Corporation Tax - Northern Ireland Affairs Committee Contents

Examination of Witnesses (Questions 294-342)

Q294 Chair: Thank you very much for joining us this afternoon. Could I perhaps ask you very briefly to introduce yourselves? Tell us a little bit about your work, and then perhaps we could ask a few questions.

Ken Redpath: My name's Ken Redpath. I'm the current Chairman of the Belfast City Branch of the FSB. I've been a member of the FSB for 12 years and, naturally, I'm a small business owner.

Roger Pollen: I'm Roger Pollen. I am Head of External Affairs, so I'm the senior staff member for Northern Ireland for the Federation of Small Businesses there.

Q295 Chair: As you know, we're conducting an inquiry into the different levels of corporation tax in the UK and Ireland, and the impact that may be having on Northern Ireland. We're delighted to welcome you here so that we can get your opinions. Perhaps I could start; I understand that you generally do support a reduction in the rate of corporation tax to benefit Northern Ireland. Why in particular, if it's not too obvious a question, are you pressing for that?

Roger Pollen: The benefits of a low­tax economy are well known. We haven't surveyed our members yet specifically on corporation tax in Northern Ireland, or we haven't got the results of that. Currently, we have a survey going out to all 8,000 members; it will be going out this week, but it's also gone out to about half of them electronically. The initial results that are coming back from that show that a significant majority are in favour of a reduction in corporation tax.

Q296 Chair: That's a fairly early assessment, is it?

Roger Pollen: We haven't gone out to detailed survey to date, because the issue of what questions we would be asking is such an undefined area. You could ask in general terms, "Are you in favour of a reduction?" but it's the detail that lies behind that that's more interesting. To a certain extent, we're watching how the debate evolves, but I think it's fair to say that the membership as a whole recognises that a low­tax economy would be much better for a business to operate in.

Ken Redpath: The initial feedback at the moment from our members is that 63% would be in favour of a lower corporation tax. In Northern Ireland, we have approached an abyss, in some respect, and we have to do something dramatic—maybe that's too strong a word—to rebalance the economy in Northern Ireland. As you know, we have been too reliant on the public purse, and something radical has to be done to try to rebalance this. Obviously, with the cut in public expenditure that is looming, a certain sector of people from the public service are going to have to be reemployed in the private sector, and the private sector at the moment would not have that capacity to do that without some boost from Government. Lower corporation tax could be seen as a way of providing that boost to get the economy moving and to take up the slack from the public service.

Roger Pollen: One of the other reasons that there's general favour for it is that where you get corporation tax relief, it can affect anybody who's making a profit under that regime. If you try to assist by giving grants, there will inevitably be a lot of people who don't find themselves eligible in some ways, so that's a much more targeted approach. Obviously, where you have a target, you have a lot of things that don't get hit by it, so corporation tax is a way of creating an environment in which anybody who is making profit can benefit from it.

Q297 Chair: Sorry, I should have asked this at the beginning: could you just remind us what size of business your organisation would cover?

Roger Pollen: We cover micro, small and medium size, medium size covering up to about 250 employees. As you know, in Northern Ireland there are very few firms that are up to that size, so the vast majority of ours would be micro-businesses, which is 10 employees and under.

Q298 Gavin Williamson: I thank you, as the Chair did, for coming along here today. If there is a lower rate on corporation tax, because of European rules, there'd be a reduction in the amount of money that would go to the Executive in Northern Ireland, so there'd be less money for the Government in Northern Ireland to spend. Do you think the benefits of low corporation tax will outweigh the loss in additional revenue and public expenditure?

Ken Redpath: Yes, I do, actually. It may take some time for that to actually show, because a lot of mechanisms would have to be put in place, but on the loss of the block grant, coming in to equal that, we are hoping, and I think there are statistics to prove it, that we would see a gain in business activity; people would have more money and companies would hopefully have more money to employ extra people and invest, so it would help to stimulate small businesses to create a shortfall.

Q299 Gavin Williamson: How long do you think it would take for that sort of benefit to start to be fed through into the economy?

Ken Redpath: That on its own could take a year or two. I wouldn't say it would be immediate.

Roger Pollen: As I understood it—I ask for your guidance on this—I wasn't aware that it would be a reduction in the block grant. I understood that it would be a repayment of the loss of corporation tax. Are you suggesting that the grant itself would be shrunk first?

Gavin Williamson: Yes.

Chair: It's something that we have yet to look into in more detail, but that's as we understand it at the moment.

Roger Pollen: What's interesting from our perspective is that the block grant, the settlement if you like, has been regarded as being sufficient to perpetuate the status quo. Okay, the block grant is being shrunk across the various devolved territories proportionally to the reductions in spending here, but if you're looking for a game changer, that has to come outside of just the status quo. In some way, if you're looking to create a taxation environment and a business environment that will get a transformation from where we have been for a long time, which has been unsustainable, to where, over time, the Chancellor wants to see us go—and the Secretary of State, yourselves and so on—there has to be some additional aspect to how that will be approached, rather than simply saying, "Well, we must get this game changed within the current shrinking resources."

Q300 Lady Hermon: I wonder whether I could just ask what evidence you could give to the Committee this afternoon that a reduction in corporation tax would create jobs. What evidence is there that reducing corporation tax guarantees jobs?

Ken Redpath: We can only relate possibly to the Republic of Ireland and how it's transformed their economy over the last number of years.

Lady Hermon: Yes?

Ken Redpath: Yes, because that's the only example you really have directly.

Lady Hermon: Under present circumstances, I'm not sure—

Ken Redpath: I'm basically talking historically. None of the big multinationals, the American companies, have suddenly decided today to up and leave. They're staying on in the Republic of Ireland, are they not? Or it appears that they're staying on in the Republic of Ireland.

Lady Hermon: Not all of them.

Ken Redpath: There are some; I appreciate there may be other reasons as well why they may be leaving the Republic of Ireland. I think they're going to retain the vast majority of the multinational investment that they have in the Republic of Ireland. The reason they're going to continue that is because of the low rate of corporation tax.

Q301 Lady Hermon: May I just ask, then, when you're surveying your members—you haven't already done so in detail—will it be possible for you to ask your membership if it is their intention, if corporation tax is reduced, to recruit and to commit themselves to recruit some people? It seems to me that in your evidence you have advocated a reduction in the public purse, and taxpayers pay for a lot of business activity in Northern Ireland. Could you commit yourselves to asking in the survey if small businesses would actually recruit more people?

Roger Pollen: There are a number of issues to unpack here. One of them is that, looking back to the Republic again, I think it can't be challenged that the reduction in corporation tax did transform the economy there. What happened after that was due to other circumstances—regulation, lack of regulation and controls and so on. We've seen that in lots of economies around the world, not just in the Republic. In terms of the importance of the reduction of corporation tax in reviving the economy there over the last 20 years, it was a game changer there, to use that phrase again.

In terms of asking businesses to commit into the future, looking at the statistics, there are about 38,000 small businesses in Northern Ireland that have employees. There are lots of businesses that don't have employees or that are sole traders. There are about 38,000. If you could create the circumstances in which each of them would take on one employee, you can then quite easily see how that sits alongside the 56,000 or so claimants at the moment. It would be dramatically helpful in rebalancing things and so on. To look ahead and say you can get a projection or you can get a commitment from small businesses to create new employment is pretty much impossible. You've got to create an environment and a climate in which they can operate and then see what follows from that.

Ken Redpath: As you know, I am a small businessman. I am incorporated and I do pay corporation tax, I'm glad to say, so how would I treat a reduction in corporation tax? Obviously there would be more liquidity in the company. It would incentivise me to invest and probably to take on extra staff, so there would be that influence.

Q302 Gavin Williamson: Mr Pollen, we touched on, and you questioned me a little bit about, where the money would come from. According to what's called the Azores judgment, if, let's say, the cost of reducing corporation tax was hypothetically £150 million, that would effectively have to come out of the budget of Northern Ireland, to the value of £150 million. Do you think that would be a worthwhile trade­off? Secondly, if you were playing Chancellor of the Exchequer, and bearing in mind that obviously the amount you cut off corporation tax would have to be balanced off, in terms of paying for it, what sort of rate would you be interested in setting?

Roger Pollen: That's specifically what we haven't yet asked our members—those rates. The obvious one that a lot of people are referring to is 12.5%, because that's what the nearest neighbour is and that would be having a whole­island approach. Another argument would be, in business, do you just try to match your competitor, or do you try to beat them? That's another approach, and I think that's a debate that the Assembly would then want to take on board. I think the first principle is for the Assembly to have the powers to get the debate moving further; I think that's what we're really focusing on here. I don't think the reduction in corporation tax on its own is sufficient. That is the one that will work probably on an international basis, in terms of foreign direct investment. That's the attractive carrot, but it's the whole package of other measures that will go alongside it. Streamlining of the planning system, for example, is within devolved powers but it's a key element to improving the business environment in Northern Ireland, but it's one of half a dozen that we could reel off that our members have identified as being of key importance to them, alongside corporation tax—it is not one or the other.

Chair: I think we're probably going to come to those issues in a moment.

Q303 David Simpson: Roger and Ken, you're very welcome to the Committee. We're all well aware of the Varney Report and, to quote the figure that Sir David Varney has mentioned, he said that there would be a £300 million tax revenue shortfall. He also criticised or questioned the ERINI methodology and suggested the increase in foreign investment was overplayed because of the corporation issue. He said also that a clear and unambiguous case for a 12.5% rate of corporation tax cannot be met. Also, the Northern Ireland Economic Reform Group has said that it is "without exaggeration, the only means we know of comprehensively changing the economic environment, within a timescale of years rather than decades", so we have two organisations at odds with each other.

You will be very much aware of the figure that we're talking about—£300 million or £250 million. That will come out of the block grant; there's no question of that. That has been made very clear. I'm a businessman in Northern Ireland myself; I wear two hats. As a businessman, I would like to see corporation tax being lowered, but as a politician, I'm responsible to a whole constituency of business people. I have to be sure that we're over all the humps. In asking John Simpson, the economist, at the last meeting where he would put corporation tax on a blank sheet of paper from one to 10, he said seven; there's a lot more important things from one to seven that we need to achieve before we get to corporation tax.

The Manufacturing Focus Group was a fantastic organisation; it managed to squeeze the Executive to cap the rates at 30% for manufacturing. How would your organisation feel if, in order to fill the gap of £300 million, the business and commercial rates had to go up to fill that gap? Remember this: you did say that the majority of your businesses were small micro-businesses. I'm only suggesting this, but if the commercial rates of companies and small businesses had to go up to fill that gap, what would they feel about that?

Roger Pollen: You're robbing Peter to pay Paul, and you're not going to get a game changer, so what's the point?

Q304 David Simpson: As business people—and I'm only asking the question and trying to tease answers out; that's the whole idea of this Committee—what would you suggest?

Lady Hermon: In other words, what you're really asking—forgive me for paraphrasing—is this: on a scale from one to 10, where would you put corporation tax?

David Simpson: That's correct. It's the same question as was put to John Simpson.

Lady Hermon: How important is it really to the Federation that you represent?

Ken Redpath: It is an important factor. There are many issues, as you know, at the moment.

Q305 David Simpson: To you, Ken, it's an important factor, because you've said, "I pay corporate tax," but is it important to somebody on the high street who is a smaller business who is not in that position? I'm not trying to be smart in saying this. I'm trying to tease it out.

Roger Pollen: I absolutely understand that. I think what we're looking at here, with respect, is that to put it at point seven on a scale of one to 10 is simplifying an argument that is much more complex than that. The majority of small businesses in Northern Ireland are not currently incorporated; that's one factor. If you were doing something that was going to bring in a lot of increased foreign direct investment, as the Irish Republic did, the small business sector will benefit enormously from that—all of the supply services and so on that go along with that. By making one change that doesn't directly affect that sector, it will indirectly affect it enormously. I don't think you can simplistically put on a graph a point at which you say, "That's less important than these others," because ideally you are looking at a much more comprehensive mix of solutions.

Q306 David Simpson: What you're saying is that you don't believe that the small business, micro-businesses, should be penalised for the sake of the larger companies.

Roger Pollen: Definitely not.

Q307 Oliver Colvile: Can I get some basic facts and figures? You have around about 8,000 members.

Roger Pollen: Yes, in Northern Ireland.

Q308 Oliver Colvile: How many of those are actually incorporated and how many of them are limited companies?

Ken Redpath: I would say that most are not incorporated.

Q309 Oliver Colvile: What are we talking about—90% not incorporated?

Roger Pollen: No, the majority are unincorporated, but it's probably 60/40.

Q310 Oliver Colvile: I have to declare a slight interest here, in that I'm a member of the Federation of Small Businesses. I'm also a member of the Institute of Directors as well.

Lady Hermon: Someone's wearing two hats as well.

Ken Redpath: And you pay your fees?

Q311 Oliver Colvile: Don't worry, I pay my dues. I've just had my card through from the IoD yesterday. It's all up to date and everything like that. What I was going to ask you is this: when I made the decision, for a whole series of different reasons, that I had to end up setting up a limited company, it was because of two reasons. One is because the then Government introduced a 10% rate of corporation tax, which encouraged us all to go in and do that. It was a very effective way of running one's tax liability stuff, and I think that was very interesting. Subsequently, when it went up, and up to the level it is at now, that became less attractive. I can understand why HMRC or the Inland Revenue were interested in doing it: it made it easier to put the foot on the ball and make sure it didn't go very far, and it was much more easily identifiable. Have you found that the whole process has had a knock­on effect in Northern Ireland as well?

Ken Redpath: Yes. Some years ago, corporation tax under Chancellor Brown meant that the first £10,000 of profits were not taxable, so there was a rush to form limited companies at that particular time, so that people could avail themselves of it. One of the reasons the Chancellor went for that was to get as many people as possible or as many businesses as possible recorded as limited companies, so that he could have more control over them. I think in some respects this could also happen on this occasion; you would get a lot more control, maybe, over companies if there are more incorporated because of corporation tax, if that's what you're getting at.

Q312 Oliver Colvile: Yes. I assume the other thing that would happen is that there would be a shift by those people who are paying a certain amount of tax as sole traders to become incorporated. That would increase the incorporated part of the tax take and reduce those people who are self­employed.

Ken Redpath: Yes.

Q313 Oliver Colvile: Do you think that this campaign, which has been very effectively run, to lower corporation tax is principally aimed at the multinationals and trying to attract them into Northern Ireland?

Ken Redpath: Initially, yes, because by attracting the multinationals, there are many knock­on effects with other services, which a smaller business community can feed off.

Q314 Oliver Colvile: So encouraging more multinationals to come in has been a success for the small-business movement within Northern Ireland, because they have been able to have, for want of a better expression—it may sound incredibly rude—the crumbs off the table or the bits of things that come down, and that's cascaded down?

Ken Redpath: Yes. The more multinationals you have, you expect more trading to be done entirely within Northern Ireland, through services, supply of goods, engineering, et cetera. There will be a spin­off from that, I would say, yes.

Q315 Mel Stride: Welcome to the Committee. Just following on from what Oliver Colvile was saying, if you look at the Northern Ireland business economy, it's largely made up, in terms of numbers at least, of small businesses, the kind of organisations that you represent. If you look at the profit profile of those smaller companies, I'm assuming you're likely to see a smallish proportion that do extremely well, but a large number that are kind of doing okay and making small profits. Then we look at lowering corporation tax and we look at where the impact is going to be felt. It would, under that scenario, largely be of benefit to the larger companies—the utilities, et cetera—and of far less benefit to the small organisations that you're representing. Will it follow that, in a sense, the smaller companies are disadvantaged by using money in this form—that is, by lowering headline rates of corporation tax? What perhaps we should be looking at is more payroll taxes, particularly if we want to encourage employment.

The other part of my question would be another downside that has been put to us as a Committee in terms of lowering corporation tax, which is the so­called deadweight effect. While we're trying to use that as a mechanism for bringing in FDI, the reality is, under EU state aid regulations, it has to apply to everybody, and therefore it's not just those who are bringing in that benefit but the existing companies that get a windfall gain. I'd really value your comments on those two issues, please.

Roger Pollen: I think that the expectation would be that those indigenous smaller companies that get a windfall gain, as you put it—effectively an unexpected investment in them by the Executive—would be much more likely to go on and increase their employment, take on additional employees and expand their businesses. That's been the general finding, or there has been survey work that has suggested that people would take on additional employees if the costs of doing so were reduced. One of the ways of reducing them would be to take less tax off them; there are others, such as national insurance holidays, that are worth considering.

To go back to this question about the stated aims of trying to rebalance Northern Ireland's economy, if you try to do it within the existing resources and you try to do an element of it by increasing taxes there, whether it's through rates or whether it's through payroll tax, or whatever else, and you try to take more money out of the existing system to try to pay for improving it, it's very unlikely to succeed. There's a rebalancing that needs to be done. The vast majority of businesses in Northern Ireland are very small businesses, which shows there's a lack of large businesses. One of the objectives has to be to try to develop or attract more large businesses, so that you have a better balance across the economy, because it's those large businesses to which a lot of other smaller businesses will provide goods and services. It has to be something that will change the balance that's there at the moment.

Q316 Mel Stride: Just on that point, your argument for lowering corporation tax would be more to do with attracting larger companies in and changing that element of the mix than encouraging and sustaining the small business community that you represent; would that be right?

Ken Redpath: They would indirectly be sustained by that action. By encouraging larger companies, it would feed down the chain to small businesses, stimulating them to create profit, and maybe bringing more of them into the corporation tax net than were there before.

Q317 Mel Stride: Can I quickly switch to Invest NI for a moment? Do you feel that they are adept at encouraging entrepreneurship and new small business start­ups in Northern Ireland?

Roger Pollen: About 6,000 new businesses start up each year in Northern Ireland. If you look at them, measuring them after three years and after five years, there's the highest survival rate of small businesses in Northern Ireland anywhere in the UK. There's clearly something about the environment or the support that's offered in that environment that is succeeding better there than elsewhere. Surely then the objective has to be to move that from 6,000 to 9,000, or to increase it in any case. If there's a proven track record of being able to sustain that establishment of businesses in the longer term, then that's an area to focus on. Invest NI, I think, have been very good at offering a lot of support through various resources—websites, information and so on—that I know a lot of small businesses avail themselves of, so I think they have been good. Could they be better, is that the question?

Q318 Mel Stride: Specifically, with the independent review of economic policy that's just come through, do you think there have been any improvements recently as a consequence of that?

Roger Pollen: One of the things that are coming back to us from a lot of small businesses is that there are over 200 sources of business advice for small enterprises in Northern Ireland. Now that's confusing. 200 places you can go to get advice if you're running a small business or want to set one up. In one of our surveys recently, we asked how useful it would be if a small advice business centre, with trained staff who could provide business advice and refer people to other agencies, were to be established. Now, I accept these results are still to be finally analysed, but 73% have indicated that that would be either quite useful or very useful to them. In other words, there should be a much smaller array of sources of quality information and advice than currently exists. I think there is an opportunity and a need to sharpen up the advisory environment that's there.

Ken Redpath: There are too many. There are local councils, local enterprise agencies, Invest NI and others. It is confusing for the average man on the street to know exactly where to go. They think, "I'll go to Invest NI," only to be thrown down the chain again, so there needs to be a refocusing slightly of that by Invest NI. To date, yes, they have done a good job and they've brought some very high­profile jobs to Northern Ireland, Citibank being one of them recently. They've increased their number substantially. They're focusing now on bringing better high­value jobs to Northern Ireland, which will pay better wages. Some of the call centres in the past, of course, have been low wage, and it hasn't necessarily helped the economy in Northern Ireland, because we want higher wage earners.

Q319 Naomi Long: It's good to have you at the Committee. A number of Members have already touched on the issue of windfall gains and the potential that has to be a bone of contention in reducing corporation tax. There would be companies that, doing nothing differently from what they're doing today, would end up gaining from that. In particular, for example, the banks and some of the large utilities could make a windfall gain from a reduction in corporation tax, without any step change in their delivery or job creation activity. In probing this with the Finance Minister and indeed with a number of the economists who have given evidence, most people seem to agree that this would have to be applied uniformly and there would be very few options for clawback. It would be a cost that would have to be borne. How would you and your members feel about that?

Roger Pollen: I think asking members how they feel about banks is a big subject on which we could spend quite a lot of time, and it may take us on to another area of interest within this discussion.

Chair: It's not part of your survey, then.

Roger Pollen: It is, actually; we just haven't got the answers yet. The issues haven't yet been fully explained to the small business sector sufficiently well for us to be able to go out and get a satisfactory view from them. There would be great concern obviously if, on the one hand, the banks appear to be making lending very difficult to the small business sector and, on the other hand, are being subsidised by the Executive. That is, to be honest, a detail that will emerge, I suspect, once we get some information coming forward on how this process might actually be able to be applied in practice. At the moment, we're commenting in the absence of hard facts. As you say, there are a lot of views on it.

Q320 Naomi Long: I have to say that all the views would agree that it would have to be applied uniformly. It couldn't be applied differentially between existing and new business, for example; it would have to be applied to all businesses that were liable for corporation tax. I'm raising the issue specifically because I'm aware of the difficulties that many small businesses are having in terms of being able to access lending and so on, particularly in what is a very constricted banking market in Northern Ireland. It's just that the banks could be a major beneficiary of the reduction in corporation tax, as could some of the large utilities, but without having to create more employment or have any other strings attached, in terms of, for example, assisting small business. Foreign direct investment does, if you like, have a trickle­down effect to small business and does have a knock­on effect, but that wouldn't necessarily be the case in those two sectors. I just wanted to probe whether your members had given that consideration.

Ken Redpath: We don't have an answer at the moment, because we haven't raised the question. Some of the big utilities probably do mitigate their tax anyway, by moving offshore and things like that. Maybe the Exchequer is losing some tax at the moment, which maybe they could get the utilities paying, keeping all their tax in Northern Ireland.

Roger Pollen: The question in some ways would surely be: is it worth the advantages to all of the rest of the economy and the sector to deny the banks that opportunity? In other words, you think it would be good to stop the banks getting that benefit, but the cost of stopping them getting it is actually damaging to the rest of the sector that you're trying to sustain. It might then fall to the Executive to try to look at other opportunities for drawing in additional revenue from the banks and utilities that have benefited from this, keeping the playing field level on corporation tax, but finding other ways of making them contribute better. Ultimately you would also have to say that a healthy banking sector is good for business. I appreciate the point you're making about their not being able to attach strings to it, but a healthy banking sector is essential because, at the moment, we're not seeing a healthy banking sector and businesses are suffering as a result of it.

Q321 Naomi Long: Just to explore further, in terms of job creation, Ken, you mentioned that it would create liquidity in your business and you would therefore be more predisposed to expansion, job creation and so on. In the FSB survey of members—the published version that we have—it was mentioned that in Northern Ireland people actually expect to employ fewer staff in 12 months' time than they did at the point when the survey was taken, as opposed to the rest of the UK, where people were detecting the opportunity for recovery. Would something like a change in corporation tax and so on offset that, or would it do more than that? Would it potentially be an incentive to drive the recovery forward?

Ken Redpath: Yes, a lot of the small businesses, as you say, probably are marginal. In these economic times, they are talking this way. I think it's the general talk; everybody's talking about reducing costs, reducing staff. If they were able to retain some extra profit in their business, as I said before, I think it would help incentivise them to think about not talking it down but possibly talking it up for a change. There is a lot of talking things down at the moment, and we have to get a bit away from that sort of mindset and give a stimulus to people talking up for a change. We have to be more positive, which may come with a change in corporation tax. Most small businesses I hope would employ extra staff if they did get a change in the corporation tax, because they would have something more to play with in their business. If there's something else added along with that—I don't know whether they could tinker a wee bit with NIC or something else—that would give them that stimulus, maybe to create that extra job, instead of reducing a job.

Q322 Naomi Long: Just to explore that one step further very briefly, a number of the people who have given evidence have suggested that, whilst corporation tax may be beneficial, it is not a silver bullet to resolve all the problems in the Northern Ireland economy. Given that that's the case, most people are saying that it would be useful as part of a package of measures. Given that you represent small and medium­sized enterprises, which are predominantly the businesses in Northern Ireland, what other measures would you want? You mentioned planning already as one area where you would want to see reform but, if you were to make up the package, what else would be in it, in addition to planning and corporation tax? [Interruption.]

Roger Pollen: I'm sorry.

Kate Hoey: Small businesses can never turn their phones off.

Roger Pollen: I actually did; it's obviously very important. Apologies for that. Beyond corporation tax, there are other bits we've touched on—other tax breaks such as rates relief and flexible capital allowances. The Assembly's already introduced a small businesses rates relief programme. We'd like to see that go much further. That's been helpful, but I think it could be extended and could deliver more. Looking at the early results of the current survey that's going out—I think it was the 2009 one you referred to—58% of members are saying that they would like to see savings on employment costs, and national insurance holidays. What we haven't looked at yet is whether there is scope for considering that in a way of driving a degree of social change, so that you get actual direct subsidy to get to people who have been long­term unemployed and so on, and use small businesses to target that and treat that as a separate entity, not unrelated to the enterprise zone ideas. We touched on planning regulations. Assistance with staff recruitment is one thing that comes back as being something that small businesses would like, and assistance with employee training is another. If you've got a small business and you need to put in place training programmes for your employees to upskill them and to allow your business to perform better, the difficulty of doing that yourself can be quite significant.

Ken Redpath: I agree that corporation tax solely on its own is not the magic bullet. It can be the headline to encourage other lesser but beneficial things to happen, as Roger was telling you, on planning, possibly NIC and other associated things that would help business stimulate business on a day-to-day basis. But, yes, it's not the top thing, and it is not that if we don't get that it's the end of the world, but it is a big, big help.

Roger Pollen: The other thing that is coming back from the early results of that survey is research and development incentives. That's somewhere where Northern Ireland recently has been performing well. I think 2009 recorded the highest ever R and D spend, up 40% in cash terms. That shows what tax policy harnessed to effective and targeted Government action can do to drive beneficial change. A lot of companies in Northern Ireland are well placed to capitalise on that. Coming back to Invest NI support, there's a good basis in terms of the science park, universities and so on like that. Again, finding a way of putting direct and meaningful change in there would be very helpful.

Q323 Kate Hoey: I'm a great supporter of the Federation of Small Businesses right across the UK, and you're obviously affiliated to the overall national Federation. As a London MP who's got lots of businesses, some of them in great difficulty, how would you feel, as part of that national organisation, if Northern Ireland were to be treated differently? I have a lot of constituents who already think Northern Ireland gets far too much support. How would you feel if, in the end, Northern Ireland ended up with a much lower corporation tax than the rest of the United Kingdom?

Roger Pollen: I think that we would be delighted; however, we would see it hopefully as a pilot, so that if it succeeds there, it might be reversed back to where the rest of our membership is active. I know we had beneficial treatment in terms of the national insurance contributions holiday that was announced in the Budget in June, which was done on a regional basis; Northern Ireland was one of the beneficiaries, but other places weren't. The FSB's approach was very much that this was discriminating against the businesses in the areas that weren't being targeted. It would always be our approach that it's a UK­wide organisation representing UK­wide businesses that are trying to operate within that environment. On our border, we have the Republic of Ireland, which has a different tax regime, and that is probably why we're feeling the pain of that much more acutely than mainland GB. It's because, within a few miles, there's somebody who's operating under a more beneficial tax regime. I think there's a reason for that. If people are suggesting that we've already had far too much—I know that that's a comment that has been made—

Kate Hoey: I wasn't saying I shared that view.

Roger Pollen: I appreciate that. If that were the case, why hasn't it worked? Why do we need additional assistance? Why do we need some degree of "special treatment" at the moment? I think it's because the circumstances that we have endured for 40 years have created an environment, in which we now find ourselves, with the private sector out of balance with the public sector and within itself. The lack of large businesses there means that there is some need for an external force to come in to change the dynamic. After that, we're totally confident that private business and private enterprise will take up the slack, but it needs an external force to allow that change to happen.

Q324 Kate Hoey: So you'd just see it as a temporary two­year measure, or three­year measure?

Roger Pollen: No, definitely not. I've spoken to industrialists elsewhere, outside of Northern Ireland, and said, "Look, we are considering a reduction in corporation tax here; it's within the political discussions. Were we to do that, what would that mean to your company? Would you consider coming here, and if not, why not?" The answer has come back loud and clear that if there was anything that suggested it was other than a long­term commitment, they just wouldn't entertain it. It has to have stability and that's why it has to have a degree of cross­party support, and support that takes it beyond the turn of a single Assembly. It has to be seen to be a structural change.

Ken Redpath: Any large organisation coming into Northern Ireland would be investing as well. They're not going to put investment in unless it's going to be seen as more permanent.

Q325 Lady Hermon: To quote a phrase that you've used on a number of occasions, Mr Pollen, you see a need for rebalancing the economy in Northern Ireland. Can I just ask both of you whether you really think in your conscience it is fair and equitable to reduce corporation tax for the benefit of reducing tax on profits of very large businesses in Northern Ireland, at the expense of somewhere in the region of £300 million coming out of the block grant to be spent on schools, hospitals, aftercare, and looking after the elderly? Is that, in your mind and in your conscience, fair and equitable? How would you explain that to the people of Northern Ireland?

Roger Pollen: The FSB doesn't have a collective conscience. Are you asking me personally?

Q326 Lady Hermon: Yes, I am asking you personally. Explain it to us as a Committee. I find it very difficult to reconcile the fact that we will be advocating a reduction of corporation tax to benefit large businesses, many of them not members of your federation at all, at the expense of the budget for hospitals and education.

Roger Pollen: I'm honestly not being flippant when I say that. Your penultimate point is interesting: that many of them are not our members. The very fact that we're advocating it for people who are not our members indicates the conviction we have that this is the right thing to do for the economy of Northern Ireland. We are sitting in Northern Ireland with hospitals built in South Down, where the accident and emergency can't be staffed full time because there isn't the resource there to do it. I take your point—your suggestion is that there are even more resource now going to be taken away to sustain business.

If you look at how you're going to change the environment in the longer term, you have to have more money coming in, generated within Northern Ireland. Once you get into that situation, then you can do more and deliver more services. Until you get to that point, you cannot continue, and it has been made clear to us that we cannot continue with a subsidy culture, where we are dependent on a block grant, and where we aren't capable of generating the revenues that we need to play our part.

Chair:Sylvia, have you finished?

Lady Hermon: I would like to hear from Mr Redpath. He, too, has a conscience, I'm sure.

Ken Redpath: I have a conscience, I assure you. On the face of what you say, yes, you would think that's a bad thing to do—

Q327 Lady Hermon: Sorry to intervene. You're the witness, and I'm sorry to repeat the question. I just think that one of the points that has come through on a number of occasions, when you've responded to questions from Naomi Long, for example, was that the point hadn't really been made when you were surveying your members. A number of points, a number of details and the outworking of the reduced corporation tax hadn't actually been put to your members. Am I right in that?

Roger Pollen: That's still an ongoing exercise.

Lady Hermon: To add to that list, I would hope that, when you're surveying your members, you actually explain to them what the knock­on effect for the block grant to Northern Ireland will mean for wives, families and the vast majority of people in Northern Ireland who are not in a business—that there will be a corresponding reduction in the block grant to be expended on schools and hospitals.

Roger Pollen: With respect, when we survey our members we put facts in front of them and we put questions to which we want the answers to help inform the discussion. That would be a subjective judgment that you've suggested we should put to them—that in order to achieve one, we should have the other. You're saying, "The effect of that would be to create this," and I think that's speculation. I think that the whole point of this session and these sessions that you've been having is that there's no settled will as to what the direct impact of this would be. There will be a period of change, as there always is when taxation policy changes, but you cannot necessarily extrapolate out how that's going to impact and over what period.

Q328 Lady Hermon: Just to repeat a point that was made by Mr Williamson here to my right—he was absolutely right to do so—that, according to the evidence we've already taken, the Azores judgment in Europe will mean that, if there is a reduction in any region of the United Kingdom or a member state of corporation tax, there must be an equivalent reduction in the block grant, otherwise it is an unlawful state aid. The impact from day one, if corporation tax were to be reduced by the Assembly—as we heard yesterday from the Secretary of State—would be a corresponding cut in the block grant. That is a fact. That is not subjective opinion. That is not my expression or my conscience talking. That is a fact. Am I right, Mr Williamson?

Gavin Williamson: You're absolutely spot on.

Chair: Before we go too far down this road, what you're saying, without answering the question for you, is that that may reverse over five or 10 years.

Ken Redpath: That, hopefully, is what the statistics will show us—that over a period of time, it will be reversed.

Q329 Oliver Colvile: At the very beginning, you agreed that you would welcome a low­tax economy; you think that would be a good thing. Has anybody done any modelling to work out how much more money may come out of a low­tax economy, especially with corporation tax? Have you any idea? I'll give you an example, and I banged on about this, I have to say, during the course of the last month or so. I watched a television programme on Channel 4 that talked about Hong Kong and how it had reduced taxation quite significantly. Almost immediately they had seen a very significant growth in tax take as far as the revenue is concerned. Have you any idea as to whether that might happen here and how that would work and, indeed, how much extra? The other thing is how quickly you think that there would be a stimulus to grow business within Northern Ireland.

Ken Redpath: It is an ongoing thing; we haven't got the answers to all these. Roger is still surveying and we're still, as an organisation, putting these things together, so I can't give you a direct answer on that. As you said yourself, in Hong Kong it was shown that reducing the corporation tax did stimulate overall growth in the economy, and the general tax intake was greater. That's an example.

Roger Pollen: Closer to home, within the Republic of Ireland, as we've said, the transformation over the decades from the '90s onward showed a vast growth in the economy by taking that decision to cut corporation tax. It's also interesting that 50% or thereabouts of the exports from the Republic of Ireland are from pharmaceutical companies alone. They're multinational companies that choose to be based there because of their corporate climate.

Q330 Mel Stride: On Sylvia's point, very quickly: on the issue of being asked to give your view as to whether it's right to lower corporation tax, because of course it has to be paid for out of the block grant and may have an effect on other areas, like health and education, I'm assuming that you are here to represent your members and your members' interests. You might argue that it would be for others—politicians such as ourselves and other people and witnesses we might have—to start to conjure with those judgments. You're here basically to promote the interests of small business. Would that be correct?

Roger Pollen: That's correct, and I don't think it's within our competence to make that kind of judgment.

Mel Stride: I just wanted to clarify that in my own mind, thank you.

Q331 Mr Benton: Just quickly, arising out of the last couple of contributions, if I understand the situation correctly, a healthier economy in Northern Ireland brought about by a reduction in corporation tax would effectively mean, if I've understood you correctly, that the hospital that you referred to, for example, would be manned, albeit that the wherewithal to man these, shall we say, defunct operations would have to come from some form of taxation. Couple that with the concerns that have been expressed about windfalls—in other words, beneficiaries being companies that do not bring an additional well-being factor to the overall economy. Now, if you couple them together, it tends to suggest that, before granting the reduction in corporation tax to any particular large or small business, maybe there should be examination of whether the business satisfies some criteria and has made a contribution to enhancing the wealth of Northern Ireland. Now, is that an impractical situation as far as small businesses are concerned?

Ken Redpath: Sorry, just to clear this up, regarding what you've just said, are you indicating that the large companies that would benefit—

Mr Benton: What I'm saying is that if the Government were disposed to say, "Yes, let's have a reduction in corporation tax in line with the Republic," that would mean that some companies would not do a hand's tap, but they would be the beneficiaries of it. This applies equally to small businesses. What I'm putting to you is, supposing the Government were minded to do this, how difficult or how unwieldy would it be to say to companies, "Look, here is the incentive if you like—reducing the corporation tax—but you show us and you indicate to us exactly, precisely, what you've done for the general enhancement of the Northern Ireland economy," through increased job opportunities and all the criteria that we've mentioned? It's just a thought, following the two previous contributions, as I said. I wondered how difficult it might be for small businesses to look at an approach like that.

Ken Redpath: Yes, you're getting at the social conscience that Lady Hermon was mentioning in relation to businesses. If they're getting the benefit, is there some indirect way that they can give back to the community in, for instance, health and manning hospitals? That sort of thing could be worked out, but would need to be gone into. I'm sure everybody's there to give good will, if they can. There's a possibility that some structure could be worked out, but it would need a lot of consultation and it would have to be worked through as a model to see if it would work. It's one of those things to explore, yes.

Q332 Mel Stride: Just to move away from the corporation tax incentive for a minute and look at the other incentives there might be here, do you think that the current incentives for R and D, skills development and perhaps IP as well are sufficiently strong in Northern Ireland at the moment, or do you think there is scope for movement there as well?

Ken Redpath: There are attractive incentives for R and D at the moment. That's been increased in recent times. The incentives are there. Of course, everything can always be improved upon. You can always tweak things a bit better where they may be failing. There's always room for improvement, but I believe overall that there are adequate incentives to do those sorts of things that you're referring to.

Q333 Mel Stride: John Simpson suggested when he came here that lowering corporation tax, for some of the reasons we've discussed this afternoon—the deadweight issue, assisting existing businesses and not necessarily therefore being used to attract new ones coming in—might not be the right way to go. What you might actually do is focus on things like R and D tax credits, et cetera, as a means of coming up with an incentive that is more likely to be appealing to those coming into Northern Ireland than to existing players, and that is more attractive to companies that might expect to have a greater propensity to produce jobs and actually employ people. He said—I'll run it by you here to see if you agree with it—that the Irish Republic might be able to say, "We have the lowest corporation tax rate of 12.5%", but if we get all these other measures sorted out, he said we might be able to say for Northern Ireland, "Come to us and we'll probably make you tax-free for five years." It's this idea of targeting using measures other than corporation tax. Do you feel that that is something that could work?

Ken Redpath: We have discussed this in the past. It's the headline that we're really after here. Those things are grey areas, if you want to put it that way, to attract companies. What's attracted multinationals to the Republic of Ireland is essentially the reduced tax rate, not R and D.

Q334 Mel Stride: I think Mr Simpson was suggesting that you'd have to move from where we are now to another place and, in that other place, you would have sufficient incentives in there to be able to say, as your shop­window statement, "Come to us and we'll probably make you tax-free for the next five years." Would that positioning do it, do you think?

Roger Pollen: I don't know how many of you sell, but I think the difficulty that certainly the First Minister and the Enterprise Minister have said they feel is that they've gone out with a very good story about Northern Ireland's economic prospects, the cost of doing business there, the educated work force, the access to universities and everything else, and they feel that the thing they are missing in their locker, to use the phrase, is the reduced rate of corporation tax to match the Republic. You have to look back over the past number of years and say that, despite all of those benefits that we have had over the Republic—lower labour costs and everything else—they have still been the ones that attracted the FDI. Therefore, it would suggest that that is still something that is needed to enable the selling to go on. I think the other package of benefits you're talking about and that John was referring to is essential as well, as part of a mix of making it succeed, but in terms of actually attracting people in, that would be a difficult sell, "We'll probably make you tax-free for five years"; it's not a strong message.

Q335 David Simpson: Gentlemen, no matter which way this works out, whether we achieve the corporation tax lowering or not, I think there's going to be an element of risk and gambling on all this, because there are going to be a lot of factors that have to dovetail in. This global economic crisis that we're going through makes it even more difficult. In relation to the point that I put earlier, on the comments of John Simpson, who said that corporation tax should be No. 7, you felt that it just wasn't that simple. When I look at the briefing notes from the Federation of Small Businesses NI Voice annual survey, out of those surveyed, 49% of the members said that the main priority to improve economic prospects was to cut business rates. Second to that was bank lending, more bank lending and lending fairly, at 41%. No. 3 was cut employers' national insurance. No. 4 was jointly held by keeping VAT at 15% and maintaining low interest rates. Joint No. 5, which is interesting, was increasing personal tax allowances and—this isn't too far away from No. 7—corporation tax. Last of all was reduced, 10% lower income tax rates; 14% surveyed said that. The FSB NI Voice has come out with a survey saying that corporation tax is sitting at No. 5 according to the members surveyed, not No. 1.

Now, I do believe, and I think Naomi hit on it, that corporation tax is part of this. As a businessman, I'm in the same position as Ken; I detest paying tax but I have to do it. I'm in the same position; we are in the position of paying tax. I do believe, personally as a businessman, there are other fiscal elements. R and D is very difficult for small companies. Small companies like ourselves are very much hands­on. It's very difficult to avail oneself of R and D, so we have to look at other fiscal proposals. I think there is a mix, a cocktail, of fiscal proposals that we can use. I do believe corporation tax is in there. I'm not convinced, personally speaking, it's No. 1 on the list.

Chair: I think that's like one of those exam questions where the last word is 'discuss'.

Roger Pollen: The first thing to say on that is I suspect that that, again, is the 2009 survey. At the time when that was commissioned, there was little or no discussion of being able to devolve corporation tax, and therefore of being able to change it in one part of the UK. Asking that question then and now will almost certainly get different answers. What's interesting is that a lot of the other elements there are still consistent with what the members are saying now. It's the package of benefits around that: it's the business rates; it's the R and D taxation rates; it's the—sorry, you've got it in front of you; I don't.

Q336 David Simpson: I could be completely wrong on this now, but whenever the Manufacturing Focus Group was involved in the Programme for Government that has been done in the Assembly—and Naomi's nodding here—I understood that at that stage corporation tax was talked about. It was on the agenda. It may not have been high up the agenda, but it was on the agenda in 2009 and well on the agenda, at that stage.

Naomi Long: 2007.

Roger Pollen: That's also a survey of FSB members in the Northern Ireland, the majority of whom are not incorporated. Looking at it from a selfless point of view, you can have one view on corporation tax—

David Simpson: Not from a conscience point of view.

Roger Pollen: In other words, they're sitting there thinking, "What in this list affects me?" It they're not incorporated, corporation tax isn't going to be No. 1 on their list. If you're saying, "What affects Northern Ireland's economy?" then it's a different question, to which you'll get a different answer.

Q337 David Simpson: If it doesn't affect them—I'll finish with this, Chairman—they would not accept the fact that they would be penalised for bigger companies getting a reduction?

Roger Pollen: What we're looking at and trying to draw out of our members and from the information available is what impact it would have on small businesses indirectly, whether they individually benefit from it or not. They will benefit from a more dynamic economy.

Q338 David Simpson: Really what you're saying is your members would not be happy with banks, utilities or newspaper magnates achieving lower corporation tax. I said that for a reason.

Chair: I think we've probably covered that.

Lady Hermon: Could I just add that in fact not all newspaper proprietors are in favour of a reduction of corporation tax?

David Simpson: That's correct.

Q339 Oliver Colvile: One of the points made in the last five or 10 minutes was how difficult it is for small and medium­sized enterprises to do research and development. That's always an issue. Would you agree that that is a problem for your members—to do R and D and to have access to it? If that is the case—tomorrow we will be having a long discussion in this place about universities and things like that—is it not an idea that small businesses could approach universities in order to get them to do some of the R and D work for them? Would that be helpful?

Roger Pollen: I may be jumping ahead; you may want to talk about what else might be in an enterprise zone.

Chair: We are looking at that next, yes.

Roger Pollen: Perhaps leading on to that, there is the issue of looking at how you can make better use of the assets we have, which of course is Lady Hermon's point in many ways as well. If you've got a finite pot, what can you do with it and how can you do more with that? This has not been researched or surveyed and, if I can add a big health warning, it's simply early work in progress, but one thing is to look at the intellectual property that has been developed within the universities there and has not yet been exploited. It has probably not yet been published. It is to see if there's a way of releasing that almost as open source, but with caveats attached to it, so that the development of it must either be done in Northern Ireland or, in some way, have a link back so that there are financial benefits to Northern Ireland. By putting it out there, people who have not been involved in the process of its development can actually start to say, "That's something we can make use of and can develop."

Oliver Colvile: If the Federation of Small Businesses would be interested in doing it on a national basis, I would be very interested, most certainly for my constituency down in Plymouth.

Q340 Naomi Long: Very briefly, you mentioned the enterprise zone. We had an interesting exchange with the Secretary of State yesterday with respect to what an enterprise zone might look like. I don't think we are any clearer as to what package of measures might be included, other than reduced corporation tax. It was interesting that David drew out of the findings of your survey that the restricted banking arrangements in Northern Ireland are a significant challenge and something you'd like tackled. The Secretary of State pretty categorically said that won't be part of the enterprise zone package yesterday, although I hope he will change his mind in light of what we said about it.

Roger Pollen: Sorry, could you clarify what he said wouldn't be part?

Naomi Long: The issue of dealing with banking in Northern Ireland specifically, and the restricted banking market, which is something that I raised in the context of it being repeatedly raised with me by small businesses, in particular, that are not able to access decent lending arrangements with local institutions. Are there other elements that you would like to see as part of an enterprise zone? Feel free to say that banking is an issue, because it would reinforce the argument that a number of us put yesterday. Are there other elements in addition to simply the corporation tax that you feel would be necessary to make an enterprise zone meaningful?

Roger Pollen: Can I cut straight to the banking one first of all, and say, yes, that ought to be considered? Certain banks are making efforts; other banks are saying that they are surprised at how few people are coming to them looking for money, and so on. The bottom line is that small businesses are having great difficulty in getting finance at the right rates. It seems to us that one of the sensible ways, if we are really going for some fresh thinking on this, within the context of the enterprise zone, is to explore the concept of Post Bank. I know FSB's called for it nationally. I think there are difficulties with that because of the arrangements with the Bank of Ireland and the finance there, but it seems to us that's another reason for suggesting that you consider Northern Ireland as a pilot and see if you could actively develop the Post Office network to provide business banking facilities at an affordable rate, and do it within the context of an enterprise zone, so as it can be treated as a pilot. That might fit in and mesh with other Government priorities to do with the Post Office but allow us to move forward, because we are part of the UK that has its own banks, but banks that are not regulated within Northern Ireland. This may be a way of introducing a new player into that game and introducing a new dynamic into business financing.

Q341 Chair: That's an interesting point. I'm sure we can look at that in our next discussions, thank you. Anybody else? Any final questions you'd like to put? Okay, it's been a very interesting discussion. Thank you very much.

Roger Pollen: Can I add just one thing, Mr Chairman? It seems to me there is a remarkable opportunity facing us at the moment. Yes, there are lots of difficulties and so on, but American policy at the moment is to repatriate American jobs to America from all parts of the world except for Northern Ireland, where their policy is to put them in there. That's a remarkable opportunity—to have the world's biggest economy very sympathetic to us and supportive of that. At the same time, you've got President Barroso from the European Commission making commitments to do special things with and for Northern Ireland. He's meeting the First Minister and Deputy First Minister tomorrow in Brussels. Add to that the fact that the Coalition Government have recognised that there is a need for a long­term structural change to move from the status quo to something more sustainable, and they're seriously considering granting taxation and other powers that no other region in the UK enjoys. Finally, consider that all five of the main parties of the Assembly are broadly in agreement that the private sector and, in particular, small businesses are central to delivering recovery. When you get that coincidence of US, European, UK and local good will and interest, it shows that there is a tide that needs to be seized. Corporation tax is almost certainly going to be central to that in some way, given that the interests are in significant part lying outside of Northern Ireland and the UK, so there is an opportunity here. I think it's quite clear that none of us have a clear idea yet as to how that might look and what it will include, but I think that we would certainly as a federation urge very strongly that you look at all the measures you can to seize that tide and to make a significant game­changing move.

Chair: I think we're in danger of provoking further discussion.

Q342 David Simpson: Roger, when you talk about the Americans and trying to get into other parts of the globe, there was an interesting comment by the New York Stock Exchange, which has moved into Belfast. It said that corporation tax was not No. 1. There were other issues ahead of it, going back to the John Simpson thing. There were skills, technology, infrastructure and the work force, all of which came before corporation tax. It was a factor, yes, of course, because they're in the South as well, but it wasn't their top priority.

Roger Pollen: If I may extend the conversation slightly, Chairman, yes, it's being looked at, but that's why we're saying that we should consider what other measures there are. If there are other measures that can be taken without stepping outside of the Azores issue, whereby there can be game­changing investment made into the other issues we talked about, such as reducing business taxes, creating more flexibility there, national insurance and so on, then obviously the small business sector is going to benefit from that as well. We aren't saying that there is a clear and obvious solution to the issues we face, but there's certainly so much good will that we need to capture. Corporation tax is very much an important part of the considerations.

Ken Redpath: I agree.

Chair: Thank you very much for coming. We have enjoyed it.

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