Written evidence from Capitus
In response to the Northern Ireland Affairs Committee
investigating the possibility of establishing Northern Ireland
as an Enterprise Zone, Capitus Limited offers its opinion as follows.
1.0 Who is Capitus and why are we Responding
to This Consultation?
- 1.1 We feel that it is important to first
of all set out the perspective from which we are commenting on
this issue.
- 1.2 Capitus is an Investment Incentives Consultancy
specialising in advising clients on the tax incentives available
for specific areas of capital investment. We act for major institutional
and listed plc investors, owner managed businesses, banks, hoteliers,
care home operators and retailers, to name but a few, throughout
the UK. Our core activities are focused on the incentives available
for investment across all sectors of commercial property development
and refurbishment in all sectors ranging from manufacturing facilities
through to hotels, shopping centres, offices and data centres,
etc.
- 1.3 We offer clients advice with respect
to the following key tax incentives for investment and facilitate
the claiming of these reliefs to encourage and stimulate growth:
- The various capital allowances available for
investment in plant and machinery.
- The Enhanced Capital Allowances scheme available
for investment in energy and water efficient technologies.
- The provisions of the Business Premises Renovation
Allowances scheme which encourages investment in disadvantaged
areas (for example, all of Northern Ireland qualifies).
- The Land Remediation Relief scheme aimed at encouraging
investment and regeneration of Brownfield and Long Term Derelict
land.
- The use of Enterprise Zones to stimulate economic
growth in specifically targeted areas.
- 1.4 It is our specific and in-depth knowledge
of these areas that allows us to offer our considered opinion
on the possibility of establishing Northern Ireland as an Enterprise
Zone. We comment on the specific areas that the NI Affairs Committee
has requested views on as follows:
2.0 How Does an Enterprise Zone Operate?
- 2.1 We understand that the Coalition Government,
in conjunction with the Northern Ireland Executive wish to evaluate
methods to 'rebalance' the Northern Ireland Economy. In particular,
stimulate growth in the private sector and reduce the reliance
upon public sector investment and expenditure.
- 2.2 It is therefore imperative that the UK
Government encourages increased private sector productivity, investment
and job creation in the short to medium term within the Northern
Ireland economy.
- 2.3 An Enterprise Zone will achieve the desires
listed in 2.1 and 2.2 by providing a competitive commercial environment
for private investment. Traditionally, an Enterprise Zone would
incentivise investment and innovation by offering tax reductions,
allowances or reliefs, financial assistance or non-monetary benefits
to potential investors in excess of those currently available
in other areas.
- 2.4 Prior experience of Enterprise Zones,
particularly within the North East and North West of England,
Clyde Bank in Scotland and the Lower Swansea Valley in Wales were
relatively successful. These original Enterprise Zones offered
investors an exemption from Land Duty and Commercial Property
Rates, 100% capital allowances for expenditure and a simplified
planning regime.
- 2.5 Ideally, a 21st Century Enterprise Zone
should operate by targeting quality investment from job-creating
private companies and individuals. Therefore, it is important
to not only incentivise the investor to develop high quality premises
but also the tenants who bring employment to the region.
- 2.6 Although success had been witnessed throughout the
previous Enterprise Zones, in our view, Northern Ireland failed
to adequately benefit due to the reasons listed in section 3.2.
3.0 Why Should NI be declared an EZ?
- 3.1 It is our opinion that if the Government
is to achieve its stated desire of moving NI away from its well
documented over-reliance on the public sector, a package of stimulus
measures must be introduced for a period of time to encourage
private sector investment generally and foreign direct investment,
in particular.
- 3.2 The factors that lead us to this conclusion
are as follows:
- The negative impact of 30 years of conflict
- An obvious point but one which cannot be overstated
for a whole variety of reasons. Apart from the obvious lack of
private sector investment during that period and the economic
consequences of that, we believe that "The Troubles"
have led to a whole generation which is mentally reliant on the
State for their economic well-being. This, in turn, has led to
a culture which is not conducive to nurturing entrepreneurial
spirit.
- The geographical proximity to the Republic
of Ireland:
- Again, we believe that this is a huge factor
mitigating against inward investment to Northern Ireland. The
ROI has a CT rate of 12.5% (astonishingly, now supported in part
most recently by a loan from NI resident UK taxpayers), multiple
Enterprise Zones and tax incentives aimed at encouraging investment
in specific sectors such as hotels, nursing homes, nurseries etc.
and as such ROI is still a hugely attractive environment for a
company to invest in. Compare this to the position in NI - a 28%
CT rate, no Enterprise Zone and no
tax incentives whatsoever aimed at encouraging specific sector
growth (apart from the soon to be phased out and highly restrictive
Business Premises Renovation Allowance).
- We are surprised that Northern Ireland attracts
any inward investment at all and we need at least a level playing
field if we are to compete on any level let alone move our economy
from public sector reliance.
- The brain drain:
- Again, the "brain drain" throughout
the course of 'The Troubles' is well documented. However, to encourage
some of these people to return to NI and lead "home grown"
private sector growth, it has to become a more attractive,
cosmopolitan and safe place to live free of conflict. It is our
opinion that if all the economic and taxation conditions exist
to encourage both UK private sector investment and foreign direct
investment throughout Northern Ireland that other social and cultural
developments will follow, keeping local talent here and encouraging
exiled talent to return.
4.0 What should be included in any Enterprise
Zone Proposals?
4.1 We feel that the following factors should
be considered and included in any proposals for establishing an
Enterprise Zone in Northern Ireland:
- 1. The geographic areas of Northern Ireland
that should benefit from EZ status.
- If EZ proposals are to be adopted at all, we
feel very strongly that the whole of Northern Ireland should
have EZ status. These proposals are not aimed at encouraging investment
in deprived areas or rural areas within Northern Ireland in preference
to say, Belfast for example. They are designed to take NI away
from a culture of reliance on State and replace that with private
sector job creation and growth. Giving EZ status to specific areas
within the Province would not achieve this and would, we believe
have a detrimental impact overall. If the whole of NI achieved
EZ status, inward investors would not cluster around specific
areas and would instead base location strategy on the merits of
the location under consideration (access to workforce, infrastructure
and transport links, land cost etc.)
- 2. Priority sectors that we would want
to encourage to invest here.
- We believe it is imperative that Northern Ireland
attracts investment from job-creating industries which will benefit
from the region's comparative advantages - the excellent education
system, relatively low wages and relatively low property costs.
- We believe high-technology sectors including
bio-sciences, high-technology engineering, pharmaceuticals and
particularly ICT would benefit from the availability of educated
graduates. We also believe entities operating within the 'green
economy' would benefit from any proposals.
- However, if employment would be expected to shift
from the public sector to private sectors, we believe it will
be important to attract appropriate jobs for these displaced individuals.
- Tertiary sectors such as financial services,
banking and retail would not require initial targeting as we envisage
entities operating within these industries to flow into Northern
Ireland as and when the economy grows. We would not envisage Belfast
being able to compete as a primary financial hub, however, certain
'back-office' and supportive functions from within these sectors
(such as the recent Citi and NYSE investments) should not be excluded.
- 3. What type of Investor could benefit
from EZ status in Northern Ireland?
- As previously mentioned, it is imperative to
incentivise investors seeking to bring quality employment to the
region. By encouraging the initial investment, the wider economic
and social externalities provided will create a more vibrant,
competitive and wealthy region.
- Although local investors will not be excluded
from the EZ benefits, we feel International and particularly European
entities wishing to improve UK or Irish market positions would
benefit from EZ proposals.
- In line with the Coalition Government's desire
for an export led, knowledge based economy, we feel it is important
to attract the right entities willing to make a long-term commitment
to Northern Ireland.
- 4. A statement of the levels of tiered
tax relief that could apply to specific sectors wishing to invest
- For example, 50% tax relief could apply to ordinary
property investors, 100% for property investors providing properties
with an "excellent" BREAAM rating (to encourage energy
efficiency), 100% for manufacturers, offices, hotels, etc 125%
for pharmaceutical companies, "high tech" companies
and companies involved in the "green economy", 150%
for companies involved in significant R&D. etc. etc.
- 5. The Corporation Tax Rate that will
apply to companies in the EZ and other tax considerations.
- Rather than chasing the Celtic Tiger dream with
a universal lower rate of corporation tax, we feel the utilisation
of targeted allowances and reliefs (such as enhanced rates of
capital allowances or R&D tax relief) would provide the necessary
incentive without attracting myopic investors intent on tax migration.
- 6. A statement on the implementation of
a simplified planning regime applicable to the EZ
- We would appreciate a reduction in planning bureaucracy
and administration and welcome a fast-track system for planning
consent.
- 7. A statement of the length of time that
the EZ will run for
- Up until now, UK Enterprise Zones have run for
a fixed period of 10 years. However, we believe that it would
be very difficult to achieve the objectives that the Government
are attempting to achieve in this relatively short space of time
and we consider that a more realistic time frame might be 15 years.
- 8. A statement on whether or not Business
Rates "holidays" might apply within the zone
- Considering the pressures currently experienced
by local councils and the requirement for sustained investment
in infrastructure, we believe a business rates holiday should
only be implemented for the smallest of entities.
- 9. Anti-avoidance provisions
- The Enterprise Zone should include tapered claw-back
provisions which would be enforceable if an entity removes the
investment during the time of the EZ.
- We would recommend tightening of UK-UK transfer
pricing regulations to prevent spurious profit-shifting from entities
seeking only to reduce head-office taxation liabilities.
5.0 Previous Enterprise Zones in NI
- It is our
opinion that previous EZs in Northern Ireland achieved some success
in stimulating investment in the areas that were targeted. However,
they were too "area specific" and open to abuse for
those wishing primarily to shelter tax liabilities (see 6.1 below).
Furthermore, they were operating during "the Troubles"
and so it is difficult to be objective about how successful they
really were because of the extreme anti-investment negative effect
of the conflict.
6.0 What can we learn from initiatives to
stimulate Enterprise in other Countries?
- 6.1 EZs are generally recognised as providing
a stimulus for investment in various jurisdictions throughout
the world. They were modelled on the original concept introduced
by Geoffrey Howe in 1978. There are (or were) a number of EZs
throughout the world (in the USA in particular). However, we highlight
below our main concern with EZs and one which must be addressed
in the implementation of an EZ for NI.
- 6.2 We believe that one of the worst features
of the 100% tax allowance available for investors in geographically
specific Enterprise Zones throughout the UK and the ROI was speculative
property investment by investors looking only to shelter tax liabilities.
This led to property prices rising to levels significantly higher
than market value of similar properties outside the EZ which,
in the long term, is not sustainable and leads to wealthy individuals
and companies not contributing the levels of taxation to the Treasury
that they would otherwise have to.
- 6.3 We would go as far as to say that EZs
and similar property based tax sheltering schemes in the ROI were
in part responsible for the property bubble and its subsequent
bursting which has ultimately put the ROI economy in such a currently
perilous state. Indeed, the ROI has now introduced restrictions
on the levels of income that can be sheltered against tax in this
way.
- 6.4 Whilst we believe that encouraging speculative
property development and a property owning landlord sector is
a key feature of making an Enterprise Zone work, we feel that
allowing "armchair" high nett worth investors to directly
avail themselves of the same levels of EZ tax relief as a foreign
direct investor for example would be a mistake and should be avoided.
We have further more detailed opinions on how this could be addressed
but this is beyond the scope of this consultation.
7.0 Conclusions
- 7.1 We consider that a comprehensive series
of measures all included under the banner of an Enterprise Zone
would be a very positive incentive for inward investors. From
our own client base, we are aware of many companies and institutional
investors that would find such a series of measures highly attractive
and would put Northern Ireland on their list of targeted geographic
areas to invest in.
- 7.2 We believe that there are enough individuals
in Northern Ireland who want to see it flourish and who have the
entrepreneurial leadership to grasp this opportunity to move away
from a society being propped up by the public sector and towards
one where a culture of private sector led economic growth becomes
the norm. We strongly recommend that serious consideration is
given to making sure that Northern Ireland gains Enterprise Zone
status as soon as possible to both kick start this project and
ensure that the cost to The Treasury is kept to a minimum.
21 January 2011
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