Introduction

The Chartered Institute of Taxation (CIOT) is pleased to be invited to respond to the questions raised by the Northern Ireland Affairs Committee (NIAC) in respect of the consideration of mechanisms for changing the corporation tax rate, as announced in the Emergency Budget by the Chancellor of the Exchequer, George Osborne, on 22 June 2010.

In order to answer the questions we asked members of the Chartered Institute of Taxation and Association of Tax Technicians (ATT) in both Northern Ireland and the Republic of Ireland for their input via a survey. This response can therefore be taken as also supported by the ATT. The survey was sent electronically to members in September with a very short deadline for responses but still attracted a response rate of about 15%.

The results below summarise members’ views, as expressed in their responses to the survey. There is inevitable overlap and duplication between the answers to some of the questions but we have not edited these overlaps out, preferring to give the full picture of responses. We have not followed up the responses in any way but could do so if NIAC wished for further input. Nor have we sought views from members resident elsewhere in the UK.

Executive summary

The general consensus of opinion is that, while the UK-wide reduction in the corporation tax (CT) rate to 24% is unlikely to be of significant benefit to Northern Ireland (NI), where most companies pay CT at the small companies rate, there would be a significant improvement to the competitiveness of the NI economy if the rate were to be equalised with that of its nearest neighbour, the Republic of Ireland (ROI), i.e. 12.5%.

Respondents suggested that further measures would also be required to protect the NI economy in the face of public expenditure cuts, due to the overdependence of the region on the public sector and the relative lack of private investment. Other suggestions included reductions in employment costs (e.g. reduced rates of employer national insurance), improved infrastructure and increased relief for capital expenditure.

It is accepted that many issues will have to be considered, not least how to fund any tax reductions. However, members’ views are that it should be possible to take this opportunity to improve the competitiveness of the NI economy and much of the cost of tax reductions would be met by increased investment and economic activity.

Question 1: What effect will the reduction in the corporation tax rate on a UK wide basis announced in the June 2010 Budget have on the competiveness of the NI economy?

Responses were mixed:

· Little or no impact – 46%

· Moderate impact – 18%

· Significant impact – 33%

· No comment – 3%

The responses to question 4 are also relevant. These suggest that despite the limited impact, over 70% of respondents see the benefits as worth having.

Respondents considered that only a small minority of companies in NI are large enough to take advantage of a reduction in the full rate of corporation tax and any benefit is likely to be minimal. As a stand-alone measure, it is unlikely to be successful in attracting inward investment from multinationals, particularly given the availability of a 12.5% corporation tax rate in the ROI. It was also regarded as a UK-wide measure, so multinational investors would be just as likely to take advantage of it by investing elsewhere in the UK, i.e. outside of NI.

Question 2: What would be the benefits of equalising the corporation tax rate in NI with that of the Republic of Ireland?

About three quarters of those responding considered that it would make NI companies more competitive when compared to their counterparts in the ROI.

Specific comments from our members’ survey included that it would create a significant opportunity to attract foreign direct investment into NI. It would make NI companies as competitive as their ROI counterparts and act as a significant draw to attracting inward investment. Whilst the rate reduction may not directly have a big impact on smaller companies, those companies would benefit from increased trade levels with the larger businesses that could be attracted to Northern Ireland.

Respondents noted that a small number of NI businesses with operations in the ROI had established companies there to take advantage of the lower CT rate and the ability to remit profits back to NI tax-free. By equalising the CT rates, this would obviate the requirement for such cross-border tax structures and should reduce compliance costs as a result.

Question 3: What alternative measures could be introduced by the UK Government to make the NI economy more competitive?

This question provoked a range of responses, as expected. Over a third considered that non-tax measures were more important than tax reductions. Slightly fewer thought that tax reductions should be targeted at individuals rather than companies. There was also some support for targeting taxes other than CT and a good number gave alternative suggestions.

The most popular alternative measure was to promote employment. Suggestions ranged from reduced rates of employer national insurance contributions (NICs) to enhanced deductions for employee costs. Also popular were measures to increase relief for capital expenditure.

A reduction in the headline CT rate was clearly popular with many, with some commenting that there is a risk that more detailed measures would be more complex or lost in translation, and so not generate the level of business investment required to improve the NI economy.

Non-tax measures that were felt to be important included improved infrastructure, investment in communications and education, reduced bureaucracy and a stable executive. They also considered that the local economic development agency, Invest NI, should be doing more to support small family businesses as opposed to attracting low paid "call centre" type operations. The political and cultural issues, which attract negative media attention, also need to be addressed.

Question 4: Is a reduction in corporation tax the simplest and quickest way to make the NI economy more competitive?

Over 70% of respondents considered that a reduction in corporation tax was the simplest and quickest way of making the NI economy more competitive.

A reduction in the CT rate could be a good first step in making the NI economy more competitive. It will not guarantee FDI but will make NI more attractive to FDI business and levels the playing field with the ROI. .

Introducing a reduced rate would need to be carefully considered in the context of the reduction in funding from Westminster, especially if, as is likely to occur, other UK regions (such as Scotland, Wales and Tyneside) lobby for a similar reduced CT rate and compete for any foreign investment.

Question 5: How long would it be before NI realise the benefits from a reduction in corporation tax to be comparable with the Republic’s rate?

The majority (over 60%) of respondents thought that the benefits would be realised in the short term (0 – 5 years).

However, some felt that NI is such a long way behind ROI that it will take a number of years before the effects of a reduced rate of CT will have any noticeable effect, if at all. There is also the possibility that ROI may have to increase their CT rate.

Question 6: What are the legal barriers to the introduction of different corporation tax rates on a regional basis within the UK?

We did not provide any options to members in respect of this question, so responses summarised below are the spontaneous views of members.

Members considered that barriers should not be problematic provided NI bears the fiscal consequences of the reduced rate. A number referred to the Azores [1] case and the fact that the NI Assembly can comply with the three requirements laid out in that case. The recent British Aggregates judgment (T‑359/04), which deals with the exemption from aggregates levy in Northern Ireland, does however suggests that some care is needed to ensure that a tax measure such as this does not constitute state aid.

Whilst other parts of the UK may feel they have been discriminated against if NI proceeds with a CT rate reduction, there should be no legal barriers as NI is easily distinguishable from the rest of the UK (e.g. Scotland and Wales) as it is part of the island of Ireland and is at a bigger disadvantage than the rest of the UK given the close proximity with ROI.

Some members pointed towards the EU political desire to harmonise taxes across all member states and suggested that it may be difficult to obtain clearance at the EU level for a CT rate reduction.

If NI has a 12.5% CT rate, that could raise issues under the UK’s Controlled Foreign Companies (CFCs) regime, assuming the rest of the UK keeps a significantly higher rate. The easiest solution might be to exclude NI from the rest of the UK for CFC purposes. Genuine businesses should fall within one of the CFC exemptions in any case.

Most of the anti-avoidance rules that would be required already exist, for example the transfer pricing legislation.

Question 7: What do you consider the effect of a reduced corporation tax rate in NI will be?

There was a very mixed response to this question. The most popular responses were –

· More businesses would move from other parts of the UK to NI.

· Fewer businesses would move from NI to the ROI.

· There would be an increase in tax-geared incorporations in NI.

Respondents felt that there could be modest levels of migration to NI from the rest of the UK but this would be better than migration to outside the UK. By attracting business that would not otherwise be in the UK, it would increase the overall tax take in the UK.

Many members considered that NI business would be able to compete more effectively with their ROI counterparts and the subsequent increase in inward investment from larger companies over time should increase the total tax take, including both PAYE and CT, whilst creating jobs and reducing the amount of state benefits paid to individuals in NI. A reduced CT rate would also reduce the incentive for NI based businesses to maintain subsidiaries in ROI.

Any perceived loss of tax revenue resulting from a reduced CT rate could be offset by increased output.

Some of our members considered the geography of NI and that there are significant costs associated with that e.g. transport of goods, place of supply, etc. The effect of a reduced CT rate may be an expansion of businesses that are service orientated, or that rely on IT and high value, easily transportable goods.

Few members expressed concerns that businesses will seek to move their CT residence without moving their operations. Given the anti-avoidance measures already at HMRC’s disposal, increased aggressive avoidance was not seen as a significant issue.

Question 8: What evidence is there from other countries that having different corporation tax rates on a regional basis is effective?

Over half of the respondents considered that there is clear evidence that low corporation tax rates can improve competitiveness. However, nearly a third of respondents did not consider that they had the experience to comment.

Low CT rates combined with proper infrastructure and inward investment will increase competitiveness. A clear example of this is the ROI where, even in the worst recession in the last 50 years, they have raised the majority of the headline rates of tax, across all taxes, with the clear exception of the CT rate, which has been maintained 12.5%.

Some members considered the distortions that a regional variant CT rate in NI could create within the UK tax system. They considered it likely that Scotland and Wales would wish to follow suit and that may reduce NI’s advantage over time.

Question 9: What are the implications for other regions if a lower rate of corporation tax is introduced in NI?

The most popular answer was that other regions such as Scotland and Wales would seek equivalent benefits. In relation to Scotland, this is not currently on the list of measures planned for the Scottish Parliament under the Calman Commission proposals.

Some members considered that if each region wishes to reduce its CT rate, then, providing it is prepared to finance it from its own budget, then that region should be entitled to make its own ‘business case’ for a reduced CT rate.

It may unfairly benefit NI business but the region is unique in its over-dependence on the public sector. For the NI economy to become more self-sufficient it needs more private investment; reducing the CT rate is one way of achieving this.

The geography of Northern Ireland is likely to mean that not many GB companies will seek to relocate to NI, but it may impact on those seeking to start up new businesses.

Other comments

We invited members to make any other comments that they considered relevant to this subject.

Significant responses were as follows –

· The ability to vary corporation tax rates in NI should be devolved to the NI Assembly which should then determine what the appropriate rate should be and when the reduction should take place.

· Private investment is badly needed in NI. Reducing CT rates would encourage inward investment thereby increasing employment levels, which would augment income tax revenues across the UK.

· There is definite merit in using tax to stimulate growth in the local economy. However, changing the CT rate appears to be an overly simplistic solution and one that could drive short-term opportunistic behaviour from investors rather than the long-term sustainable growth we need in the region.

· Due to the large public sector and impending cuts, something needs to be done to stimulate private sector growth. With the ROI 0%/12.5% corporation tax rates, we need a comparable rate to attract investment.

· A typical client of mine has an £800K turnover, £50K profit with 14 employees. This measure would save them £4,250 in corporation tax (difference between 21% and 12.5%). A targeted grant of the same amount, which provides them with an additional resource of training or export capability, would be of more help - to push them to improve the business, rather than passively accepting some additional cash flow. Alternatively, £4,250 to take off the purchase of new equipment (but with the cash now, not 9 months after year-end) would promote investment.

· The change in rates will have a massive psychological impact in Northern Ireland and help provide confidence to the Private Sector to develop and grow their businesses, which is vital in these economic times. The overall state of the economy in the island of Ireland, coupled with the state of the banking sector in Ireland means that the economy needs a major boost to help make it anywhere near competitive and attract new investment. Failure to take action at this time could lead to many years of economic deprivation seeing NI fall even further behind GB in private sector activity and increasing its reliance on the State by way of Public Sector work and the Benefits system. As both the Public Sector and the Benefits systems are targeted to produce significant savings in the next few years, the effect in NI could be catastrophic. The Government must not waste this opportunity.

· We need more than tax incentives. We are a nation of small business but Government Agencies appear (perception) to focus on the larger international businesses. Also, what is government doing about small business banking?

The Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, Government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.

The CIOT’s 15,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.