Conclusions and recommendations
The Northern Ireland economy
1. Largely
on account of a long period of terrorist activity, Northern Ireland's
economy has underperformed by comparison with the UK as a whole.
However, in relatively more peaceful times, taxpayers in the rest
of the UK might expect Northern Ireland to improve its economic
performance and to take steps to enable it to do so. (Paragraph
11)
2. We acknowledge
the forthcoming reduction in the ability of Invest NI to use Selective
Financial Assistance grants to attract foreign direct investment.
There is a need to develop other incentives if Invest NI is to
continue to attract foreign direct investment and bring new jobs
to Northern Ireland. (Paragraph 15)
Arguments for devolving corporation tax
3. Although
there were exceptions, the vast majority of witnesses, particularly
those involved in business, who gave evidence to the inquiry or
whom we met in Northern Ireland, argued for a reduction in the
corporation tax rate in Northern Ireland. Moreover, many of them
said that previous policies had not had the desired effect and
a significant reduction in corporation tax would be the dramatic
change that business in Northern Ireland needed. (Paragraph 20)
4. We welcome the
publication of the Treasury's consultation paper and the debate
that is taking place as to how best to support the Northern Ireland
economy. In principle, we support the devolution of the power
to vary corporation tax to the Northern Ireland Executive. However,
we understand that there will be consequences associated with
doing this and recognise that there are concerns that need to
be addressed before this can take place. (Paragraph 41)
EU rules on state aid and the Azores judgment
5. We
are confident that the proposal to devolve the power to vary corporation
tax to Northern Ireland can meet the criteria of the Azores judgment,
although it is difficult to know for certain how the ECJ would
apply the judgment in a new situation. It is essential that the
Northern Ireland Office and the Treasury seek to reduce the risk
of legal challenge through detailed and formal discussions with
the EU Commission. (Paragraph 56)
6. The Azores judgment,
and the subsequent cases, indicate that the decision for Northern
Ireland to have a rate of corporation tax, separate from the rest
of the UK, could not be taken at Westminster. The power to vary
the corporation tax rate would need to be devolved to the Northern
Ireland Executive. Northern Ireland would bear the full financial
responsibility for any reduction in tax revenue, and consequently
Northern Ireland would not be compensated from HM Treasury for
any tax loss. (Paragraph 57)
Total corporation tax revenue in Northern Ireland
7. The
Treasury urgently needs to set up a system which can accurately
assess how much corporation tax is collected in Northern Ireland.
(Paragraph 66)
Impact upon the block grant
8. The
Northern Ireland Executive needs to know how much corporation
tax is raised in Northern Ireland, how the corresponding reduction
in the block grant will be calculated, including how the block
grant is readjusted in retrospect, and how this is likely to impact
upon the total block grant and public expenditure planning now
and in the future. (Paragraph 68)
9. Any method of calculating
the reduction in the block grant must strike a balance between
many factors, most notably simplicity and accuracy. It must also
conform with EU law. The calculation of the reduction in revenue
in future years would be complicated by factors such as UK growth
and inflation assumptions, the extra business which Northern Ireland
would attract, and be adjusted according to the variations in
what we know to be a volatile source of income. Furthermore, this
may be complicated by any decision of the UK Government to increase
or reduce the block grant, or change the Barnett Formula altogether.
Any transitional arrangement would make assessing the amount of
money going to the Northern Ireland administration, and therefore
its own public expenditure planning for the next three to five
years difficult. (Paragraph 71)
10. Possibly the best
way of devolving the responsibility for setting the rates of Corporation
tax to the Northern Ireland Assembly would be for the Treasury
to calculate how much corporation tax is raised in the province;
then reduce the block grant by this amount; give the Assembly
the power to set its own rate of corporation tax; and allow the
Assembly to keep those receipts. This would provide a transparent
system which would more readily satisfy the EU, and would also
ensure that, if there were to be any increase in the corporation
tax take then the Assembly would benefit. This would be the method
of transfer we would prefer. (Paragraph 72)
11. It is essential
that the UK Government clarify whether any mechanism can be devised
that allows HM Treasury to return to Northern Ireland a share
of the revenue raised that is not corporation tax if receipts
from other taxes are reasonably clearly related to changes in
the corporation tax rate. However, it would be wrong to disguise
the complexities this would entail. (Paragraph 75)
Political support and agreement with the Northern
Ireland Executive
12. There
appears to be unity among the political parties in Northern Ireland
on the devolution of the power to vary corporation tax. The Treasury's
consultation paper makes it clear that the research that is necessary
before a decision would be taken will require considerable resources
and time, and they would be unwilling to divert these resources
unless they were confident that the Northern Ireland Executive
would use the power. It would be for the Assembly to assess the
benefit and cost of changing the corporation tax rate. (Paragraph
80)
Phasing, certainty and the final rate
13. We
conclude that in the event of the power being devolved, the important
decisions on detail, such as the rate and speed at which the rate
might be varied, would be for the Northern Ireland Executive.
From the evidence we have received, we would strongly urge the
importance of maintaining the lower rate. (Paragraph 85)
HMRC and the UK tax system
14. HMRC
has been criticised recently for its effectiveness in settling
disputes regarding corporation tax. HMRC needs to demonstrate
it has the capability to manage a mechanism for administering
different corporation tax rates within the UK. (Paragraph 90)
Burden upon business
15. We
agree that the burden on UK businesses overall must not outweigh
the gain to Northern Ireland businesses. This is made more important
by the probable time delay between lowering the corporation tax
rate in Northern Ireland and the consequent realisation of the
benefits. The Government have said they will not devolve corporation
tax to Northern Ireland if it creates an administrative burden
that outweighs the gain. We will pay close attention to the responses
to the consultation as to what kind of mechanism might be introduced.
(Paragraph 94)
Tax avoidance, tax evasion and brass plating
16. We
have heard expressions of concern about the risk of encouraging
brass plating and tax avoidance generally if the corporation tax
rate in Northern Ireland is lowered. Our evidence suggests that
this risk is sufficiently well mitigated against for it not to
present a persuasive argument. (Paragraph 102)
17. We note that if
the corporation tax rate was changed in Northern Ireland, it would
have to be a single rate applied across the board. This would
mean that companies could receive a windfall gain without increasing
economic activity. It would also add to the issues arising from
corporation tax volatility. However, we conclude that such rough
justice does not invalidate the wider benefit of adopting a lower
rate. Indeed, it is important to ensure that companies already
operating in Northern Ireland continue to do so in the face of
strong competition from elsewhere in the world. (Paragraph 105)
Implications for the UK
18. We
recognise there is value in UK fiscal unity and value in a tax
system that is administratively simple to operate, both for HMRC
and businesses. We are also aware that the Calman Commission in
Scotland and the Holtham Commission in Wales are part of a broader
debate around the devolution of tax powers to their respective
parts of the UK. However, the situation in Northern Ireland is
different from Scotland and Wales. Northern Ireland is the only
part of the UK that shares a land border with another sovereign
country, and that country has a corporation tax rate of 12.5%.
(Paragraph 109)
19. We are not persuaded
that, as a result of a lower corporation tax rate, there would
be a significant amount of movement of businesses from other parts
of the UK to Northern Ireland. However, there is a risk that investment,
either foreign or GB based, will go to Northern Ireland that might
otherwise have gone to or remained in other parts of the UK. (Paragraph
115)
Enterprise zones
20. We
recognise the potential in offering targeted incentives on top
of corporation tax to incentivise particular sectors. However,
we conclude that now is not the time to consider devolving further
tax powers to the Northern Ireland Assembly. The complexities
of doing so would be likely to stall change. Targeted fiscal incentives
should continue to be legislated for and administered on a UK
wide basis. (Paragraph 127)
21. Transport tax
rates must not deter businesses from coming to Northern Ireland;
any consideration of applying a per plane tax to freight must
take into account that businesses could be lost to the Republic
of Ireland if this is introduced. (Paragraph 128)
22. A skilled workforce
is essential to take advantage of any expansion in the sectors
that Northern Ireland wants to attract. Education and planning
are already devolved matters, and the Northern Ireland Assembly
must make its own decisions about where and how to invest in skills
training, and how to reform its planning system. (Paragraph 135)
| 
