Written evidence from the Chartered Institute
of Taxation (Northern Ireland Branch)
1. INTRODUCTION
1.1 The Chartered Institute of Taxation (CIOT)
is pleased to be invited to respond to the questions raised by
the Northern Ireland Affairs Committee (NIAC) in respect of the
consideration of mechanisms for changing the corporation tax rate,
as announced in the Emergency Budget by the Chancellor of the
Exchequer, George Osborne, on 22 June 2010.
1.2 In order to answer the questions we asked
members of the Chartered Institute of Taxation and Association
of Tax Technicians (ATT) in both Northern Ireland and the Republic
of Ireland for their input via a survey. This response can therefore
be taken as also supported by the ATT. The survey was sent electronically
to members in September with a very short deadline for responses
but still attracted a response rate of about 15%.
1.3 The results below summarise members' views,
as expressed in their responses to the survey. There is inevitable
overlap and duplication between the answers to some of the questions
but we have not edited these overlaps out, preferring to give
the full picture of responses. We have not followed up the responses
in any way but could do so if NIAC wished for further input. Nor
have we sought views from members resident elsewhere in the UK.
2. EXECUTIVE
SUMMARY
2.1 The general consensus of opinion is that,
while the UK-wide reduction in the corporation tax (CT) rate to
24% is unlikely to be of significant benefit to Northern Ireland
(NI), where most companies pay CT at the small companies rate,
there would be a significant improvement to the competitiveness
of the NI economy if the rate were to be equalised with that of
its nearest neighbour, the Republic of Ireland (ROI), ie 12.5%.
2.2 Respondents suggested that further measures
would also be required to protect the NI economy in the face of
public expenditure cuts, due to the overdependence of the region
on the public sector and the relative lack of private investment.
Other suggestions included reductions in employment costs (eg
reduced rates of employer national insurance), improved infrastructure
and increased relief for capital expenditure.
2.3 It is accepted that many issues will have
to be considered, not least how to fund any tax reductions. However,
members' views are that it should be possible to take this opportunity
to improve the competitiveness of the NI economy and much of the
cost of tax reductions would be met by increased investment and
economic activity.
3. Question 1: What effect will the reduction
in the corporation tax rate on a UK wide basis announced in the
June 2010 Budget have on the competiveness of the NI economy?
3.1 Responses were mixed:
- Little or no impact - 46%
- Moderate impact - 18%
- Significant impact - 33%
- No comment - 3%
The responses to question 4 are also relevant. These
suggest that despite the limited impact, over 70% of respondents
see the benefits as worth having.
3.2 Respondents considered that only a small
minority of companies in NI are large enough to take advantage
of a reduction in the full rate of corporation tax and any benefit
is likely to be minimal. As a stand-alone measure, it is unlikely
to be successful in attracting inward investment from multinationals,
particularly given the availability of a 12.5% corporation tax
rate in the ROI. It was also regarded as a UK-wide measure, so
multinational investors would be just as likely to take advantage
of it by investing elsewhere in the UK, ie outside of NI.
4. Question 2: What would be the benefits
of equalising the corporation tax rate in NI with that of the
Republic of Ireland?
4.1 About three quarters of those responding
considered that it would make NI companies more competitive when
compared to their counterparts in the ROI.
4.2 Specific comments from our members' survey
included that it would create a significant opportunity to attract
foreign direct investment into NI. It would make NI companies
as competitive as their ROI counterparts and act as a significant
draw to attracting inward investment. Whilst the rate reduction
may not directly have a big impact on smaller companies, those
companies would benefit from increased trade levels with the larger
businesses that could be attracted to Northern Ireland.
4.3 Respondents noted that a small number of
NI businesses with operations in the ROI had established companies
there to take advantage of the lower CT rate and the ability to
remit profits back to NI tax-free. By equalising the CT rates,
this would obviate the requirement for such cross-border tax structures
and should reduce compliance costs as a result.
4.4 A minority of respondents felt that equalising
the CT rate with ROI would have a negative impact, resulting in
an influx of 'brass plate' companies with no real economic presence.
5. Question 3: What alternative measures could
be introduced by the UK Government to make the NI economy more
competitive?
5.1 This question provoked a range of responses,
as expected. Over a third considered that non-tax measures were
more important than tax reductions. Slightly fewer thought that
tax reductions should be targeted at individuals rather than companies.
There was also some support for targeting taxes other than CT
and a good number gave alternative suggestions.
5.2 The most popular alternative measure was
to promote employment. Suggestions ranged from reduced rates of
employer national insurance contributions (NICs) to enhanced deductions
for employee costs. Also popular were measures to increase relief
for capital expenditure.
5.3 A reduction in the headline CT rate was clearly
popular with many, with some commenting that there is a risk that
more detailed measures would be more complex or lost in translation,
and so not generate the level of business investment required
to improve the NI economy.
5.4 Non-tax measures that were felt to be important
included improved infrastructure, investment in communications
and education, reduced bureaucracy and a stable executive. They
also considered that the local economic development agency, Invest
NI, should be doing more to support small family businesses as
opposed to attracting low paid "call centre" type operations.
The political and cultural issues, which attract negative media
attention, also need to be addressed.
6. Question 4: Is a reduction in corporation
tax the simplest and quickest way to make the NI economy more
competitive?
6.1 Over 70% of respondents considered that a
reduction in corporation tax was the simplest and quickest way
of making the NI economy more competitive.
6.2 A reduction in the CT rate could be a good
first step in making the NI economy more competitive. It will
not guarantee FDI but will make NI more attractive to FDI business
and levels the playing field with the ROI.
6.3 Introducing a reduced rate would need to
be carefully considered in the context of the reduction in funding
from Westminster, especially if, as is likely to occur, other
UK regions (such as Scotland, Wales and Tyneside) lobby for a
similar reduced CT rate and compete for any foreign investment.
7. Question 5: How long would it be before
NI realise the benefits from a reduction in corporation tax to
be comparable with the Republic's rate?
7.1 The majority (over 60%) of respondents thought
that the benefits would be realised in the short term (0-5 years).
7.2 However, some felt that NI is such a long
way behind ROI that it will take a number of years before the
effects of a reduced rate of CT will have any noticeable effect,
if at all. There is also the possibility that ROI may have to
increase their CT rate.
8. Question 6: What are the legal barriers
to the introduction of different corporation tax rates on a regional
basis within the UK?
8.1 We did not provide any options to members
in respect of this question, so responses summarised below are
the spontaneous views of members.
8.2 Members considered that barriers should not
be problematic provided NI bears the fiscal consequences of the
reduced rate. A number referred to the Azores[1]
case and the fact that the NI Assembly can comply with the three
requirements laid out in that case. The recent British Aggregates
judgment (T-359/04), which
deals with the exemption from aggregates levy in Northern Ireland,
does however suggests that some care is needed to ensure that
a tax measure such as this does not constitute state aid.
8.3 Whilst other parts of the UK may feel they
have been discriminated against if NI proceeds with a CT rate
reduction, there should be no legal barriers as NI is easily distinguishable
from the rest of the UK (eg Scotland and Wales) as it is part
of the island of Ireland and is at a bigger disadvantage than
the rest of the UK given the close proximity with ROI.
8.4 Some members pointed towards the EU political
desire to harmonise taxes across all member states and suggested
that it may be difficult to obtain clearance at the EU level for
a CT rate reduction.
8.5 If NI has a 12.5% CT rate, that could raise
issues under the UK's Controlled Foreign Companies (CFCs) regime,
assuming the rest of the UK keeps a significantly higher rate.
The easiest solution might be to exclude NI from the rest of the
UK for CFC purposes. Genuine businesses should fall within one
of the CFC exemptions in any case.
8.6 Most of the anti-avoidance rules that would
be required already exist, for example the transfer pricing legislation.
9. Question 7: What do you consider the effect
of a reduced corporation tax rate in NI will be?
9.1 There was a very mixed response to this question.
The most popular responses were:
- More businesses would move from other parts of
the UK to NI.
- Fewer businesses would move from NI to the ROI.
- There would be an increase in tax-geared incorporations
in NI.
9.2 Respondents felt that there could be modest
levels of migration to NI from the rest of the UK but this
would be better than migration to outside the UK. By attracting
business that would not otherwise be in the UK, it would increase
the overall tax take in the UK.
9.3 Many members considered that NI business
would be able to compete more effectively with their ROI counterparts
and the subsequent increase in inward investment from larger companies
over time should increase the total tax take, including both PAYE
and CT, whilst creating jobs and reducing the amount of state
benefits paid to individuals in NI. A reduced CT rate would also
reduce the incentive for NI based businesses to maintain subsidiaries
in ROI.
9.4 Any perceived loss of tax revenue resulting
from a reduced CT rate could be offset by increased output.
9.5 Some of our members considered the geography
of NI and that there are significant costs associated with that
eg transport of goods, place of supply, etc. The effect of a reduced
CT rate may be an expansion of businesses that are service orientated,
or that rely on IT and high value, easily transportable goods.
9.6 Few members expressed concerns that businesses
will seek to move their CT residence without moving their operations.
Given the anti-avoidance measures already at HMRC's disposal,
increased aggressive avoidance was not seen as a significant issue.
10. Question 8: What evidence is there from
other countries that having different corporation tax rates on
a regional basis is effective?
10.1 Over half of the respondents considered
that there is clear evidence that low corporation tax rates can
improve competitiveness. However, nearly a third of respondents
did not consider that they had the experience to comment.
10.2 Low CT rates combined with proper infrastructure
and inward investment will increase competitiveness. A clear example
of this is the ROI where, even in the worst recession in the last
50 years, they have raised the majority of the headline rates
of tax, across all taxes, with the clear exception of the CT rate,
which has been maintained 12.5%.
10.3 Some members considered the distortions
that a regional variant CT rate in NI could create within the
UK tax system. They considered it likely that Scotland and Wales
would wish to follow suit and that may reduce NI's advantage over
time.
11. Question 9: What are the implications
for other regions if a lower rate of corporation tax is introduced
in NI?
11.1 The most popular answer was that other regions
such as Scotland and Wales would seek equivalent benefits. In
relation to Scotland, this is not currently on the list of measures
planned for the Scottish Parliament under the Calman Commission
proposals.
11.2 Some members considered that if each region
wishes to reduce its CT rate, then, providing it is prepared to
finance it from its own budget, then that region should be entitled
to make its own "business case" for a reduced CT rate.
11.3 It may unfairly benefit NI business but
the region is unique in its over-dependence on the public sector.
For the NI economy to become more self-sufficient it needs more
private investment; reducing the CT rate is one way of achieving
this.
11.4 The geography of Northern Ireland is likely
to mean that not many GB companies will seek to relocate to NI,
but it may impact on those seeking to start up new businesses.
12. OTHER COMMENTS
12.1 We invited members to make any other comments
that they considered relevant to this subject.
12.2 Significant responses were as follows:
- The ability to vary corporation tax rates in
NI should be devolved to the NI Assembly which should then determine
what the appropriate rate should be and when the reduction should
take place.
- Private investment is badly needed in NI. Reducing
CT rates would encourage inward investment thereby increasing
employment levels, which would augment income tax revenues across
the UK.
- There is definite merit in using tax to stimulate
growth in the local economy. However, changing the CT rate appears
to be an overly simplistic solution and one that could drive short-term
opportunistic behaviour from investors rather than the long-term
sustainable growth we need in the region.
- Due to the large public sector and impending
cuts, something needs to be done to stimulate private sector growth.
With the ROI 0%/12.5% corporation tax rates, we need a comparable
rate to attract investment.
- A typical client of mine has an £800K turnover,
£50K profit with 14 employees. This measure would save them
£4,250 in corporation tax (difference between 21% and 12.5%).
A targeted grant of the same amount, which provides them with
an additional resource of training or export capability, would
be of more help - to push them to improve the business, rather
than passively accepting some additional cash flow. Alternatively,
£4,250 to take off the purchase of new equipment (but with
the cash now, not 9 months after year-end) would promote investment.
- The change in rates will have a massive psychological
impact in Northern Ireland and help provide confidence to the
Private Sector to develop and grow their businesses, which is
vital in these economic times. The overall state of the economy
in the island of Ireland, coupled with the state of the banking
sector in Ireland means that the economy needs a major boost to
help make it anywhere near competitive and attract new investment.
Failure to take action at this time could lead to many years of
economic deprivation seeing NI fall even further behind GB in
private sector activity and increasing its reliance on the State
by way of Public Sector work and the Benefits system. As both
the Public Sector and the Benefits systems are targeted to produce
significant savings in the next few years, the effect in NI could
be catastrophic. The Government must not waste this opportunity.
- We need more than tax incentives. We are a nation
of small business but Government Agencies appear (perception)
to focus on the larger international businesses. Also, what is
government doing about small business banking?
13. THE CHARTERED
INSTITUTE OF
TAXATION
13.1 The Chartered Institute of Taxation (CIOT)
is a charity and the leading professional body in the United Kingdom
concerned solely with taxation. The CIOT's primary purpose is
to promote education and study of the administration and practice
of taxation. One of the key aims is to achieve a better, more
efficient, tax system for all affected by it - taxpayers, advisers
and the authorities.
The CIOT's comments and recommendations on tax issues
are made solely in order to achieve its primary purpose: it is
politically neutral in its work. The CIOT will seek to draw on
its members' experience in private practice, Government, commerce
and industry and academia to argue and explain how public policy
objectives (to the extent that these are clearly stated or can
be discerned) can most effectively be achieved.
The CIOT's 15,000 members have the practising title
of 'Chartered Tax Adviser' and the designatory letters "CTA".
20 September 2010
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