Corporation Tax in Northern Ireland - Northern Ireland Affairs Committee Contents

Written evidence from CB Richard Ellis Limited


1.  CB Richard Ellis (CBRE) is the largest commercial real estate adviser in the world, offering a full service real estate in more than 300 offices worldwide. Within the United Kingdom, CBRE has more than 25 years experience advising both public sector and private sector clients on all aspects of Enterprise Zone strategy, development and investment. Since the 1980's, CB Richard Ellis has been involved in more than £1 billion of transactions in UK Enterprise Zones, and is appointed to advise on a number of the "final" Enterprise Zone developments which will be undertaken prior to the termination of such status in April 2011.

2.  As we understand it, there is not yet any detail of the proposed structure which any new Enterprise Zone in Northern Ireland might take or the range of benefits which may be available. Accordingly, this submission reflects our experience of transacting business within the UK Enterprise Zones since they were first introduced in 1981. It also takes particular cognisance of our relevant experience in the Northern Ireland market where we have a local presence and are one of the leading real estate firms operating in the region.

3.  UK Enterprise Zones offered a range of fiscal, financial and administrative incentives as a means of stimulating economic activity and employment creation within areas of the UK where industrial decline had caused significant unemployment, especially through the loss of traditional industries.

4.  The first UK Enterprise Zones (EZs) were designated in 1981, the last in 1996. In total, in the period to 1996, 36 EZs were designated, each for a period of 10 years, during which a series of benefits were available within the defined land boundaries of each EZ. The benefits typically included:

  • 4.1  Exemption from Development Land Tax (benefit superseded by removal of DLT in 1983).
  • 4.2  100% initial allowances in relation to qualifying expenditure.
  • 4.3  100% relief from commercial rates (but not water rates).
  • 4.4  A simplified planning regime. Projects which conformed with a published planning scheme for each EZ would not require planning consent in the normal manner but would be able to apply for a "deemed consent".
  • 4.5  Certain relaxations in the need to provide statistical data to public sector agencies.

5.  Of these benefits the most significant and most valuable were (4.2) and (4.3). These are individually in some cases and collectively in many cases sufficiently powerful incentives to influence development decisions.


6. We have listed below some general observations and recommendations based on our experience of advising on and observing the operation of EZs in a number of jurisdictions, predominantly in the UK.

  • 6.1  In our experience, the granting of EZ status over an area of land generally has the effect of increasing the value of that land. In the earliest EZs, land in the ownership of both private and public sector entities was designated. In later EZs, only land in public ownership was designated to avoid private sector windfall gains. This latter approach should be considered in Northern Ireland, if relevant.
  • 6.2  We advise that care should be taken to ensure that the land designated for the EZ is capable of development. In some of the UK EZs, land remained undeveloped during the entire designation period when the benefits of such status might have delivered better outputs had an alternative site been designated.
  • 6.3  In our experience, there is rarely a direct linkage between the availability of EZ benefits and job creation. The simple act of EZ designation does not in itself create employment. However, we have found that the benefits of EZ designation if utilised efficiently within a financing structure, can produce lower property occupancy costs or higher incentives for a property occupier. Those reduced costs, when considered alongside other support mechanisms, may improve the viability of a particular project attracting a business to locate within the boundaries of the EZ.
  • 6.4  In many cases, we have found that the benefits of the EZ designation are not a direct and immediate advantage to new inward investors. This is because EZ allowances are not a grant, but an allowance. In practice and by way of simple explanation, we brief clients to consider EZ allowances to be the equivalent of a credit note which can be used to offset UK Corporation Tax or UK Income Tax liabilities. Inward investors that are new to the UK may, in the earliest years of trading, have no, or only limited profits liable to UK tax. Accordingly, the benefit of such a credit note may be limited or deferred until such times as the inward investor generates sufficient taxable profits.
  • 6.5  In our experience, the majority of EZ investment in the UK has been provided by Collective Investment Vehicles (Syndicates, Limited Partnerships or Trusts) comprising high net worth investors. These vehicles are typically supported by debt facilities provided by banks or other lending institutions, secured against the buildings being developed and the future income flows (rent or guarantees) available. The individual investors within these collective investment vehicles will typically be seeking to shelter a liability to income tax at the highest marginal rate (recently 40%) and currently 50%. A sophisticated market has become established for Collective Investment Vehicles of this nature which are formed and sponsored by specialist investment houses within the Enterprise Zone community. Current issues surrounding the availability of bank finance for property development and investment could have a negative influence on the pace of development within a new EZ.
  • 6.6  UK legislation prescribes that the original designation period for each EZ was 10 years. A mechanism known as "Golden Contracts" permits the initial allowances benefit of EZ status to be extended for a further period of up to 10 years where contracts for the construction of development have been put in place prior to the expiry of the original 10 year designation period. The other benefits cannot be similarly extended. Given that the latest EZ designation in the United Kingdom was 1996, this would imply that the latest Golden Contract extensions might run until 2016. However, the UK Government announced recently that notwithstanding the Golden Contact periods which applied to certain EZs, all would come to an end at 5 April 2011.
  • 6.7  The growing gap between UK Corporation Tax rates (trending lower) and UK Income Tax rates (trending higher) would suggest that private investors rather than companies investing in a new EZ would benefit more.
  • 6.8  We can see that there might be a potential mismatch between the future availability of EZ allowances in Northern Ireland and the muted reduction in the rate of Corporation Tax. The net worth of EZ allowances to a company paying Corporation Tax at 12.5% would be 12.5 pence in the pound (based on qualifying expenditure), whereas a top rate income tax payer would find the same allowances to be worth 50 pence in the pound, a multiple of four.
  • 6.9  An issue that is not generally appreciated is that in any property development, the benefits of EZ status are shared between a number of parties, including the land owner, the developer, the investors/owners and the tenant. No single party would typically take full benefit from allowances and this can result in the extent of the potential benefit being significantly less than might be anticipated.
  • 6.10  One of the benefits of EZ status in the United Kingdom has been relief from general rates during the initial designation period. Whilst this might appear to offer an occupational cost saving to businesses locating within EZ property, in a free market the rental levels for such property will increase to absorb much of the benefit of rates relief. The impact of the foregone rates revenue could have significant repercussions in Northern Ireland considering the current economic situation and proposed cuts to public sector and local authority funding.
  • 6.11  As was substantially the case in the period up to 2007 and to a lesser extent since 2007, the benefits of EZ status have been used within financing structures to allow significant speculative development to take place. It is important that the EZ agencies have a control mechanism in place to allow a balanced release of land and avoid the risk of the market being over supplied, which could have substantial negative rather than positive impacts for the medium to long term viability of commercial property development within the Region where the EZ is located. This is particularly pertinent considering the current weakness in the Northern Ireland property market and the extent of supply currently prevailing in the region.
  • 6.12  Efficient use of EZ benefits in the financing of property development (especially speculative development) will require significant levels of bank debt and support. Given the current attitude of banks to property lending, this is unlikely to be readily available and could be a constraining factor on the pace of development.
  • 6.13  The granting of EZ status does not guarantee the willingness of the private sector to undertake development without additional support from the public sector. In certain UK locations, especially EZs of poorer quality, additional public sector support was necessary in some cases up to and including long term head leases.
  • 6.14  EZ status does not remove the risks of property development and investment. Equally, it does not transform projects which are inherently unviable into those which can be taken forward on a commercial basis. Examples exist around the UK of properties which have been developed with the benefit of EZ allowances and which have never been occupied, indeed some have been demolished prior to occupation. It is critical to ensure that the sites identified for designation have the capability to survive and thrive in their own right once the designation no longer applies and incentives are removed.
  • 6.15  Not all commercial property qualifies for EZ allowances in the context of current UK legislation. A qualifying building is defined as a commercial building or an office building. A commercial building must be one which is used for the purpose of a trade, profession or vocation thus, situations can arise when non-trading occupiers wish to occupy commercial buildings other than offices and would be declined as an occupier. Certain industry sectors are also excluded in terms of EU law.
  • 6.16  UK EZs include provision for a simplified planning regime. Typically, the planning regime for each site within the EZ will specify a range of uses considered acceptable by the planning authority and the EZ authority. Where a development is proposed which accords with such use(s), then the developer will seek confirmation from the planning authority that its proposals accord with the scheme and are thereby given a deemed consent. Care needs to be taken that the process of obtaining a deemed consent does not replicate the typical planning process, thereby negating the benefit of such a relaxation.
  • 6.17  It should also be borne in mind that notwithstanding the uses permitted within the planning scheme, there is nothing to stop a land owner or developer making application within the normal planning framework for a use or uses which fall out with the scheme. The planning authority would in such circumstances typically deal with such an application as a standard "non EZ" application. In this context there can sometimes be a tension between the EZ objectives and the general planning process however, provided the control of the land is initially vested in the public sector then irrespective of any planning consent which might be granted through the normal processes, the public sector land owner can decline to release the land for development unless the development proposal fits the wider EZ objectives. In our experience, the simplified planning regime is rarely the predominant factor attracting developers or indeed occupiers to EZs with the financial attractions generally having a higher weighting.
  • 6.18  In UK EZs, certain uses are prohibited under EU regulations. These include ship building, steel making and various others.
  • 6.19  There is no doubt that many of the EZs in the UK served to kick start a process of regeneration which would not otherwise have been possible. In some EZs the momentum established by EZ status has continued after the end of the designation period whilst in others the pace of development has either slowed or come to a virtual halt. Whilst it may be tempting to view EZ status as being generally appropriate for the areas of most significant economic challenge (and EZs could play a part in these areas), long term success is most likely to be achieved where the extent of market failure is less severe and there is the realistic prospect of a sustainable market after EZ benefits have ceased. We know of instances where EZ buildings have been constructed and, having lain vacant for virtually the full designation period, now face demolition.


7.  The Northern Ireland economy and property market are at a critical juncture just now. Economic conditions are challenging; the rate of unemployment continues to increase and the public sector, which has been the dominant employer and occupier of commercial property in the region for many decades, is facing significant cutbacks. The region has many positive attributes including high quality infrastructure, 100% broadband penetration, a highly skilled and well educated workforce as well as house prices, occupation costs and wage costs that are significantly below other locations in the UK. Despite very significant improvements in competitiveness in the Republic of Ireland over the last two year period, property prices and wage costs remain significantly more competitive north of the border. However, the existence of a 12.5% corporation tax rate in the Republic of Ireland is undoubtedly impacting on Northern Ireland's ability to attract large scale multinational companies to set up operations in the region.

8.  If Northern Ireland is to compete with the Republic of Ireland and encourage more foreign direct investment and create much needed jobs, measures such as the introduction of EZs and a lowering in the current rate of Corporation Tax in the region are needed to enhance the attractiveness of the region and encourage occupiers and employers to locate here. Based on our experience in the Northern Ireland real estate market, we believe that commercial activity and job creation would increase if either of these measures or a combination of them were introduced in the region.

We suggest that:

  • 8.1  As in many other EZ designations, we suggest that a number of different sites should be designated in Northern Ireland. While designation will bring about the regeneration of run down and deprived areas of the region, the focus has to be on job creation and we would not advocate identifying sites purely on the basis of social or economic deprivation. Sites must be selected on the basis that the locations and resulting development will be viable, notwithstanding the EZ benefits being removed after a ten year period.
  • 8.2  We would advocate developing speculative accommodation on the EZs but in the current depressed market this must be a controlled process and ideally where a specific end user or market shortfall is identified. We would advocate that EZ designation can aid specific key sectors such as Renewable Energy, Pharmaceuticals' etc.
  • 8.3  There are specific areas in Northern Ireland where land is in public or quasi public ownership. Extreme consideration needs to be given to specific areas and one designation is certainly not a remedy for all. For example, we would cite the Boucher Road area of Belfast, the freehold of which lies with the City Council. Light industrial and logistic operators now struggle to benefit in this area due to a large number of retailers locating therein and thereby driving ground rent pricing. A blanket designation on this area would also benefit retailers and would not address the current problems. However, individual designation of areas within the Boucher Road could help industrial, logistical and employment generating uses to compete with neighbouring retail land users.
  • 8.4  Another specific example may be the Harbour Estate in Belfast. A blanket EZ on the Harbour Estate could well benefit and increase productivity on the Port side and for light industrial and logistical users but would not necessarily be relevant for the benefit of private developers building apartments and retail units on land currently in part ownership with the Harbour in Titanic Quarter.
  • 8.5  There are a high number of sites throughout provincial towns in Northern Ireland which are Local Authority owned and earmarked for development briefs. The availability of enterprise status to these individual sites may well mean the development is possible rather than economically challenged by lack of funding. Again, we would stress development should only be encouraged where there is an identifiable end user.
  • 8.6  The impact of a lack of bank finance in the Northern Ireland market. We believe is creating a major barrier to job creation. Where a devised zone status can incentivise activity, it must be encouraged.
  • 8.7  EZ designation is sometimes regarded as a "label" or "brand name" but we believe it is a mistake to categorise it as such. In terms of deemed planning status alone, the creation of zones may have a knock-on benefit in removing work from an already overstretched planning system.
  • 8.8  On its very lowest level, a designation of EZs within Northern Ireland creates interest in the location and a competitive edge within the Republic of Ireland already benefitting from local Corporation Tax. We believe the introduction of EZs in Northern Ireland may go some way towards the re-occupation of space in the industrial, light industrial and logistics sector and indeed can also be used to promote areas for the regeneration of office stock or specialised uses such as a medical campus.
  • 8.9  One of the concerns that will undoubtedly arise at a local level is the cost of implementing EZs. While the Exchequer will have to bear the cost of granting capital allowances and local authorities forego rates revenue, the expenditure on land and infrastructure could be mitigated somewhat if lands that are already in public ownership are designated.

28 January 2011

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