Corporation Tax in Northern Ireland

Written Evidence from Chartered Accountants Ireland and Chartered Accountants Ulster Society

About Chartered Accountants Ireland

Chartered Accountants Ireland is the largest and longest established accountancy body in Ireland. It has over 19,000 members and 5,000 students, and it is the leading voice of the accountancy profession in Ireland.

Chartered Accountants Ireland was established by Royal Charter in 1888. Its activities and those of its members are governed by its Bye-Laws and by Rules relating to professional and ethical conduct. These provisions are contained in the Handbook which is available to all members.

Chartered Accountants Ireland is governed by a Council and it is responsible for determining policy and monitoring its implementation. Council is lead by the Officer Group and supported by the Management Team and staff. A number of committees with voluntary member involvement also play a key role.

About the Ulster Society

Chartered Accountants Ulster Society is a district society of Chartered Accountants Ireland, Ireland's largest and oldest professional body of accountants founded in 1888. The Society currently represents over 3,300 members in Northern Ireland.

A. Introduction   

1. It is the view of Chartered Accountants Ireland and the Ulster Society that a strong and sustainable local economy for Northern Ireland is an essential component in ensuring a better life and greater opportunities for all within our society. We believe that a strong economy has the potential to positively impact and bring great benefits for education, health, housing and social development.

2. For this reason we welcome the decision of the Northern Ireland Affairs Committee to open an inquiry into Corporation Tax in Northern Ireland. As an issue, a cut in the rate of Corporation Tax for Northern Ireland has been suggested and debated for decades, and we have willingly and necessarily participated in that debate both through the various Varney reviews and, in 2008, by appearing before this very Committee in February 2008.

3. We realise that now is perhaps the clearest opportunity for such a major change in policy to take place. As an Institute and a District Society of professional advisers and business leaders with the best interests of Northern Ireland in mind, the considered evaluation and judgment of our members can make a valuable contribution to the debate and we therefore take this opportunity to present our views on the questions posed by the Northern Ireland Affairs Committee.

B. Specific questions 

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 Northern Ireland economy? 

1. Under the current proposals to reduce corporation tax in the UK, the end result will be a final resting point of 24%, anticipated to commence on 1 April 2014. This is a long way away. And even if Northern Ireland was not in the unique position it is in, the lower rates of corporation tax in many other EU countries would again place us much lower down the list for the decision makers of inbounds.

2. The UK’s rate of corporation tax has fallen in recent years but at a far slower rate than in other European countries. In 1998, the EU15 average corporation tax rate was 36.8 per cent, compared with 31 per cent in the UK. In that year, the UK had the 3rd lowest rate of corporation tax in the EU15. The EU15 average rate has now fallen to 27.0 per cent, compared with a UK rate of 28 per cent, which is the 7th highest rate in the EU15.

3. The UK now has the 8th highest rate of corporation tax in the 27 EU countries. The EU27 average corporation tax rate is 23.2 per cent. The average rate of corporation tax among the 12 new member states of the EU (since 2004) is 18.3 per cent.

4. Thus, even when the rate of UK corporation tax falls to 24%, Northern Ireland will still have a higher rate of corporation tax than many of its competitors and nearly twice that of the Republic of Ireland.

2. What would be the benefits of equalizing the corporation tax rate in Northern Ireland with that of the Republic of Ireland? 

1. As an all-island body, Chartered Accountants Ireland has direct first hand experience of the impact of a reduced rate of Corporation Tax in stimulating economic growth in the Republic of Ireland. In fact as recently as 12 August the Irish Department of Finance issued their periodical Economic overview and they continue to cite their ‘favourable business tax regime’ as a key factor in having facilitated Ireland’s economic success in the boom years. Since the beginning of 2010 it is also interesting to note that, despite the difficult economic conditions which continue to be experienced in the Republic of Ireland, 55 new foreign and direct investments projects have been publicly announced by IDA Ireland.

2. As an economically aligned tax policy, the Irish Government continues to protect the low rate of corporation tax despite the ongoing economic turmoil in that region. Ireland’s commitment to its 12½% corporation tax rate, which remains the lowest in the OECD, was restated by the Minister for Finance in his Budget 2010 speech.

3. Therefore we believe that, based on historical experience in the Republic of Ireland, a reduction in the Corporate Tax rate in Northern Ireland would be a significant stimulating factor in the creation of higher value jobs, be a central plank in the drive to attract Foreign Direct Investment (FDI) by putting the local economy on a higher growth path for FDI and indigenous businesses.

4. In the longer term these measures would create greater wealth for Northern Ireland thereby resulting in a smaller subvention from HM Treasury.

5. As a key statistic - the increase in corporation tax revenues in Ireland in recent years was accounted for by increases in almost equal proportion from FDI companies and indigenous enterprise. The conclusion we draw here is that indigenous business does not suffer as a consequence of FDI projects coming to fruition. Rather, indigenous business benefits from the extra activity in the economy consequent to FDI.

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

1. There are many potential measures or tax incentives that could be used to enhance Northern Ireland’s competitiveness such as enhanced capital allowances or an enhanced rate of relief for research and development.

2. However Northern Ireland needs more than incentives to make it more competitive – it needs a commercially aligned tax policy to help it win inbound investment and thus by association growth in indigenous investment.

3. By simply looking at the experience of the Republic in its various attempts/methods to find a commercially aligned tax policy that delivered economic results is probably the best way to answer this question.

4. The Irish Government tried almost every conceivable form of tax relief before reaching what is now regarded as ‘the winning formula’ of a universally available 12.5% rate.

· Businesses had tax breaks when they increased their stocks;

· Additional tax allowances were given to entrepreneurs when they bought new machinery, even when it was purchased with grants;

· Groups of companies could spread losses on a generous basis;

· Exporters made profits tax free, and then paid tax free dividends out of those profits.

5. These measures certainly helped, but they clearly underline the difference between tax breaks which reduce tax bills, and a tax policy which stimulates and has the capacity to springboard economic development.

6. The essence of a low corporation tax rate is that it provides the incentive to earn. All other incentives, tax based or otherwise, create an incentive to spend. This is why a low tax rate is not comparable with other forms of tax incentive and why we do not believe that these measures should be pursued as an alternative to reducing the corporation tax rate.

7. This is the difference which makes the low rate effective in stimulating growth. In our experience a low corporation tax rate is THE catalyst for success.

8. However we do not dismiss other tax measures as having no value, but in fact we would advocate that both paths should be pursued at the same time. As a practical example, Northern Ireland suffers a considerable competitive disadvantage when trying to encourage and attract television drama production as we do not have a tax incentive supporting this activity. An extension of the film tax credit to cover television drama either across the whole of the UK or exclusively for Northern Ireland would allow us to expand the industry here. The Republic of Ireland, despite its already low tax rate, continues to introduce and sustain such incentives and measures for business because it recognises the need to remain competitive in the dynamic world economy. It is simply not sufficient to stand still.

4. Is a reduction in corporation tax the simplest and quickest way to make the NI economy more competitive, and how long would it be before Northern Ireland realised the benefits? 

1. In short we believe that a low corporation tax rate is the key decision maker’s ‘make or break’ in making investment decisions and in particular will make the NI more competitive in attracting high value FDI. It would be overoptimistic to state that the results would be ‘quick’. The decision to reduce the corporation tax rate should be looked at like any investment decision. However we would expect an almost immediate impact on the level of FDI in the region.

2. It should be noted that Foreign Direct Investment decisions can take time to come to full fruition. A public commitment now to reduce the rate at a future date would in itself have a positive bearing on the attractiveness of Northern Ireland as an investment location as decisions are being taken. The timing of the implementation of the change to the tax rate, and how we market the change internationally are worthy of scrutiny in their own right.

5. What are the legal barriers to the introduction of different corporation tax rates on a regional basis within the UK? 

1. The perceived EU legal barriers of state aid and tax competition were considered as part of the Varney review and this concluded in December 2007 that "a move to a differential corporation tax for Northern Ireland would be possible in principle".

2. We would anticipate that the 1998 Northern Ireland Act would also need amending accordingly. The introduction of an NI CT rate should also fit within existing UK tax legislation and be appropriately targeted at encouraging genuine economic activity in the region.

3. Whilst there will undoubtedly be a requirement for new legislation, a significant amount of the existing legislation would facilitate the introduction of such new legislation.

6. What would be the effect of reduced tax revenue in Northern Ireland? 

1. This question assumes that a reduction in tax revenues would occur if the corporation tax rate were to reduce and does not take into account the potential for increased tax revenues from income tax, national insurance and VAT which should go some way to counter-acting any fall in corporation tax revenues. Over time the cumulative effect on the public finances should become positive, as increased investment leads to increased employment, which in turn leads to higher income tax and VAT payments, and lower benefit expenditure. Nevertheless there are two potential costs to be considered in connection with a reduction in Northern Ireland’s corporation tax rate to 12.5 per cent. The first is a potential revenue loss in the region itself. The second, which can be negated by appropriate counter-measures, is the further loss of revenue in the UK as a whole due to a number of firms relocating or shifting profits from Great Britain to Northern Ireland to take advantage of its lower tax rate.

2. It is our understanding that in order to comply with EU legislation, the financial consequences of any reduction in the rate of corporation tax in Northern Ireland would need to be borne by the Northern Ireland Assembly. As a result, a reduction in the corporation tax rate in Northern Ireland would need to be viewed as an investment in the Northern Ireland economy, and as with any investment, there would be issues surrounding the timing of cash flows, a requirement for a longer term view to be taken of the investment as well as the rewards resulting and the element of risk involved.

3. While our belief is that this investment could provide a step-change to the growth of our economy, it is imperative that the detail and likely costs of the proposal are investigated. This will help to reduce uncertainty of the expectations of the proposal, but it will also help to produce a more detailed, more compelling case to UK Government and the Northern Ireland Assembly for local tax varying powers.

7. What evidence is there from other countries that having different corporation tax rates on a regional basis is effective? 

1. Whilst countries such as Germany have different regional corporation tax rates, they tend to also have a unified federal rate. As a result, there is no analogous situation against which to make such a direct comparison. And as Northern Ireland is geographically separate from the rest of the UK and effectively a ‘stand alone’ region we see a direct comparison with the experience of other countries who have reduced the rate of corporation tax as more appropriate. 

8. What are the implications for other regions if there were different levels of corporation tax within the UK? 

1. If the Northern Ireland experience proved successful then it would be possible that other UK regions such as Wales or Scotland would seek to follow suit. However, we believe that this would be a separate matter for each such region to consider

2. An NI CT rate (set at a level which is no greater than the current ROI corporation tax rate) would probably create an incentive for companies to allocate profits to a Northern Ireland subsidiary company or a Northern Ireland branch from other UK regions. If such profit shifting arose as a result of artificial allocation of a group’s profit between UK companies, this concern can be dealt with by vigorous anti avoidance legislation to detract from such activities.

3. However, if there was a migration of trading activity from other parts of the United Kingdom resulting in a genuine transfer of economic activity to Northern Ireland, then this should be welcomed as a means of facilitating the regionalisation of the United Kingdom and preventing the migration of such trading activities to places outside the UK.

C. Conclusion 

1. In summary, Chartered Accountants Ireland and the Ulster Society are both supportive of the proposal for a devolution of the power to vary and ultimately reduce the Corporation Tax rate in Northern Ireland. We welcome the opening of this inquiry as part of a wider exercise by Government to rebalance the Northern Ireland economy which together with possible mechanisms for changing the corporation tax rate would also include examining proposals for economic enterprise zones and other economic reform options

2. The Institute’s Council has put forward its support for a 12.5% headline corporation tax rate for Northern Ireland. The proposal to reduce the rate of corporation tax is a central plank of a strategy now required to rebalance the Northern Ireland economy and address the significant growth required in the private sector of that economy.

3. Whilst the debate on this issue has been ongoing for decades, we advocate that action is needed now.

4. Once such devolution has been granted the implementation of this power will be best achieved after closely examining both the potential of the proposal and the realistic costs involved, as well as outlining creative ideas on the management of the policy.

5. Chartered Accountants Ireland and the Ulster Society are committed to playing our part in creating a sustainable and successful economy in Northern Ireland and we are willing to offer the expertise and experience of our membership in assisting with any aspect of economic development. We hope that these views will be welcomed as an honest and constructive contribution to the debate.

21 September 2010