Corporation Tax in Northern Ireland - Northern Ireland Affairs Committee Contents

3  Implementation issues

Legal issues

42. Our evidence could be read as leading to a conclusion that allowing the Northern Ireland Executive to have control over the level of corporation tax would be a "win-win" situation; devolution might be strengthened by allowing Northern Ireland greater control of its own finances and, as the Secretary of State said, the taxpayers of Great Britain might not have to provide as much financial support for Northern Ireland as they do currently:

    Your [English] constituents are contributing to a massively higher rate of public spending in Northern Ireland, 25% more than your guys and my guys get. [...] I think we have a very valid case that our English constituents will gain.[88]

However, the consequences of any fiscal change are never as clear cut as that. And in any event, the means to that end are far from straightforward. The trade unions, for example, have expressed their concerns as to whether it will be effective or legal.[89]

EU rules on state aid and the Azores judgment

43. There are precedents where an EU state has devolved the power to vary corporation tax and other taxes to a 'region' within its own jurisdiction, most significantly in the case of the Azores region—islands off the west coast of Portugal—which were allowed by the national government the power to vary national corporation tax (and income tax and VAT).[90] Taxation remains a matter for individual Member states, but fiscal policy must be exercised consistently with EU law, and in the case of corporation tax with regard to state aid rules designed to avoid distortion of competition.

44. The EU Commission investigated the Portuguese measure to ensure the rules of the EU Treaty had been applied. Professor Rosa Greaves, Professor of European Commercial Law at the University of Glasgow, explained

    As far as the Commission was concerned, the measure involved a reduction applicable solely in the Azores territory in the rate of tax that had been established by national legislation and applied to the rest of the Portuguese territory. Therefore, the Commission concluded that the tax reduction was selective in nature and thus a state aid.[91]

45. The tax measure in the Azores was caught by state aid rules because it selectively applied to businesses in one geographic part of the country.[92] The European Court of Justice (ECJ) judgment accepted that there was devolution within some Member States, and set out three conditions where these measures would be compatible with state aid rules:

  • Institutional autonomy: the infra-state authority must have from the constitutional point of view a political and administrative status separate from the central government;
  • Procedural autonomy: the decision must have been taken without the possibility for the central government to intervene with regard to its content; and
  • Financial responsibility: the reduction of the national tax in the region must not be offset by aid or subsidies from other regions or central government.

46. Professor Greaves explained why the situation in the Azores did not meet these criteria:

    In the Portuguese situation, there was a constitutional clause of solidarity. Again the court has said solidarity as a principle in the constitution is fine, but in the Portuguese case was connected to financial compensation to the Azorean Government if they actually got it wrong and they were short of money to deliver the services.[93]

47. The reduction of the tax burden by the Azores authorities was inextricably linked to addressing the inequalities of the Azores region, and this was dependent on a budgetary transfer managed by the central government.

The Basque and Gibraltar cases

48. The Azores judgment has been applied in two other situations, in the Basque region of Spain (September 2008)[94] and in Gibraltar (December 2008).[95]

49. In the Gibraltar case, the Lower Court accepted that the UK provides financial support to the Government of Gibraltar, but this support was to enable the UK to fulfil its international obligations, for example for the defence of Gibraltar. Gibraltar already had its own autonomous tax jurisdiction and the Court did not see a causal link between the financial support provided by the UK and the tax revenue foregone by Gibraltar.[96]

50. In the Basque region, a trade union and two neighbouring autonomous communities brought an action in the Spanish courts for an annulment of the tax legislation. The Spanish court[97] asked the ECJ whether, in light of the Azores judgment, the setting of the corporation tax rate in the Basque Provinces satisfied the criteria of selectivity and consequently constituted a state aid. Again, Professor Greaves explained the relevance:

    They [the ECJ] repeated the Azorean mantra and made it very clear that, in this particular case, where there was a procedural autonomy or an economic and financial autonomy or an institutional autonomy, it was a matter for the trial judge to decide on the facts. When it went back to Spain, it was the Supreme Court of the Basque country that then applied the ruling to the dispute, and they ruled that the Basque country had sufficient institutional, procedural and financial independence.[98]

51. Professor Greaves noted that the Court was concerned about a causal link between the tax measure and any compensation from the national government to the region. She also pointed out that there may be many reasons why a national government may wish to transfer money to a region, and raised questions as to where the burden of proof is to demonstrate that the transfer of the money was directly because there had been a loss of revenue to the autonomous region.[99] In the Basque case, the ECJ considered that it was for the national court to verify whether, taking into account the methodology and economic data available, if the Spanish State would be providing compensation to the Basque province as a consequence of the tax measure.

Code of Conduct for Business Taxation

52. A proposal to reduce the general corporation tax rate in circumstances such as Northern Ireland would need to satisfy the code of conduct for business taxation.[100] The code is not legally binding.[101] Mr Phillip Kermode, Taxation and Customs Union Directorate General, EU Commission, explained the difference between the Code of Conduct and State aid rules:

    State aid rules are set by the Treaty. The Code of Conduct is an arrangement between the Member States of the Union meeting in the Council. It does not concern the state aid rules per se; it has its own set of rules. It came about because of concerns about harmful tax practices, which were effectively ring fenced regimes—the use of lower rates to attract business.[102]

53. The State aid rules are designed to reduce distortion in the EU. However, distortion already occurs between states because neighbouring countries can have different corporation tax rates, and fair competition is not helped by one state having a corporation tax rate that is significantly different and essentially designed to distort competition.[103] It could be argued that if Northern Ireland had a rate of 12.5% then it would reduce distortion. The other EU country that would be affected most by Northern Ireland having a lower corporation tax would be the Republic of Ireland, and politicians and business people in the Republic of Ireland have told us that they would not resent Northern Ireland having a rate of 12.5%. Indeed, the Irish Government supports this change.[104] We asked Mr Kermode that if the country most affected by Northern Ireland lowering its corporation tax was not afraid of the competition, then on whose behalf would the EU Commission be acting? He answered:

    The answer to that is the Commission is obliged to stick up for the Treaty. When it comes to state aid, the Commission has to implement the rules of the Treaty that apply to this particular area. It's clear that the Irish experience with the 12.5% has been perceived as extremely positive. [...] I don't think the Commission has any hidden agenda on this. I think the problem is a legal problem. Once the Treaties are in place and the Commission has an obligation, well then it must fulfil that obligation. Again, I think that the issue is one that should be explored—that is the whole question of the boundaries of the Azores case—in the case where you have a clear view of what you want to do.[105]

54. We note that in the Basque case it was left to the national court to interpret whether the tax measure qualified. Professor Greaves said it was difficult to give a firm answer to how the Azores could be applied in a new situation, in particular with regard to the third criterion on financial autonomy, because the two subsequent cases have not been ruled upon by the ECJ—in the case of Gibraltar it was the lower court and in the case of the Basques it was the national court. Professor Greaves told us that the lack of clarity means "the gate was opened but we don't know how wide,"[106] and "it needs a European Court of Justice decision to be final".[107] We asked Mr Kermode if he thought a proposal to devolve corporation tax to Northern Ireland could change how EU law is interpreted. He thought such a consequence should not be ruled out.[108]

55. The Secretary of State for Northern Ireland said he was confident that if the Government decided to proceed further, it would do so in accordance with the criteria laid down in Azores judgment.[109] We asked the Exchequer Secretary if he was in negotiations with the European Commission. He said: "we have informally met with the European Commission". When asked how many meetings had taken place, he replied:

    Just the one meeting. [...] This is at an informal level. As I say, this is still very much developing as a policy. We are at the consultation stage. As it becomes more detailed then there will be further discussions with the European Commission, and then ultimately we would take this to the Commission as a pretty well-developed policy, assuming we go down this route, for the Commission to confirm that we are compliant with the Azores judgment.[110]

56. 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.

57. 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.

Other complications


58. It is important that the Northern Ireland Executive and the Northern Ireland Assembly understand the implications of the decision to devolve corporation tax. If the tax reduction were successful and investment in Northern Ireland increased above expectations, then Northern Ireland could receive—on top of the increased investment and, potentially, jobs—more revenue that it would otherwise have done via the block grant. If the tax reduction did not lead to the anticipated increase in investment, then—in addition to a shortfall in investment and expected jobs—Northern Ireland would receive less revenue and would have to make decisions with a smaller budget. Any reduction in the budget could have an impact upon the resources available to spend on other priorities for the Northern Ireland economy. The Northern Ireland Finance Minister, Sammy Wilson MP MLA, told us:

    My biggest reservation at present is that I do not know what price tag is coming with this. At a time when we have taken a £4 billion hit on our budget for the next four years, it would be counter-productive if the price tag were so high that it displaced even more jobs in the public sector, and prevented us from doing some of the infrastructure work or some of the work that Arlene [Foster] is successfully doing to attract other firms into Northern Ireland.[111]

59. It was acknowledged by all the witnesses, including the proponents of the reduction in corporation tax,[112] that lowering corporation tax is not risk free. The risk in volatile corporation tax revenue would be borne by the Northern Ireland Executive in the good years and bad years. A recent report from PriceWaterhouseCoopers said that matching the rate in the Republic, i.e. 12.5%, "could cost Northern Ireland around £280 million with no certainty of an equivalent uplift in new FDI",[113] although it is difficult to estimate this figure for reasons we come onto. Dr Esmond Birnie balanced the arguments:

    the fact that in four years' time the Executive in Stormont will have £1.4 billion less to spend across 12 departments, taking both current spending and capital spending together, to ask them to take out a further £200 million is a big ask. However, the contrary view would be one of, and I know it's easy to say this and much harder to do it, it's the classic dilemma of taking butter today to have jam tomorrow. To the extent that reducing corporation tax does lead to accelerated growth in the private sector, then it leads to benefits, but benefits 10 years down the line, not an upfront benefit to compensate for the pain of the Spending Review. That would really be a dilemma, a political decision, for the Executive to make. Do they want butter now in the hope of getting jam in six to 10 years time?[114]

60. The Treasury's consultation paper described this as "a significant risk"[115] for the Executive in bearing the financial consequences of devolved Corporation Tax rates and "there may be issues of affordability in respect of this option".[116] The Exchequer Secretary told us: "there are consequences, Some might be positive; some might be negative for the Northern Ireland Executive if corporation tax does not behave in the way that is predicted".[117] The Secretary of State, on the other hand, assured us that in his view: "Emphatically it is not a gamble. A gamble is doing nothing." We asked Mr Gauke if he saw the lowering of corporation tax as a gamble. He replied:

    I think "gamble" has a necessarily pejorative tone to it, but there are clearly risks that are involved in any particular decision. The point that the Secretary of State made in his evidence: there are also risks in doing nothing. That is the decision that the Northern Ireland Executive will have to make and question what the biggest risk is; what is, to use your words, the biggest "gamble"?

61. In addition to the benefits being uncertain, it might take some time for Northern Ireland to feel the benefits, if they came at all. The Secretary of State has said he thought it would take 25 years to fully rebalance the economy,[118] but David Gauke believed some benefits might be felt sooner.[119]


62. It would not necessarily be straightforward to work out how to transfer the risk from the UK Government to the Northern Ireland Executive. The Treasury's consultation paper noted that HMRC does not "currently hold accurate data on the size of the corporate tax base in Northern Ireland".[120] David Gauke did tell the Committee that there are around 66,000 companies in Northern Ireland, and between 50% and 63% of those companies pay corporation tax.[121] Using tax liabilities of companies with a Northern Ireland postcode, the Treasury estimated the value of corporation tax receipts in Northern Ireland to be around £465 million in 2009-10, and that this could rise to around £685 million by 2015-16.[122]

63. The previous Government commissioned Sir David Varney, former Chairman of HMRC, to carry out a review of tax policy in Northern Ireland, including consideration of the case for reducing corporation tax in Northern Ireland.[123] Sir David estimated that a reduction in the corporation tax rate in Northern Ireland to 12.5% would result in around £300 million a year lost in revenue.[124] The Economic Reform Group report, The Case for a Reduced Rate of Corporation Tax in Northern Ireland, estimated the initial annual loss of revenue from reducing corporation tax rate to 12.5% would be near £215 million per year,[125] or the equivalent to a reduction of 2% in the block grant.[126]

64. If the Government decided to proceed further with devolution of tax setting powers, then the Treasury has said it would start to monitor Northern Ireland corporation tax receipts. David Gauke noted that if there was a decision to "go down this route, in the years ahead as we move towards implementing this and, indeed, even after we implement this [...] we would be able to see exactly where the profits were coming from—we could start to adjust our calculations".[127] He drew attention to the process of devolving a proportion of income tax revenue to Scotland, which is to involve a transitional period whereby forecasts would be compared with actual revenue and adjustments made.[128]

65. Corporation tax revenue, according to the Exchequer Secretary, is quite volatile.[129] Mike Williams, Director, Business and Indirect Tax, HM Treasury, told the Committee:

    of the four big sources of Government revenue, corporation tax is pretty clearly the hardest to predict. It varies more; it is harder to [produce] a forecast three years into the future that will prove accurate. Whereas, if you are forecasting income tax, national insurance or VAT, in the nature of things you are not going to get it exactly right, but you are more likely to get it right than you would tend to get right with corporation tax profits.[130]

This phenomenon has significant repercussions for the method of calculating the resulting deduction in the block grant, and consequently for the stable planning of future expenditure in Northern Ireland.

66. The Treasury urgently needs to set up a system which can accurately assess how much corporation tax is collected in Northern Ireland.


67. Both the Secretary of State for Northern Ireland and the Exchequer Secretary reiterated that, if the power was devolved, it would be for the Northern Ireland Assembly to decide whether to reduce the corporation tax rate. We cannot expect the Northern Ireland Executive to make a decision as to whether they would lower the rate without more detailed information on the likely implications for their revenue.

68. 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.

69. Mr Alan Trench, a senior research fellow at the Constitution Unit, University College London, told us that calculating the reduction in the block grant would not necessarily be straightforward.[131] He summarised the Holtham Commission methodology for calculating a reduction in the block grant if corporation tax was to be devolved to Wales:

  • own base deduction (OBD): the deduction from the block grant is indexed to the assessed growth in the devolved tax base;
  • indexed deduction (ID): the initial deduction is indexed to an external variable such as the relevant UK tax base;
  • proportionate deduction (PD): the grant is reduced by a given percentage; the initial deduction therefore grows at the same rate as the grant itself; and
  • fixed real deduction (FRD): the grant is reduced by an agreed sum which is then indexed to inflation; i.e. the present value of tax receipts is equated to a real annuity which is deducted from the grant.[132]

Mr Trench also noted that the method that carried the least risk, OBD, was most likely to be contrary to EU rules, while the method that related more closely to decisions that would be devolved and more in accord with the requirements of EU law, but would carry greater risk to the devolved administration.[133]

70. This is another aspect of the policy that has not been decided. David Gauke said:

    Some of this [...] is to be determined and might well depend upon whether there is a transitional arrangement and so on. I think, though, if we were looking at the steady state arrangement, for every x% of corporation tax, £y million would be reduced from the block grant. That assessment—what is y, for these purposes; what the reduction in the block grant would be—would be something that would be made scientifically with an appropriate methodology, with the best interests of getting the most accurate number possible.[134]

The Secretary of State commented:

    I do not think we would go through an immensely complex legislative and administrative exercise if they [NIE] were not actually going to do it. Obviously we have to get agreement with the Executive on the exact manner in which the exercise would go about [...] there is an awful lot of detail to be sorted out, and obviously that has to be run past the European Commission. There is no point going to legislate if they are not going to seriously do it.[135]

71. 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.

72. 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.

Total tax revenue

73. The Northern Ireland Economic Reform Group model suggested that while the total tax revenue in Northern Ireland would initially be reduced, the lower rate would attract an increasing amount of foreign direct investment and consequently income tax and VAT revenue would go up. Its model suggested that while it would take twenty years for corporation tax revenue to rise back to the present level, the shortfall in total tax revenue would end after six years because of the extra income tax, VAT etc.[136] There is a major problem, however, as any increase in income tax and VAT would revert to HM Treasury. It has been suggested that a mechanism could be developed that would enable Northern Ireland to benefit from the increase in such taxes.[137]The Treasury's consultation paper speculated that:

    If corporate income increased this should in turn lead to higher consumption, which might be expected to increase revenue from VAT and excise duties. National insurance contributions and income tax revenue may also increase as greater corporate earnings were distributed to labour via higher wages and employment. These taxes are not devolved and would accrue to the UK Exchequer. However, indirect tax effects could be considered carefully when calculating the adjustment to the block grant as long as doing so complied with the Azores criteria and the UK fiscal framework.[138]

74. If this proposal was carried through, revenue raised in Northern Ireland would be collected by HMRC on a UK wide basis, then reimbursed to the Northern Ireland Executive, according to some pre-agreed formula between Northern Ireland and HM Treasury necessitating another layer of administration. The Secretary of State expressed doubt that this would work,[139] and there are likely to be questions about how any such mechanism would conform to the third criterion of the Azores judgment relating to financial responsibility.

75. 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.

Political support and agreement with the Northern Ireland Executive

76. The Secretary of State described the production of the Treasury's consultation paper as "a team effort: the First Minister, Deputy First Minister, Sammy Wilson [Finance Minister] and Arlene Foster [Enterprise Minister] have all been closely involved in the drafting."[140] David Gauke said:

    I am very pleased that we were able to complete that [consultation] paper with strong cooperation, involving the Treasury, the Northern Ireland Office and the Northern Ireland Executive. I was very pleased to attend the launch on 24 March with representatives from the five leading parties in Northern Ireland, where it struck me that there was considerable appetite to explore this area.[141]

77. We asked the Secretary of State if he thought the political support would remain once the debate moved beyond "12.5% corporation tax" into some of the more detailed implementation aspects. He said:

    Yes, I think quite a lot of this has to be resolved before it is transferred. I think it is recognised that, if there is sufficient political will and leadership, the broad principle of establishing a lower rate as a step change in galvanising the private sector in Northern Ireland is probably worth some people not getting everything they would like through. Obviously there will be a debate amongst the members of the Executive.[142]

78. Other witnesses pointed to the importance of political stability in securing peace and further economic growth. Jeremy Fitch, from Invest NI, said that since the Troubles ended there had been some years of economic growth, it had felt "like a big dark cloud has lifted". He also pointed out the support from the US Secretary of State, Hillary Clinton, and Declan Kelly, the former special US economic envoy to Northern Ireland, had been "absolutely fantastic".[143] He was under no illusion that the US Administration was interested in supporting Northern Ireland was because they wanted to help secure the peace process, and see inward investment from the US as important to cementing that particular process.[144]

79. We heard views that the stable political situation was valuable. Mark MacGann, from New York Stock Exchange Technologies, told us that he saw it as "an enormous positive" and they viewed "the relationship with the Prime Minister, the Taoiseach of the Republic of Ireland based in Dublin, and the First Minister of the Northern Ireland Executive as equal in terms of a foreign company coming in."[145]

80. 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.


A phased reduction

81. One of the constant messages we received through this inquiry is that investment decisions are commonly made years in advance, and the need for certainty is paramount. The value of 12.5% to the Republic of Ireland is a belief among business and investors that it will not change and they can make long term decisions in that knowledge. The Secretary of State suggested that the issue of affordability can be ameliorated by phasing in the reduction, and his preferred option was to reduce the rate by 2.5% each year,[146] in a manner similar to the process whereby the UK Government is reducing corporation tax by 1% a year. The Treasury's consultation paper estimated that such a reduction would lead to a reduction in the block grant of £60 to £90 million per year, which is around 0.5% of a £12 billion block grant.[147] Mr Paterson described this as "a very modest risk for a potentially enormous gain."[148] He recognised that a decision on matters such as phasing would be made in Northern Ireland.[149] The Finance Minister, Sammy Wilson, agreed on the value of a phased reduction:

    there probably are good grounds for phasing it in, in so far as you probably want to prepare the ground, to first highlight the fact that this is going to be available. [...] I would also like to think that if we phased it in that way, the cost could be gradually introduced into our budget, so that we could make the adjustments over a period of time. That would be much easier than taking a big hit all at once.[150]


82. The value of a 12.5% rate to the Republic of Ireland has been reinforced by the tenacity with which it has protected it even during the recent negotiations for economic support from the EU. Several witnesses told us that anyone considering investing in Northern Ireland would want to know that Northern Ireland would keep their lower rate with similar reliability. Eamonn Donaghy, Head of Tax, KPMG Belfast; Chair, of the Tax Committee, Institute of Chartered Accountants, and member of the NIERG believed that:

    The introduction of a 12.5% rate, whether it happened immediately or whether it happened over, say, a phased period of two or three years, is probably not as important as knowing that that is going to be there for a long period of time. I think the commitment to a low rate of tax today, tomorrow and well into the future is what international business will want to see.[151]

Roger Pollen, from the Federation of Small Business, agreed and when asked what industrialists outside Northern Ireland thought about low corporation tax, responded:

    The answer has come back loud and clear that if there was anything that suggested it was other than a long-term commitment, they just wouldn't entertain it. It has to have stability and that's why it has to have a degree of cross-party support, and support that takes it beyond the turn of a single Assembly. It has to be seen to be a structural change.[152]

Trading and non-trading income

83. While the Republic of Ireland has had a headline rate of 12.5% since 2003, it has had a rate of 25% on non-trading income.[153] The Treasury's consultation paper suggests that around 25 per cent of corporation tax receipts are from non-trading income and excluding non-trading profits could potentially reduce tax take up to £85 million. It could also add significantly to compliance costs, both for business and for the tax collection authorities.[154] If Northern Ireland were to have a low rate on non-trading profits there is a risk that it would encourage 'brass plating'—where businesses move their address to a low tax jurisdiction without moving any meaningful economic activity. Eamonn Donaghy said:

    I think we could distinguish between trading profits and non-trading profits and, to be very clear, this [campaign for a 12.5% rate] is aimed at trying to attract companies that are going to create employment and trading activity, as opposed to being some form of tax haven in which non-trading profits can be sheltered. It is very much a focus on trying to create economic activity and therefore jobs in Northern Ireland.[155]

On this matter, the Secretary of State for Northern Ireland told us:

    I think that is a question for the Executive to explore with businesses and with foreign investors. My personal opinion is that the wider the tax benefit, the more people we will collect. So the more people who will gain from this, the more we will help local businesses and the wider we cast the net for foreign investors.[156]

84. There would need to be a balance struck between introducing a rate reduction that is administratively simple for HMRC and business and ensure that it does not result in a huge shock to the Northern Ireland budget. The Treasury's consultation paper said that excluding non-trading profits could cost up to £85 million in revenue, and also add significantly to compliance costs, both for business, HMRC and "could restrict the benefit to groups in particular industries".[157]

85. 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.

HMRC and the UK tax system


86. If the power to vary corporation tax was devolved to Northern Ireland, corporation tax would continue to be collected by HMRC. Brendan Morris, Chair of the Northern Ireland Branch, Chartered Institute of Taxation, said he saw no reason to deviate from using fundamental UK principles in terms of computing tax liabilities.[158] However, please note paragraph 73 above.

87. There is an administrative cost which would be borne by the tax authority.[159] HMRC does not breakdown administration costs on a regional basis, but admits that corporation tax cost £340 million to administer in 2008-9 on a UK wide basis, and that just under 70 per cent of that related to compliance activity.[160] If corporation tax was devolved then the additional administration costs associated with the operation of the system would need to be met by the Northern Ireland Executive.[161] This is the case with regard to the administration of the Scottish income tax rate in Scotland.[162] We also note a recent Public Accounts Committee Report which criticised HMRC for a lack of transparency over how it resolved corporation tax disputes, particularly with large and complex cases.[163]

88. We asked Mr Gauke if he thought it would be necessary to increase resources in Northern Ireland to combat any tax evasion issues that arise. He said:

    I do not want to necessarily put it in terms of more staff, but you clearly need to improve capability. [...] clearly HMRC would need the capability to ensure that those businesses that operate in Northern Ireland and the mainland do not artificially shift their profits.[164]

89. In addition to greater information around likely revenue, it is also vital that the Northern Ireland administration are fully aware of additional implications and costs arising to businesses that operate in Northern Ireland and to HMRC as a result. Any additional costs would be borne by the Northern Ireland administration.

90. 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.


91. John Whiting, Chartered Institute of Taxation and the Office of Tax Simplification, pointed out that the burden for HMRC would be transparent and quantifiable, but the burden upon businesses would be more problematic:

    There are of course two areas of costs. There is, as it were, the overt cost of the tax authority, HMRC Northern Ireland branch. There are the covert and more hidden costs, which is the company that has to calculate it and that has to carry out some extra calculations and has to perhaps go through extra routines; maybe has to do an extra return. I suspect that would have to be seen as a cost to the company and of course it would be a negative; only a tiny one in the great scheme of things, but the extra bureaucracy would be a negative. Of course, one of the things I think you would have to think about in any move to this lower rate is to keep it as simple as possible and to get quite pragmatic, perhaps, in terms of what returns the company that had activities across the whole of the UK had to do so it did not, for example, have to do endless schedules proving to the pound how much was and was not done in Northern Ireland versus the rest of the UK.[165]

92. The Treasury's consultation paper speculated that if there were to be a different rate in Northern Ireland from the rest of the UK, then companies which operate in Northern Ireland and across the rest of the UK which could be asked to "separately apportion income and expenditure between activity in Northern Ireland and activity in the rest of the UK (and also between types of activity if a reduced rate was limited to trading profits)."[166] It estimated that this burden could cost £50 million. The burden would apply not only to businesses in Northern Ireland, but possibly also to businesses throughout the UK that had a presence in Northern Ireland.

93. However, when we asked the Secretary of State if any of the businesses he had spoken to in Northern Ireland had raised the issue of an increased administrative or financial burden upon them due to a lower tax rate, he said: "No, honestly, no one has raised that once".[167] In the section on Implementation Issues, the Treasury's consultation paper said:

    4.56 The Government is committed to achieving simplicity in the tax system. It will only provide a separate rate of corporation tax in Northern Ireland if additional compliance burdens can be shown to be manageable and justified by overall economic benefits to most of the companies affected.[168]

94. 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.


95. We heard concerns that a low corporation tax rate in Northern Ireland would lead to problems relating to tax evasion and in particular the problem of 'brass plating'. The Irish Congress of Trade Unions raised concerns around the broader tax regime in the Republic of Ireland in comparison to the UK. In particular, they pointed out that the Republic of Ireland had no controlled foreign company legislation,[169] poor regulation of how companies make internal loans between subsidiaries to take advantage tax benefits in each jurisdiction, and a lack of transparency as to tax payments.[170] All these give Ireland a competitive advantage over Northern Ireland when trying to attract foreign direct investment. The ICTU Report quoted the Irish Revenue Commissioners as describing companies treating Ireland as a tax haven or a flag of convenience, and suggests that Ireland "offers the opportunity to avoid the filing of accounts for public inspection without any such fuss."[171] If this situation does exist in the Republic of Ireland, we do not wish to see it repeated in Northern Ireland. The Treasury's consultation paper admits as much:

    4.55 The Government would need to consider appropriate and proportionate revenue protection safeguards such as transfer pricing to prevent businesses from artificially attributing a greater share of their taxable profits to Northern Ireland.[172]

96. We asked other witnesses how difficult it would be to introduce such 'appropriate and proportionate revenue protection safeguards'. Eamonn Donaghy accepted there might be some attempts at 'brass plating'[173] but he thought:

    A lot of the legislation that we would need already exists. I think appropriate additional legislation can be introduced, and the self-policing mechanism of having additional reporting requirements—only for those companies that wish to claim it, so we are not adding red tape to anybody that does not want to claim this—is a means of trying to police this concept of getting something for nothing.[174]

Moreover, Terence Brannigan did not think this was a huge concern:

    Every time we have talked about corporation tax that has been one of the concerns. Our experience has been that it hasn't happened very much [and] when it started to happen, rules and regulations were introduced.[175]

He suggested that eligibility might be identified according to establishing the headcount of those companies trying to claim the lower rate. Importantly he said he wanted simple and straightforward ways of addressing the problem:

    What you don't want is a regulatory system that has to be blown out of proportion in order to manage that kind of thing. There are reasonably simple, straightforward mechanisms that you can introduce, and head count is one of them.[176]

97. The Holtham Commission, which investigated the possibility of devolving certain taxes to Wales, found that many countries, including the USA, had mechanisms for dealing with how companies claimed for differential rates between regions. Holtham suggested the simplest method was to allocate liability according to the proportion of payroll at a site, as long as the payroll matched the location of the employees.[177]

98. John Whiting said that there was an ongoing debate within HM Treasury, prompted by the devolution of tax powers to Scotland, around whether the UK should move to a more territorial basis of taxation. He also pointed out that transfer pricing was a very time-consuming and complex exercise which can "drag on for many, many years."[178]

99. Solutions which seek to address such tax avoidance should, ideally, be straightforward to understand and implement, and provide a reasonable degree of certainty to both taxpayer and Government. While it is not straightforward,[179] the Chartered Institute of Taxation said they think the current HMRC anti-avoidance measures and Controlled Foreign Companies legislation would be sufficient to manage any increase in aggressive tax avoidance.[180] Other witnesses suggested options to limit abuse of the system.[181]

100. We further note that the Exchequer Secretary announced in December 2010 that he would appoint Graham Aaronson, a legal expert on tax loopholes, to lead a study into a General Anti Avoidance Rule (GAAR). Mr Gauke has said he is "fully committed" to a clampdown on tax avoidance and introduced measures "expected to raise more than £2 billion and protect a further £5 billion by 2015" and "[...] groups of companies will be banned from using intra-group loans or derivatives to reduce their corporation tax bill."[182]

101. In addition, the consultation considered changing the rules governing transfer pricing for SMEs to "protect Exchequer revenue from avoidance". This may place an additional burden upon SMEs:

    4.58 Depending on what the NIE decided on the operation of the regime, additional administration costs associated with the operation of the regime would need to be met by the NIE. There is currently an exemption from transfer pricing rules for small and medium-sized enterprises within the UK. To protect Exchequer revenue from avoidance following the introduction of a differential corporation tax rate within the UK, the Government might need to consider removing this exemption.[183]

102. 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.

Dead weight and windfall gains

103. Several witnesses suggested that the Government should explore ways of retrieving the windfall tax gain paid to certain sectors, notably the utility companies and the banks. However, EU state aid rules are designed to avoid any selective advantage that may result in distortion of competition, which means that any reduction in corporation tax must be applied at the same rate to all companies eligible within Northern Ireland.[184] It could not be applied preferentially to particular sectors, and could not be refused to particular sectors—including those who do nothing to increase economic activity. Dr Esmond Birnie, PricewaterhouseCoopers, told us:

    the problem with a blanket reduction in corporation tax is that everyone gets it, and economists would say there'd be a lot of dead weight—in other words, firms that weren't adding much to wealth creation, or innovation, or exports, would get it like everyone else. [...] we run into the European rules about not favouring particular sectors, so it does seem that we are constrained; you have to have a rate across the board.[185]

104. The Treasury's consultation paper also notes that un-incorporated business might be encouraged to become incorporated to benefit from the lower tax rate:

    Tax motivated incorporation [...] would increase as the corporation tax rate falls and the differential between income tax and corporation tax rates increases. An increase in TMI results in higher corporation tax receipts although this will be more than offset by falls in income tax and NICs receipts and therefore result in a cost additional to the direct cost [186]

John Whiting mentioned this as a likely consequence of lowering corporation tax, that sole traders would incorporate to take advantage of the lower rate so it would bring more companies within the tax base of Northern Ireland.[187]

105. 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.

Implications for the UK

106. The Government acknowledged it supports decentralisation of power from Westminster and devolution of corporation tax should be seen in that context. The introduction to the Treasury's consultation paper recognises that this debate also takes place elsewhere in the UK:

    The issue of separate corporation tax rates for Scotland and Wales has been considered by the Calman and Holtham Commissions respectively. The Calman Commission's report [...] recommended against a separate rate of corporation tax for Scotland, on the grounds that a separate rate could distort competition within the UK, and that the required legislation would be likely to create significant administrative burdens. The Holtham Commission's report [...] recommended that the Welsh Assembly Government should seek discussion with the UK Government and other devolved governments on the feasibility of a separate rate. The report noted a number of legal and implementation issues and the possibility that the fiscal consequences of a separate rate could introduce volatility into the Welsh Assembly budget.[188]

The Treasury's consultation paper continued:

    Experience, especially from the implementation of the Calman Commission's recommendations on tax devolution, suggests that the complexities associated with devolving a separate rate of corporation tax to the Northern Ireland Assembly mean this would take several years to implement.[189]

107. We note the ongoing discussion in Scotland and Wales around the devolution of tax raising powers, and the cost of administering such mechanisms, and that there is not a united view as to the merits of devolving corporation tax to different parts of the UK. For example, CBI Scotland do not support a separate rate for Scotland.[190]

108. A number of concerns have been expressed about the setting of different levels of tax across the UK, yet council tax is set at different levels between local authorities. Some concerns have been expressed as to why just Northern Ireland should have the power to vary corporation tax rates and not, for example, the north west of England. The Government could not devolve the power to vary corporation tax to an English region because of EU rules on State aid and the criteria laid down in the Azores judgment.

109. 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%.


110. We heard concerns that a lower rate of corporation tax could lead to a loss of investment into parts of England, Wales and Scotland. Sir David Varney concluded that if Northern Ireland lowered corporation tax rate to 12.5%, one of the consequences would be a significant displacement of capital and profits from the rest of the UK, near £2.2 billion over a ten years.[191] However, Terence Brannigan, CBI, said he did not think there would be a shift to Northern Ireland from other disadvantaged areas of the UK as relocation of existing operations is:

    an exceptionally difficult, costly, time-consuming and risky business [and] secondly, if that were going to happen, you would probably have seen a wholesale shift into the Republic of Ireland from the UK [or] you would have seen a major shift from the North of Ireland down the road, down the A1 to Dublin and down to Cork and across to Limerick, and of course we haven't seen that.[192]

111. Victor Hewitt, from the Economic Research Institute and the Economic Reform Group, accepted there would be "an element of displacement" but it was not the intention.[193] Similarly the Secretary of State was confident it would not be an issue:

    I think the paper does acknowledge there will be some movement, but Northern Ireland is not a very big place. There are 1.8 million people there, and there is a limit to the number of businesses that will want to up sticks and move. They will be well embedded in other parts of the UK, their markets are there, their workforces are there [...] So I think there will be a modest movement but there is movement the whole time within the economy. I do not think it is something we should be too alarmed by.[194]

112. There is also a concern that FDI to the UK would preferentially go to Northern Ireland rather than England, Scotland or Wales. Indeed, the Treasury's consultation paper estimated that around 12.5% of the FDI attracted to Northern Ireland as a result of the lower corporation tax would be investment that would have gone elsewhere in the UK.[195]

113. Eamonn Donaghy, of NIERG, argued that as a result of the lower rate in the Republic of Ireland there "has been some displacement from GB and the UK to the Republic of Ireland" but it had not been significant nor led to a large amount of jobs going from GB to the Republic of Ireland. He thought that if a firm wanted to move from the north east of England to the Republic of Ireland for tax reasons, they would be prepared to move to Singapore or Estonia.[196]

114. At a time of economic difficulty in the Republic of Ireland and the United Kingdom, this is a sensitive subject that would need to be handled with care. For example, while we heard doubts that a large number of financial services' employers would migrate from Canary Wharf to Belfast, it may be that some might go to Belfast rather than the International Financial Services Centre in Dublin.

115. 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.

88   Q 31 [Responsibilities of the Secretary of State for Northern Ireland] Back

89   Richard Murphy, 2010, Lowering Northern Ireland's Corporation Tax: Pot of Gold or Fool's Gold? ICTUNI Back

90   Portugal v Commission (C-88/03) [2006] ECR I-7115; [2006] 3 CMLR 45 Back

91   Greaves, Rosa, 2009, Autonomous regions, taxation and EC state-aid rules, 34 European Law Review, p785  Back

92   Q 344 Back

93   Q 345 Back

94   Joined Cases C-428/06 to C-436/06. The Gibraltar case is being appealed to the European Court of Justice. Professor Greaves said she expected it to confirm what the Lower Court has stated. Back

95   Cases T-211/04 and T-215/04 Back

96   Q 345 Back

97   The Tribunal Superior de Justicia de la Comunidad Autonoma del Pais Vasco. Back

98   Q 358 Back

99   Qq 346-351 Back

100   Ev 219 Back

101   Q 354 Back

102   Q 382 Back

103   Q 271 Back

104   We met the Irish Ambassador to the UK and politicians in Dublin before the General Election in February 2011 Back

105   Q 402 Back

106   Q 344 Back

107   Q 358 Back

108   Qq 380-381 Back

109   Q 32 Back

110   Qq 49-50 Back

111   Q 128 Back

112   Q 106 Back

113   Cut in corporation tax 'could cost NI £280m' PwC says, 7 January 2011 Back

114   Q 229 Back

115   HM Treasury, Rebalancing the Northern Ireland economy, para 4.62 Back

116   HM Treasury, Rebalancing the Northern Ireland economy, para 4.67  Back

117   Q 30 [Rebalancing the Northern Ireland economy] Back

118   Q 24 [Responsibilities of the Secretary of State for Northern Ireland] Back

119   Q 41 [Rebalancing the Northern Ireland economy] Back

120   HM Treasury, Rebalancing the Northern Ireland economy, para 4.33 Back

121   Q 60 [Rebalancing the Northern Ireland economy] Back

122   HM Treasury, Rebalancing the Northern Ireland economy, para 4.35 Back

123   HM Treasury, Review of Tax Policy in Northern Ireland, December 2007.

124   Ibid, Executive Summary, page 4 Back

125   Economic Reform Group, The Case for a Reduced Rate of Corporation Tax in Northern Ireland, May 2010. The NIERG model assumed a starting point of 28%, Back

126   NIA Deb, 11 May 2010 [Ms McCann] Back

127   Q 18 [Rebalancing the Northern Ireland economy] Back

128   Q 15 [Rebalancing the Northern Ireland economy] Back

129   Q 30 [Rebalancing the Northern Ireland economy] Back

130   Q 19 [Rebalancing the Northern Ireland economy] Back

131   Ev w11 Back

132   Independent Commission on Funding and Finance for Wales, 2009, Funding Devolved Government in Wales: Barnett & Beyond, First Report to the Welsh Assembly Government. and Independent Commission on Funding and Finance for Wales, 2010, Final Report: Fairness and Accountability-A New Funding Settlement for Wales. Back

133   Ev w11 Back

134   Q 26 [Rebalancing the Northern Ireland economy] Back

135   Q 18 [Responsibilities of the Secretary of State for Northern Ireland] Back

136   Economic Reform Group, The Case for a Reduced Rate of Corporation Tax in Northern Ireland, May 2010 Back

137   PricewaterhouseCoopers, Corporation Tax Game Changer or Game Over, January 2011 Back

138   HM Treasury, Para 4.44 Back

139   Qq 47-48 Back

140   Q 1 [Responsibilities of the Secretary of State for Northern Ireland] Back

141   Q 1 [Rebalancing the Northern Ireland economy] Back

142   Q 61 Back

143   Note Declan Kelly resigned on 11 May 2010. See  Back

144   Q 37  Back

145   Q 252  Back

146   Q 22 [Responsibilities of the Secretary of State for Northern Ireland] Back

147   HM Treasury, Rebalancing the Northern Ireland Economy, page 38 Back

148   Q 12 Back

149   Q 44 [Responsibilities of the Secretary of State for Northern Ireland] Back

150   Q 136 Back

151   Q 9 Back

152   Q 324 Back

153   Trading income applies to that earned from economic activity, for example, buying and selling goods with a view to making a profit or surplus, providing services. Non-trading income is passive in nature, e.g. arising from investments in money, securities and property. Back

154   HM Treasury, Rebalancing the Northern Ireland economy, para 4.67 Back

155   Q 11 Back

156   Q 58 Back

157   HM Treasury, Rebalancing the Northern Ireland economy, para 4.8 Back

158   Q 175 Back

159   Q 69 Back

160   HM Treasury, Rebalancing the Northern Ireland economy, para 4.51 Back

161   HM Treasury, Rebalancing the Northern Ireland economy, para 4.59. See also Q 40 [Rebalancing the Northern Ireland economy] Back

162   Q 74 Back

163   PAC, 18th Report of Session 2010-11, HM Revenue and Customs' 2009-10 Accounts, HC 502. See also Oral evidence to the Treasury Committee, Administration and Effectiveness of HM Revenue & Customs, 11 May 2011, Qq 391-423 Back

164   Q 39 [Rebalancing the Northern Ireland economy] Back

165   Q 74 Back

166   HM Treasury, Rebalancing the Northern Ireland economy, para 4.54 Back

167   Q 50 Back

168   HM Treasury, Rebalancing the Northern Ireland economy, paras 4.55 - 4.56 Back

169   Rules controlling what a high tax jurisdiction can claim from a company that has already paid tax in a lower tax jurisdiction Back

170   Richard Murphy, 2010, Lowering Northern Ireland's Corporation Tax: Pot of Gold or Fool's Gold? ICTUNI Back

171   Ibid., page 13 Back

172   HM Treasury, Rebalancing the Northern Ireland economy, paras 4.55 Back

173   Q 30  Back

174   Q 20 and Q 30 Back

175   Q 113 Back

176   Q 113 Back

177   Independent Commission on Funding and Finance for Wales, Fairness and accountability: a new funding settlement for Wales. July 2010, Final Report, Summary, para 7.6 Back

178   Q 80 Back

179   Ev 202 Back

180   Ev 192. The purpose of the CFC legislation is to prevent UK companies from avoiding UK tax by diverting income to subsidiaries in low tax countries. A CFC is a company which is not resident in the UK (but which is controlled by individuals or companies who are) and which is subject to a level of taxation less than three quarters of what it would have paid had it been resident in the UK. Back

181   Ev 202 Back

182   Exchequer Secretary to the Treasury David Gauke 'fully committed' to tax clampdown', The Daily Telegraph, 7 December 2010. See also  Back

183   HM Treasury, Rebalancing the Northern Ireland economy, para 4.58 Back

184   See Q 18 or Q 59 or Q 65 Back

185   Q 218 Back

186   Q 39 Back

187   Q 56 Back

188   HM Treasury, Rebalancing the Northern Ireland economy, para 1.11 Back

189   HM Treasury, Rebalancing the Northern Ireland economy, para 4.1  Back

190   Oral evidence to the Scottish Affairs Committee, Supporting Scotland's Economy, 26 January 2011, Qq129-131 Back

191   HM Treasury, The Varney Review of Tax Policy in Northern Ireland, December 2007 Back

192   Q 111 Back

193   Q 30 Back

194   Q 57  Back

195   HM Treasury, Rebalancing the Northern Ireland economy, para 4.19 Back

196   Q 30 Back

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