Northern Ireland as an enterprize zone
Written evidence from Capitus
In response to the Northern Ireland Affairs Committee investigating the possibility of establishing Northern Ireland as an Enterprise Zone, Capitus Limited offers its opinion as follows.
1.0 Who is Capitus and why are we Responding to This Consultation?
1.1 We feel that it is important to first of all set out the perspective from which we are commenting on this issue.
1.2 Capitus is an Investment Incentives Consultancy specialising in advising clients on the tax incentives available for specific areas of capital investment. We act for major institutional and listed plc investors, owner managed businesses, banks, hoteliers, care home operators and retailers, to name but a few, throughout the UK. Our core activities are focused on the incentives available for investment across all sectors of commercial property development and refurbishment in all sectors ranging from manufacturing facilities through to hotels, shopping centres, offices and data centres, etc.
1.3 We offer clients advice with respect to the following key tax incentives for investment and facilitate the claiming of these reliefs to encourage and stimulate growth:
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The various capital allowances available for investment in plant and machinery.
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The Enhanced Capital Allowances scheme available for investment in energy and water efficient technologies.
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The provisions of the Business Premises Renovation Allowances scheme which encourages investment in disadvantaged areas (for example, all of Northern Ireland qualifies).
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The Land Remediation Relief scheme aimed at encouraging investment and regeneration of Brownfield and Long Term Derelict land.
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The use of Enterprise Zones to stimulate economic growth in specifically targeted areas.
1.4 It is our specific and in-depth knowledge of these areas that allows us to offer our considered opinion on the possibility of establishing Northern Ireland as an Enterprise Zone. We comment on the specific areas that the NI Affairs Committee has requested views on as follows:
2.0 How Does an Enterprise Zone Operate?
2.1 We understand that the Coalition Government, in conjunction with the Northern Ireland Executive wish to evaluate methods to ‘rebalance’ the Northern Ireland Economy. In particular, stimulate growth in the private sector and reduce the reliance upon public sector investment and expenditure.
2.2 It is therefore imperative that the UK Government encourages increased private sector productivity, investment and job creation in the short to medium term within the Northern Ireland economy.
2.3 An Enterprise Zone will achieve the desires listed in 2.1 and 2.2 by providing a competitive commercial environment for private investment. Traditionally, an Enterprise Zone would incentivise investment and innovation by offering tax reductions, allowances or reliefs, financial assistance or non-monetary benefits to potential investors in excess of those currently available in other areas.
2.4 Prior experience of Enterprise Zones, particularly within the North East and North West of England, Clyde Bank in Scotland and the Lower Swansea Valley in Wales were relatively successful. These original Enterprise Zones offered investors an exemption from Land Duty and Commercial Property Rates, 100% capital allowances for expenditure and a simplified planning regime.
2.5 Ideally, a 21st Century Enterprise Zone should operate by targeting quality investment from job-creating private companies and individuals. Therefore, it is important to not only incentivise the investor to develop high quality premises but also the tenants who bring employment to the region.
2.6 Although success had been witnessed throughout the previous Enterprise Zones, in our view, Northern Ireland failed to adequately benefit due to the reasons listed in section 3.2.
3.0 Why Should NI be declared an EZ?
3.1 It is our opinion that if the Government is to achieve its stated desire of moving NI away from its well documented over-reliance on the public sector, a package of stimulus measures must be introduced for a period of time to encourage private sector investment generally and foreign direct investment, in particular.
3.2 The factors that lead us to this conclusion are as follows:
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The negative impact of 30 years of conflict
An obvious point but one which cannot be overstated for a whole variety of reasons. Apart from the obvious lack of private sector investment during that period and the economic consequences of that, we believe that "The Troubles" have led to a whole generation which is mentally reliant on the State for their economic well-being. This, in turn, has led to a culture which is not conducive to nurturing entrepreneurial spirit.
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The geographical proximity to the Republic of Ireland.
Again, we believe that this is a huge factor mitigating against inward investment to Northern Ireland. The ROI has a CT rate of 12.5% (astonishingly, now supported in part most recently by a loan from NI resident UK taxpayers), multiple Enterprise Zones and tax incentives aimed at encouraging investment in specific sectors such as hotels, nursing homes, nurseries etc. and as such ROI is still a hugely attractive environment for a company to invest in. Compare this to the position in NI - a 28% CT rate, no Enterprise Zone and no tax incentives whatsoever aimed at encouraging specific sector growth (apart from the soon to be phased out and highly restrictive Business Premises Renovation Allowance).
We are surprised that Northern Ireland attracts any inward investment at all and we need at least a level playing field if we are to compete on any level let alone move our economy from public sector reliance.
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The brain drain
Again, the "brain drain" throughout the course of ‘The Troubles’ is well documented. However, to encourage some of these people to return to NI and lead "home grown" private sector growth, it has to become a more attractive, cosmopolitan and safe place to live free of conflict. It is our opinion that if all the economic and taxation conditions exist to encourage both UK private sector investment and foreign direct investment throughout Northern Ireland that other social and cultural developments will follow, keeping local talent here and encouraging exiled talent to return.
4.0 What should be included in any Enterprise Zone Proposals?
4.1 We feel that the following factors should be considered and included in any proposals for establishing an Enterprise Zone in Northern Ireland
1.
The geographic areas of Northern Ireland that should benefit from EZ status.
If EZ proposals are to be adopted at all, we feel very strongly that the whole of Northern Ireland should have EZ status. These proposals are not aimed at encouraging investment in deprived areas or rural areas within Northern Ireland in preference to say, Belfast for example. They are designed to take NI away from a culture of reliance on State and replace that with private sector job creation and growth. Giving EZ status to specific areas within the Province would not achieve this and would, we believe have a detrimental impact overall. If the whole of NI achieved EZ status, inward investors would not cluster around specific areas and would instead base location strategy on the merits of the location under consideration (access to workforce, infrastructure and transport links, land cost etc.)
2.
Priority sectors that we would want to encourage to invest here.
We believe it is imperative that Northern Ireland attracts investment from job-creating industries which will benefit from the region’s comparative advantages - the excellent education system, relatively low wages and relatively low property costs.
We believe high-technology sectors including bio-sciences, high-technology engineering, pharmaceuticals and particularly ICT would benefit from the availability of educated graduates. We also believe entities operating within the ‘green economy’ would benefit from any proposals.
However, if employment would be expected to shift from the public sector to private sectors, we believe it will be important to attract appropriate jobs for these displaced individuals.
Tertiary sectors such as financial services, banking and retail would not require initial targeting as we envisage entities operating within these industries to flow into Northern Ireland as and when the economy grows. We would not envisage Belfast being able to compete as a primary financial hub, however, certain ‘back-office’ and supportive functions from within these sectors (such as the recent Citi and NYSE investments) should not be excluded.
3.
What type of Investor could benefit from EZ status in Northern Ireland?
As previously mentioned, it is imperative to incentivise investors seeking to bring quality employment to the region. By encouraging the initial investment, the wider economic and social externalities provided will create a more vibrant, competitive and wealthy region.
Although local investors will not be excluded from the EZ benefits, we feel International and particularly European entities wishing to improve UK or Irish market positions would benefit from EZ proposals.
In line with the Coalition Government’s desire for an export led, knowledge based economy, we feel it is important to attract the right entities willing to make a long-term commitment to Northern Ireland.
4.
A statement of the levels of tiered tax relief that could apply to specific sectors wishing to invest
For example, 50% tax relief could apply to ordinary property investors, 100% for property investors providing properties with an "excellent" BREAAM rating (to encourage energy efficiency), 100% for manufacturers, offices, hotels, etc 125% for pharmaceutical companies, "high tech" companies and companies involved in the "green economy", 150% for companies involved in significant R&D. etc. etc.
5.
The Corporation Tax Rate that will apply to companies in the EZ and other tax considerations.
Rather than chasing the Celtic Tiger dream with a universal lower rate of corporation tax, we feel the utilisation of targeted allowances and reliefs (such as enhanced rates of capital allowances or R&D tax relief) would provide the necessary incentive without attracting myopic investors intent on tax migration.
6.
A statement on the implementation of a simplified planning regime applicable to the EZ
We would appreciate a reduction in planning bureaucracy and administration and welcome a fast-track system for planning consent.
7.
A statement of the length of time that the EZ will run for
Up until now, UK Enterprise Zones have run for a fixed period of 10 years. However, we believe that it would be very difficult to achieve the objectives that the Government are attempting to achieve in this relatively short space of time and we consider that a more realistic time frame might be 15 years.
8.
A statement on whether or not Business Rates "holidays" might apply within the zone
Considering the pressures currently experienced by local councils and the requirement for sustained investment in infrastructure, we believe a business rates holiday should only be implemented for the smallest of entities.
9.
Anti-avoidance provisions
The Enterprise Zone should include tapered claw-back provisions which would be enforceable if an entity removes the investment during the time of the EZ.
We would recommend tightening of UK-UK transfer pricing regulations to prevent spurious profit-shifting from entities seeking only to reduce head-office taxation liabilities.
5.0 Previous Enterprise Zones in NI
It is our opinion that previous EZs in Northern Ireland achieved some success in stimulating investment in the areas that were targeted. However, they were too "area specific" and open to abuse for those wishing primarily to shelter tax liabilities (see 6.1 below). Furthermore, they were operating during "the Troubles" and so it is difficult to be objective about how successful they really were because of the extreme anti-investment negative effect of the conflict.
6.0 What can we learn from initiatives to stimulate Enterprise in other Countries?
6.1 EZs are generally recognised as providing a stimulus for investment in various jurisdictions throughout the world. They were modelled on the original concept introduced by Geoffrey Howe in 1978. There are (or were) a number of EZs throughout the world (in the USA in particular). However, we highlight below our main concern with EZs and one which must be addressed in the implementation of an EZ for NI.
6.2 We believe that one of the worst features of the 100% tax allowance available for investors in geographically specific Enterprise Zones throughout the UK and the ROI was speculative property investment by investors looking only to shelter tax liabilities. This led to property prices rising to levels significantly higher than market value of similar properties outside the EZ which, in the long term, is not sustainable and leads to wealthy individuals and companies not contributing the levels of taxation to the Treasury that they would otherwise have to.
6.3 We would go as far as to say that EZs and similar property based tax sheltering schemes in the ROI were in part responsible for the property bubble and its subsequent bursting which has ultimately put the ROI economy in such a currently perilous state. Indeed, the ROI has now introduced restrictions on the levels of income that can be sheltered against tax in this way.
6.4 Whilst we believe that encouraging speculative property development and a property owning landlord sector is a key feature of making an Enterprise Zone work, we feel that allowing "armchair" high nett worth investors to directly avail themselves of the same levels of EZ tax relief as a foreign direct investor for example would be a mistake and should be avoided. We have further more detailed opinions on how this could be addressed but this is beyond the scope of this consultation.
7.0 Conclusions
7.1 We consider that a comprehensive series of measures all included under the banner of an Enterprise Zone would be a very positive incentive for inward investors. From our own client base, we are aware of many companies and institutional investors that would find such a series of measures highly attractive and would put Northern Ireland on their list of targeted geographic areas to invest in.
7.2 We believe that there are enough individuals in Northern Ireland who want to see it flourish and who have the entrepreneurial leadership to grasp this opportunity to move away from a society being propped up by the public sector and towards one where a culture of private sector led economic growth becomes the norm. We strongly recommend that serious consideration is given to making sure that Northern Ireland gains Enterprise Zone status as soon as possible to both kick start this project and ensure that the cost to The Treasury is kept to a minimum.
21 January 2011
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