to the idea of lowering the tax, but you’re arguing that maybe we look at these specific areas like R&D and training tax reliefs, etc. You’re also saying that one of the weaknesses of the tax approach is that it applies to everybody-the deadweight argument-which I totally accept. So, I’m therefore interested in whether you feel there would be a distorted impact of going the R&D tax relief route in as much as it might naturally favour new entrants-I suppose it might, arguably because they’re coming here to invest, aren’t they-and if that’s the case, what kind of level of impact do you think that might be, in terms of every pound that is then spent not on tax reduction but on tax credits actually getting to the end objective of bringing people in? I’ve probably not phrased that very well, but I think you’re just about following me. It’s a way of increasing the bang for the buck on the inward investment? Isn’t that, in a way, what you’re arguing?

John Simpson: Yes.

Mel Stride: Can you quantify that in any way for us?

John Simpson: I don’t think we can quantify it, but what we can say is that, if this was available, who are the people likely to be doing R&D or innovation expenditure? Would they be encouraged to do it in Northern Ireland if that became a tax allowance? To answer this: yes, in both cases, this would be worth having. I hypothesise, but only hypothesise-and I can’t spell it-that ultimately you could be offering incoming businesses a set of circumstances in which, if they were doing the right things, their tax liability might be very low indeed, if not zero.

Q289 Mel Stride: So what you might call the multiplier effect of doing it that way as opposed losing it through deadweight the other way might be very significant, mightn’t it? The impact might be two, three, four, five times through spending the pound in that way on the inward investment.

John Simpson: Yes. The Irish advertise, "We have the lowest corporation tax rate of 12.5%." The Northern Irish advertise, "Come to us and we’ll probably make you tax free for five years."

Q290 Oliver Colvile: That comes back to a question that I asked our previous witnesses about the whole concept of actually reducing taxation as a whole because it makes it much more attractive. When we had Richard Murphy here, he said, "No, no," and that this was quite the wrong way of going about it, but I think there is some evidence to suggest the lower the taxes, the greater the amount money that Government ends up receiving into its revenue. Would you agree with that?

John Simpson: It can be right. It’s the same point Ms Long was making: would it repay itself? Given the right circumstances, there will be a plus or there will be a movement in that direction, but none of us sitting around the table can quantify it at this stage.

Q291 David Simpson: Just to wind up from my point of view, John, what I’m taking out of your evidence today is that corporation tax is really an element, but without fast-track planning, R&D, skills and all of that, it is not a silver bullet to do the job on its own. What is your understanding, finally, of what the Secretary of State has said about Northern Ireland and either an enterprise zone or enterprise zones. We haven’t really got to the bottom of it; what’s your understanding of that or what do you believe it could be?

John Simpson: Won’t we know something about that in a week’s time?

David Simpson: I don’t know. Normally you know more than I do. Tell us what you think.

John Simpson: Aren’t we expecting high and mighty visitors to arrive to speak to the business community some time next week?

David Simpson: Yes, I think the Chancellor and some others or whatever; some of his officials.

John Simpson: The short answer is that whoever invented the phrase, "We’ll make Northern Ireland into an enterprise zone," didn’t ever specify what that meant.

David Simpson: Yes, that’s the problem.

John Simpson: It might mean, "We’re actually talking about corporation tax"; that’s what it means. I’d like it to be a bit more than that, but then the next line of retreat would be-or the next line of advance-enterprise zone, "Yes, we could spend £100 million more on x and y." Are you coming to finance that particular problem? I think the short answer at the moment is that it would be a dangerous expectation that the enterprise zone was going to come with Treasury largesse-never mind the Presbyterian Mutual Society for the moment-so that I’m in the dark. I don’t have a ready set of suggestions as to how to make an enterprise zone something very significant without it meaning spending on doing something different.

Q292 Oliver Colvile: Do you think there is quite a good case now for Southern Ireland and Northern Ireland to be working much more closely together in trying to present a much more coordinated case for inward investment in both parts?

John Simpson: I have no difficulty with cooperation between the state agencies-Invest Northern Ireland and the IDA. I, at the moment, and have been for the last four or five years, working in parallel with Padraic White who was the Chief Executive of the IDA until he retired and is now involved with me in terms of some of the things in West Belfast on the Shankill, and the language is the same, but don’t expect that the agencies will, as it were, put all their cards on the table as if it’s one pack of cards. They do have to play different suits in a cooperative manner and the two suits, and cooperation, must be the metaphor-if you’re allowed to mix suits on cooperation. It depends what card game you play. There you are.

Oliver Colvile: Okay. That’s really helpful.

Chair: Has anybody else any final questions?

Mel Stride: Can I just, Chairman, make one point, which is that I have found your evidence extremely helpful? It was very kind of you to come and give it.

Lady Hermon: Very helpful indeed. Thank you.

Q293 Chair: Thank you very much. A final point: what I’m hearing is you say tax in its wider sense is important; not necessarily just one tax, but the whole the tax system. Would that be correct?

John Simpson: Yes. This is tax and incentives, and now, with incentives being trimmed by the changes in the European legislation on state aids, which I’m not opposing, but for that package of the things you do to incentivise-partly tax, partly aids-but partly the wider setting in which you ask business to operate.

Chair: Thank you very much indeed for your evidence.