The soundness of definitions around Northern Ireland company, Northern Ireland employee and Northern Ireland profits and losses, for example, are fundamental. For SMEs, as we know, a company will be a Northern Ireland company if at least 75% of its staff time and costs relate to work carried out in Northern Ireland. This is a novel approach for the UK. However, is it correct that this means that up to 25% of employee effort outside Northern Ireland can effectively qualify for the Northern Ireland rate? If so, what will be the

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overall consequences of this? In theory, this presumably means that this extra tax will be collected and retained by the Northern Ireland Executive but there will be an additional adjustment to the block grant. We were told that on introduction 97% of SMEs will qualify under this test.

A parallel point arises more generally should tax avoiders get away with organising income to be subject to the Northern Ireland rate with economic activity still remaining outside Northern Ireland. In those circumstances, who is bearing the risk of the overall tax forgone? Presumably it would depend upon when this all took place. Will it feature in the initial adjustment of the block grant and how the growth of the initial deduction is to proceed? If the reality is that Northern Ireland bears the risk of tax avoidance, who is going to bear the cost of compliance and making sure that effort is made to tackle that avoidance? Does that rest with the Treasury more generally or with the Northern Ireland Executive?

It is noted that the test for SMEs and staff time is a per company one and on the face of it there is a risk that, within a group, arrangements will be made to have split contracts. How is it proposed to address this? The provisions for identifying the Northern Ireland profits and losses of a large company follow a tried and tested route and adopt the principles that are attributable to a permanent establishment. Nevertheless, this approach can give rise to disputes, although unlike the international situation, the revenue authorities will be seeing both sides of the equation. Internal royalties and interest payable by the Northern Ireland regional establishment are to be ignored, but again this is only intra a single company. It does not seem to look at the wider group context.

I will not speculate about what might happen in the future should corporation tax ever be devolved to Scotland. There could be a three-way tussle to work out to which establishment profits are to be attributable across three territories. We know also that a number of international companies organise their affairs to avoid UK tax and try to sustain that on the basis that they can presumably argue that they do not have a permanent establishment in the UK. Indeed, it would be ironic if the wider avoidance measures now being taken by the Government caused them to seek the shelter of a permanent establishment in Northern Ireland.

Time does not permit me to go into this more. It is a pity that we are denied the opportunity of at least a detailed Committee process on this Bill. I do not argue that so much from a constitutional point of view, just that it would be good fun to get into some of the detail of these provisions. However, I accept that we must acknowledge the position of the elected House. This is an important and, I believe, ground-breaking measure which we hope will have the opportunity to be implemented and prove a stimulus to the economy of Northern Ireland.

5.26 pm

Lord Bew (CB): My Lords, as I wish to say some cautious and possibly even sceptical things about the Bill, and the project of the Bill, I think in all fairness that I should begin by reminding the House of exactly

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why it has been brought forward by the Minister today. In his fine maiden speech, the noble Lord, Lord Hay, alluded to some of this. He, like Mr Mark Durkan in the other place, will be aware that in their own constituencies there are people who are working just over the land border for companies which are paying a very low rate of corporation tax. The land border is actually a real and perceptive issue in explaining why the Northern Ireland Assembly has decided to go down this road. There is, I think, a certain pride in the Northern Ireland Assembly that one thing has been done to address the old dependence of the Northern Ireland economy on the state; one move has been made that makes a gesture towards acknowledging the problem, and it is the decision of all the parties to ask for this power. I must say that there is an immediate difficulty: expectations are raised. The Northern Ireland Assembly may possibly find that the expectations raised by this will be somewhat disappointed. That is something which has to be borne in mind.

The Minister referred in her opening speech to the ways in which the project is now covered in the fog and ambiguities relating to the recent crisis of the Stormont House agreement, and I agree with her absolutely. However, even in the months leading up to the Stormont House agreement—and here I mention the “Wonga loan” referred to by the noble Lord, Lord Empey—it was clear that there was a difficulty in Northern Ireland about the public debate. It was very striking that in the days before the Prime Minister arrived it was considered to be the height of local patriotism by large sections of the Assembly to rattle the begging bowl as loudly as possible. No respect or attention was paid to such factors as a needs basis, and here I would mention the north-east of England or the West Midlands. Actually, if we had a block grant on that basis, on the face of it, Northern Ireland would really face significant reductions.

I say this not because I do not believe in the union and the necessity within the union for regions that are less well-off to be looked after in both the good times and the bad times. I was struck last Thursday in your Lordships’ House by a debate in which the noble Lord, Lord Shipley, spoke about the 70th anniversary of Dresden. He spoke as somebody whose father had been an air raid warden in Coventry on the night of one of the worst bombings. A number of other British cities were mentioned as having suffered the bombing. Actually, Belfast was the city that lost almost 1,000 people in one night, the second heaviest loss of life as a result of German attacks.

The union means that you are there in good times and in bad times, and that is the great attraction of the idea. I absolutely accept the argument that Northern Ireland has required and has received special and generous treatment from the Treasury in recent times, but there is a problem with devolution. As I am sitting beside the noble Baroness, Lady O’Neill, I cannot help thinking about her kinsman’s autobiography. Terence O’Neill, later Lord O’Neill of the Maine, discussed some of these issues. He explains in his autobiography that he could not convey, even to well educated people within Northern Ireland, that Northern Ireland, even in 1968, was subsidised by the Treasury. He had to take that into account in his relationship with the British Government.

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One of the most remarkable achievements of devolution in Northern Ireland was to move away from the Government of Ireland Act, which set up an unsustainable basis for the funding of Northern Ireland, and replace it with the principle of parity. It was the achievement least understood by the population at large. That is the paradox of Northern Irish devolution. Devolution is again having that effect internally. The population does not seem to understand. The public debate is not sufficiently informed by the realities of the relationship to the Treasury.

There is a second ambiguity at the moment which was not alluded to by the Minister in her opening speech. That is the situation regarding future developments with respect to corporation tax. The Chancellor has spoken recently about the possibility of UK corporation tax going to 15%. The Republic’s corporation tax is now 12.5%. In real terms, the Republic’s corporation tax, because of devices known as the “double Irish”, is something like 3% to 4%. That is the clue to so much of the attraction of inward investment which has kept that economy afloat, but it is actually a remarkably low effective corporation tax.

By the way, this House has seen an unusual amount of capitalist knocking for the House of Lords this afternoon, but I would like to add my two-pennyworth. One of the implications of the discussion we have had is that the Varney report referred to, originally produced in the Treasury, said that corporation tax was not the decisive factor in the decision of companies to employ, and there were other factors, and it was really only number six. Actually, this Bill is impossible without the assumption that this polling, or this word from our capitalist class, is a lie. It is based on the assumption that they are simply not telling the truth about why they behave as they do, and that actually they follow the low rate of corporation tax. The experience of the Irish economy is the key thing, and all the other things that they talk about as vitally important are not really that important. They might fill in a form and say that, but look at how they behave. That is my little bit added to the unusual wave of anti-capitalist rhetoric sweeping the House of Lords this afternoon. This legislation is tacitly based on the fact that what companies tell us about their behaviour with respect to corporation tax is not the full truth—to put it as simply as that.

If the Treasury achieves the aim of getting 15%, and if the unusual mechanisms known as the “double Irish”—which pushed Irish corporation tax down to 3% or 4%, or so it is reported—are now coming under attack from the United Kingdom Government, the European Union and the United States Government, is it not reasonable to think that, two years down the road—in effect, this legislation has a two-year stay on it—the level of corporation tax in the United Kingdom may not be that much removed from the real corporation tax levels of the Irish Republic? The legislation is driven by a keen desire on the part of the Government and the Assembly to show that something can be done to attempt to rebalance the Northern Irish economy. We all have to respect that. However, it may be the case that, two years from now, it might not have quite the meaning it seems to have today.

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I conclude with one technical point which came up in the debate in the other place. There was unanimity across a number of the Northern Irish parties—the SDLP, Lady Sylvia Hermon, the Alliance Party and some in the Democratic Unionist Party—about those companies entitled to come within the ambit of eligibility for lower rates of corporation tax. Essentially, the point was made that credit unions and mutual societies had a case to be included and were not an example of potential brass-plating. I have campaigned with Mr Mark Durkan in the other place for the credit unions of Northern Ireland. They are racy of the soil and are used by as many as 30% of population. It does not seem to me that mutual societies and credit unions are an example of possible brass-plate abuse. If we are going ahead, I think that there is a case—certainly, it was argued across a number of the parties—for looking at the categories that might be included within the ambit of the legislation.

5.36 pm

Lord Lexden (Con): My Lords, the noble Lord, Lord Bew, is an old friend from academic life and it is good to follow him. It is good, too, to have an opportunity to congratulate the noble Lord, Lord Hay of Ballyore, on his maiden speech. It is clear that he was a faithful and dedicated servant of the Northern Ireland Assembly, just like his predecessor, my noble friend Lord Alderdice.

I share the hope that has been widely expressed in this debate that the Bill before us will assist the progress of Northern Ireland and help secure its longer-term prosperity. The important measure of devolution for which the Bill makes provision has not, like some other measures of devolution, been conceived in undue haste or brought forward with insufficient preliminary work. The case for devolving the rate of corporation tax in Northern Ireland was advocated powerfully in Ulster Unionist circles in the 1980s, as my noble friend Lord Empey has told us. It was taken up enthusiastically by my right honourable friend Owen Paterson when he was Conservative shadow Secretary of State for Northern Ireland before the last election. A commitment to action was included in the Conservative Party’s 2010 manifesto and in the manifesto of the Ulster Unionist Party then led by my noble friend Lord Empey. Indeed, it was the subject of discussion between the two parties as part of the work that was done with the aim of creating an enduring partnership between them. I regret that that aim was not in the end successfully accomplished. Ulster’s position in the United Kingdom would have been strengthened by such a partnership.

After the election, the coalition made clear in its Programme for Government that it would,

“work to bring Northern Ireland back into the mainstream of UK politics”—

a commitment to lift all true unionist hearts. In the course of doing so, it would examine,

“potential mechanisms for changing the corporation tax rate in Northern Ireland”.

That examination began exactly four years ago with the publication of a government consultation document stressing the overwhelming need to rebalance the Northern Ireland economy by increasing the size of its private sector, which over several generations had shrunk so alarmingly.

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From 2011 onwards, I inquired about the progress of the Government’s work through a number of Oral and Written Questions. There is little doubt, I think, that the announcement of the Government’s decision was delayed to avoid discussion of it during the Scottish referendum campaign of last year. The decision was finally made known in the Chancellor’s Autumn Statement last December, and I welcomed it in the debate on the Statement which took place in this House. It is important to remember that the Bill implements clear commitments that have been given to the people of Northern Ireland. It would have been extremely regrettable if a measure so long in gestation and enjoying such widespread support in Northern Ireland had not been carried into law before the election.

We are all extremely conscious of the acute difficulties that have arisen within the Northern Ireland Executive. It is obvious that they must be resolved if the scene is to be set successfully for the transfer of power over the main corporation tax rate to the Executive in 2017, the target date. I express my admiration for the tenacity and determination with which my right honourable friend the Secretary of State for Northern Ireland continues to work with the political parties in the Province to try and overcome the severe problems. Her predecessor, my right honourable friend Owen Paterson, pressed the case for the devolution of corporation tax with immense fervour. The arguments which he and many others made have been accepted widely, if not universally, in Northern Ireland. In these circumstances, it would be tragic if political instability in Northern Ireland should, at the final hour, deprive the Province of the prospect of benefits which so many economic experts predict and which so many business men and women hope to deliver.

When the Chancellor announced the Government’s decision in favour of devolution, in his last Autumn Statement, the Northern Ireland Chamber of Commerce and Industry declared that,

“our politicians must grasp this opportunity”.

There is no doubt that that is exactly what Northern Ireland politicians, as a whole, wish to do. I hope that, with the assistance of my right honourable friend the Secretary of State for Northern Ireland, they will be able to make that wish a reality and then go on to deal successfully with the challenges that will at once arise, most notably through the reduction of Northern Ireland’s block grant, which has rightly featured prominently in this debate.

This is a money Bill but, as a number of noble Lords have stressed, it has significant constitutional implications. It adds a new element to the unbalanced and asymmetrical arrangements that characterise the United Kingdom’s three devolved settlements and create resentment in undevolved England. The justification, as we all know and has been stressed often in this debate, is the existence of a low rate of corporation tax in Northern Ireland’s neighbour, the Republic of Ireland, with which it competes for international investment. Will the greater imbalance that this measure will introduce within the devolved settlements be accepted on all sides in Wales and Scotland? As we have heard, it is clear that it will not. Nationalist politicians in Scotland

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and Wales have said that what Northern Ireland has, they must have too. How will the main British parties react? That is the question to which we now need to know the answer.

This Bill has been conceived in the best interests of Northern Ireland and could serve those very well indeed. However, at the same time, it could add to the United Kingdom’s constitutional instability which, sadly, is so marked a feature of life in our country today.

5.42 pm

Lord Browne of Belmont (DUP): My Lords, I congratulate my noble friend Lord Hay of Ballyore on an excellent maiden speech. During his long public service, he has continually sought to achieve consensus between the two communities in Northern Ireland and he has had a great deal of success in that. His fair-mindedness, negotiating skills and ability to remain calm when faced with adversity will enable him to make a useful contribution in this House.

I wholeheartedly support the Bill and it is fitting that it will complete its parliamentary stages on St Patrick’s Day. I am not suggesting that we will be celebrating the Bill in 1,000 years’ time, but it has the potential to transform Northern Ireland’s economy in the long term and to ensure a level of prosperity that the Province has not enjoyed before. Although today is the end of the parliamentary process, this is far from the end of the corporation tax story. To quote Sir Winston Churchill,

“this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

Indeed, what a long beginning this has been. The campaign for the devolution of corporation tax for Northern Ireland in its present form dates back a decade. I thank the business groups that have supported the campaign to build a political consensus on this issue for many years. Their work helped to build support for corporation tax devolution not just among Northern Ireland’s politicians but among key Northern Ireland Office and Treasury Ministers. That support proved invaluable when difficult times came.

I pay particular tribute to Northern Ireland’s First Minister, Peter Robinson, who played a very significant role in championing this cause in the Northern Ireland Assembly. I also thank the present Government for taking the initiative on this and responding to the united political call from the Northern Ireland parties. I am sure that at times it would have been easier to accept the Treasury orthodoxy on such matters rather than to take a new policy initiative. Despite any doubts that it may have had, the same Treasury did not hesitate to commit itself to drawing up the Bill. I know that the policy of corporation tax devolution has not been enthusiastically supported by the Labour Party but I must acknowledge its role in ensuring the Bill’s smooth passage through Parliament.

Strictly speaking, the Bill does not devolve corporation tax powers to the Northern Ireland Assembly but allows the Assembly to set the Northern Ireland rate of corporation tax, with every other aspect of the regime remaining the responsibility of Her Majesty’s Revenue and Customs. That is why I think that those who have some concerns about the Bill on constitutional

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grounds are wrong. The Bill does not in any way undermine the union between Great Britain and Northern Ireland. Indeed, if this policy proves to be a success, it will mean that Northern Ireland will make an increased contribution to the United Kingdom economy. That can only be good for Northern Ireland in particular and for the United Kingdom as a whole.

There are others who argue that Northern Ireland will not reap the rewards of a lower rate of corporation tax but will pay too heavy a price in the reduction of public expenditure. Time does not allow for a comprehensive rebuttal of this argument but I will briefly make the following observations.

First, most economists agree that a reduction in the corporate tax rate is one of the most effective policy tools to achieve a rebalancing of the Northern Ireland economy towards the private sector, which in my view is an essential prerequisite for future economic prosperity. Convincing evidence is provided in a recent study by Ulster University’s Northern Ireland Centre for Economic Policy, which has estimated that the lowering of the corporation tax rate to 12.5% from April 2017 would result in the creation of 37,500 additional jobs by 2033. In simple terms, that means more jobs and better jobs. It means more money circulating in the local economy, and a higher standard of living and a better quality of life for everyone in Northern Ireland. In the longer term, it means that we have the capacity to fund public services at the level many of us would wish to see.

A lower rate of corporation tax is good not just for foreign direct investment but for our indigenous businesses. While a reduced level of corporation tax for Northern Ireland is not in itself a panacea for all our problems, the Bill as drafted provides useful safeguards on several technical issues. The separate arrangements for large companies and SMEs and the exclusion of profits from investment and certain other activities seem eminently sensible. This should discourage tax avoidance through brass-plating and encourage employment-creating trading activities and foreign direct investment.

Secondly, the experience of the Republic of Ireland would indicate that a lower level of corporation tax has been one of the key drivers of its economic success. It is no coincidence that, even at their lowest economic ebb, this is the one policy that the Republic of Ireland’s Government have refused to give up.

Thirdly, it must be recognised that this policy will involve difficult decisions about reductions in public expenditure. In my view, the Northern Ireland Executive will have to prioritise interdepartmental discussions to arrive at a budget agreement to facilitate the earliest possible implementation of the rate cut.

I do not pretend that significant issues and challenges do not remain, both in terms of agreeing all the final details and in relation to the other measures that the Northern Ireland Executive will have to put in place to ensure that the policy is a success. I am confident, however, that these challenges can be overcome.

After today, the next phase is the rollout of this power: it will pass to the Northern Ireland Executive to take forward. We now need the Executive to agree what the Northern Ireland corporation tax rate should be, from when it should apply and over what period it

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should remain in force. In these areas, with some compromise on all sides, I believe that agreement can be reached.

My party’s preference would have been for a 10% corporation tax rate, but it is prepared to go along with the emerging consensus that the rate should be 12.5%. The earliest possible date for the introduction of this rate is April 2017. Given that we have waited so long for this power, the rate should be introduced as soon as possible after that date. A quick decision will enable Invest Northern Ireland to go out and sell the policy to those investors for whom a low headline rate—

Lord Trimble: I thank the noble Lord for giving way. He is talking about the desire to have quick decisions on this. Did I miss something? Did I miss him saying when the implementation of the Stormont House agreement would be sorted out through fully providing for welfare reform and implementing it? I did not hear that.

Lord Browne of Belmont: I am saying that this cannot be implemented until all these things are sorted out.

Finally, I hope that there will be a political consensus that the lower corporation tax is not merely a short-term experiment but a policy that will be in place for many years. That is what is needed to give the long-term confidence to businesses and investors that Northern Ireland is the place to do business. The Bill will provide a sound basis for the development of a productive economy fit to survive in the very competitive global economy. It is a good example of positive co-operation between the Northern Ireland Executive and the Westminster Government and I trust that it will be one of many in the coming years.

5.52 pm

Lord Davies of Oldham (Lab): My Lords, this has been a fascinating debate, in which two obvious problems with the Bill have been identified that might not have been entirely anticipated. They broadened the debate to such an extent that I sympathise with the Minister responding to it. The breadth that has developed is obvious enough. First, questions have been directed to points of such substantial detail that we want answers this evening because this is a money Bill and we have no chance to press the issues any further. Therefore, I hope that the noble Lord—I know how scrupulous he is in observing time limits when he is winding up—will indulge himself sufficiently to respond to those very detailed points, one of which I will refer to in a moment, so that we can make as much progress as we can before we pass the Bill, defined as it is as a money Bill, by taking all its stages after Second Reading.

The second aspect that has broadened things was raised by the noble Lord, Lord Forsyth. He was not alone in this respect, although he probably presented the most challenging dimension on it. The noble Lord, Lord Shipley, accurately reflected this as well. They said that the Bill raises issues relating to devolution powers and the position of the United Kingdom.

I am absolutely delighted to welcome the contribution of the noble Lord, Lord Forsyth, on the prospects of a convention immediately after the election. He has only

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to vote Labour and he will help with that. Unfortunately, he is not allowed to but perhaps he can persuade the other members of his family to vote Labour to ensure that we have a convention after the election.

The noble Lord, Lord Shipley, also identified in his very useful contribution that there are real issues at stake here. I do not doubt that the noble Lord, Lord Newby, will be somewhat reluctant to indulge in that part of the debate to a very large extent. However, it is clear that this is a further step towards devolution, which is welcomed on all sides. We heard in all speeches—and know from the deliberations in Northern Ireland, particularly in the business community—that people are in favour of this measure. Of course, as the noble Lord, Lord Bew, indicated, that might be on the basis of a fairly limited perspective on what the implications are for devolution and the position of the United Kingdom as a whole—the interaction of the parts. We heard some very challenging contributions today. It is a great pity that we are able to raise them only in the context of a Second Reading debate that concludes very shortly.

Of course, we support the Bill and will give every assistance to its progressing satisfactorily. However, we have anxieties about it. Noble Lords raised the question of the trade-off between this and the block grant. Extending wider than that, there is the whole question of devolution arrangements as well. The Barnett formula came into the debate, too. We have anxieties on those issues and the Minister must recognise that when the Bill goes through, the hoped-for increase in revenue in due course will be balanced against the block grant. I hope he will appreciate that this has considerable ramifications for the Northern Ireland public.

My noble friend Lady Blood emphasised the fact that loss of resources for government might crucially affect the amount that the Government are able to invest in, for example, training and education. These are clearly issues of great importance to making a strategy for increasing the private sector’s capacity to compete successfully. Reference was made to the days of the Republic of Ireland tiger, but it was not just the business rate taxation that was crucial to Ireland. A great deal was made of that, of course. As the noble Lord, Lord Forsyth, reflected, certain companies hived themselves off to the Republic to take advantage of that, but other factors at play also made the Republic attractive at that time. Northern Ireland has a clearly important task to fulfil in matching up in certain respects.

That is why we are concerned about the effect of this. The Government have made it clear that there is a delaying timetable for the implementation of this measure. It is dependent on the Northern Ireland community, particularly the Assembly at Stormont, reaching an agreement that gives the Government confidence that there is fiscal security in the economy, and gives strength to that economy. Two years is a pretty short timetable to make that demand—it is a pretty substantial demand as well. The Minister must flesh out what his tests are for this demand being met before corporation tax reduction powers are vested in Northern Ireland.

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None of us regards corporation tax as a panacea. It can play its part, and we are aware of the strength of opinion in the business community that it will help, but it is not a panacea for the economy; much more substantial improvements need to be made as far as the Northern Ireland economy is concerned. Therefore, the only thing I can say to the Government is that I understand their need for delay—they want to get the Bill through before this Parliament concludes and so they built in the delay before implementation—but delay is no friend in circumstances where things are not improving as rapidly as one would hope.

I hope the Minister will address these issues and at least have a shot at the broader constitutional problems.

Lord Forsyth of Drumlean: I wonder whether the noble Lord, Lord Davies, can help me by answering the question that I put to his noble friend Lord McAvoy. I am just a bit puzzled. Of course the business community welcomes the Bill, because profitable businesses will pay less tax at the expense of the resources that are available for public services. Why is the Labour Party supporting such a measure?

Lord Davies of Oldham: My Lords, we see that there is support in Northern Ireland for the Bill, which will give some chance of rebalancing the economy to a certain extent. We are in favour of that, but recognise that the development of the Northern Ireland economy, as with all the other parts of the United Kingdom, will depend on much more fundamental issues than the rate of corporation tax. That is why we regard this as a marginal Bill in these terms. However, it would be fruitless of us to object to it, although I accept his point about why we did not address ourselves to other issues, rather than the reduction of corporation tax. He will know, because he is so well informed on Labour Party policy, that we propose to increase the corporation tax rate for the rest of the United Kingdom, with the specific objective of reducing business rates for small and medium-sized businesses. We think that is a quicker and more effective way of giving stimulus to the business community. There we are: on two areas of policy, the noble Lord, Lord Forsyth, and I are in full agreement. I did not expect to say that this evening.

Lord Forsyth of Drumlean: If it is the policy of the noble Lord, Lord Davies, that it is better to reduce business rates and that that should be applied to the rest of the United Kingdom, why is it not his policy to do that in Northern Ireland? If he believes that that is the right approach, why is he proposing something that he rejects as being the right approach in the rest of the United Kingdom?

Lord Davies of Oldham: My Lords, has the noble Lord not noticed that I am speaking from the opposition Benches? We are not in a position where we can implement our policies at present. It is only a matter of a short delay, as the noble Lord, Lord Forsyth, will readily appreciate. But at this stage, the Government put Bills before us and this is the Bill we have. I have only two alternatives: to reject the Bill whatever its benefits, or to accept it but state that we can do better. That is exactly what I have argued.

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Lord Empey: My Lords, I am sorry to have to interrupt this job interview for the best anti-capitalist speaker in the House, but will the noble Lord, Lord Davies, clarify one thing? I am assuming that the Opposition support the Stormont House agreement. That agreement has subsequently been ratted on by one of the parties to the it. It appears to some of us that the reason they are doing that is the hope that, after the election, were there to be a change of Government, the noble Lord’s party would be more readily prepared to put more money into the Stormont House process. Therefore, they are holding out in the hope that that might happen. Will the noble Lord clarify that that is not the Opposition’s position and that the Labour Party stands over the Stormont House agreement as it was dealt with at the end of December?

Lord Davies of Oldham: Is the noble Lord seriously asking me to clarify conjecture about why people have acted as they have done in Northern Ireland thus far? The Government have said that this will need to be resolved because the reason for delaying implementation of this measure is to give us time for that to be done. We will obviously take considerable advantage of such time when we come to power.

6.05 pm

Lord Newby (LD): My Lords, perhaps surprisingly, it was with a certain amount of affection that I looked at the possibility of speaking in this debate today because the first Question I answered from the Dispatch Box, nearly two and half years ago, was about the devolution of corporation tax to Northern Ireland. It was one of the most frightening experiences of my life. Despite that affection, I am not sure that I can share the worry, or sadness, of the noble Lord, Lord McKenzie, that we will miss the fun of Committee. There are many adjectives I could think of that would describe a Committee stage on this Bill, but I am afraid I am not sure that “fun” would be near the top of my list. Perhaps that shows a lack of imagination.

I am delighted to be able to congratulate the noble Lord, Lord Hay of Ballyore, on his excellent maiden speech. He brings with him a formidable reputation as someone who has been able to persuade people, in a quiet, effective way, to work together for the good of the community at large. It is clear that these qualities are still needed in Northern Ireland today, just as they ever were. Those qualities are going to be needed if we are going to see the kind of economic development that everybody who has spoken on the Bill wishes to see in Northern Ireland.

The noble Lord, Lord Bew, I think, stressed the key issue and the key difference that has characterised the debate today, which is one of expectation. Some in Northern Ireland have very high expectations for the Bill, while others, in your Lordships’ House, have very low expectations. There is very clearly, in this Chamber at least, no agreement on that. At one end of the spectrum we have the noble Lord, Lord Forsyth, and at the other, the noble Lord, Lord Browne of Belmont, but it is quite telling that the greatest enthusiasts for this legislation are those in Northern Ireland who, on a daily basis, are grappling with how to make the

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economy stronger. The political parties and the business community are extremely keen on this. To respond to the noble Lord, Lord Davies of Oldham, on whether we should do this or business rates, the business community have said that this is what they want. It is in response to a combination of the strength of feeling in the business community and of that in the political parties that the Government have entertained this measure.

Whatever view you take about the desirability of doing this, there is clearly a huge amount of uncertainty about what the outcome will be: there are many variables that we cannot possibly bottom out at this point, several years before it comes into force. However, for the rest of my time, I will deal with some of the concerns noble Lords have raised and clarify some of the issues which are clearly uppermost in people’s minds.

The noble Lord, Lord McAvoy, began by expressing the hope that there would not be brass-plating—companies just having a brass plate in Northern Ireland and doing business elsewhere. The rules in the Bill contain many features to protect against avoidance. In addition to the exclusion of investment income, the main one is the adoption of rules for large companies which are based on existing international principles. Pure brass-plating simply will not be possible because the rules require a physical presence in Northern Ireland and, more fundamentally, a calculation of Northern Ireland’s trading profits, as if the company were a stand-alone entity, so that concern should not be too great.

A number of noble Lords, starting with the noble Lord, Lord McAvoy, asked about the modelling of the impact of the different rates. The example that the Government have set is on the basis of a 12.5% rate of corporation tax in Northern Ireland, assuming a 20% UK rate. This is expected to be £325 million in 2019-20, which will be the first steady state year if implementation takes place in April 2017 and if the rate in Northern Ireland from April 2017 is 12.5%. Obviously, the Executive will have the power to consider the impact of setting the rate. The UK Government will continue to work with them on the detail of the block grant deduction.

The noble Lord’s question on modelling led into his second question about the impact on overall income for the Executive and what that could mean in terms of levels of public expenditure. This is a key question that the Executive will have to decide, but one way in which they might decide to progress—I am not saying that they will do this—rather than going through a very big change in one year, is to reduce the rate over a number of years, as we have done in the UK, so that you set a direction of travel, with a rate of 12.5% as the end-point. It would not be necessary to implement it all from year one. The reason why we have spread it over a number of years here is that it spreads the cost, while at the same time giving companies that are investing the UK a sense of where they are going to be in a few years’ time.

The other point in terms of how the Executive will be able to manage a potentially big reduction in their income is that the impact does not all come in in one go. Even if you were to reduce the rate to 12.5% from day one, the impact on the Executive’s budget would

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rise from £120 million in 2017-18 to £280 million in 2018-19, and then get to the steady state level of £325 million in 2019-20. So, in any view, you will have a phasing in.

My noble friend Lord Trimble pointed out that the Varney report suggested that there was a raft of other things just as important as this tax change for the viability and strength of the Northern Ireland economy, including the labour market, telecommunications and transport; obviously, that is true. We have, as a Government, been helping the development of high-speed broadband and the transport infrastructure in Northern Ireland. But if anybody thinks that we are going to get the full benefit of a reduction of corporation tax while standing still on all these other very important issues, they are clearly incorrect.

I believe that my noble friend Lord Trimble was the first to raise the issue of how the rest of the UK would see this change—a point very eloquently developed by my noble friend Lord Forsyth. As far as Scotland and Wales are concerned, the Smith commission did not recommend devolution of corporation tax, nor did the Silk commission in Wales. The suggestion that there will inevitably be the same kind of pressure from Scotland and Wales as there has been from Northern Ireland is not really borne out by the experience of the views of the political parties in those parts of the United Kingdom.

Lord Alderdice: I shall press my noble friend a little. There is a huge focus on what happens if this is introduced and all the modelling and so on. I emphasise to him that part of the purpose of this is so that those people who want to take Northern Ireland out of the United Kingdom and who want to harmonise the arrangements with the rest of the island are, by the device of this Bill, made to face the real political and economic consequences of any such process. The likelihood is that, whether because things would change or not, they will look at the situation, add up the sums and discover that going down this road is not what they want to undertake. This is a completely different thing from the situation in Scotland or Wales where there is not another country that people want to be part of that is a comparator or competitor. If Northern Ireland has this power and decides not to use it, that is a very strong pilot exercise to say to people in Scotland and Wales that there is no point in going down this road because it is not actually a serious economic goer. I want to emphasise that there is a political dimension to this in terms of Northern Ireland that is quite separate from any of the economic debate which has formed a large part of this debate.

Lord Newby: That is accepted. My noble friend makes a very strong point.

Lord Forsyth of Drumlean: No, it is not accepted. My noble friend said that by giving more powers to Northern Ireland, and with it more responsibility, the case for breaking away from the United Kingdom will be blunted. That is precisely the argument which has been used by the Government in Scotland, where we gave more powers after we had won a referendum on independence, and the result is that the nationalists

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have surged. My noble friend says that no one in Scotland is crying out for corporation tax powers, but the Scottish nationalists are crying out for devo-max. In the past six months, they have gone up to 55% in the opinion polls, and the Labour Party, which has advocated more powers on the same argument as my noble friend has put, is facing annihilation. Can we not learn the lesson that by giving more powers to constituent parts of the United Kingdom, we break the unitary state which is the United Kingdom and give succour to those who wish to smash it up? When my noble friend says that Scotland is not like Ireland because there is no other country it can be, yes there is. It can be Scotland as an independent country outside the United Kingdom. That is the threat.

Lord Newby: I am not sure that is a threat in respect of Northern Ireland. I disagree with the noble Lord about both the principle of devolution and its effect. The SNP is at 55% in the polls today but, if I were a betting man, I would say that it will not be at 55% in the polls in 10 years’ time when we have seen how it manages taking responsibility for Scotland’s own income. It seems to me that one of the great weaknesses about the current settlement in Scotland is that the Scots Nats or the Government in Scotland wait to get a cheque from England but, however big it is, it is not big enough, and they do not have the responsibility for raising the money themselves. Now, they will have significantly greater responsibly for raising the money, and that will mean that they have to take more responsibility. I think that is wholly beneficial. I just disagree with the noble Lord, I am afraid.

The noble Baroness, Lady Blood, asked about building societies and credit unions. The effect and the design of the scheme is that in order to attract genuine economic activity, some mobile trades and activities are excluded, including lending and investing. The rules in respect of lending and investing do not distinguish between types of entity, so banks and building societies are treated on the same basis for that purpose. In respect of credit unions, the Northern Ireland corporation tax regime applies only to trading activity in order to encourage genuine employment. The income from the loans that credit unions make to their members is not currently taxed as trading income, so credit unions do not pay corporation tax on that income. Given those special rules already in place, this income from loans will remain outside the Northern Ireland corporation tax rules. Perversely, to bring the profits within the trading income rules, and so within the Northern Ireland regime, would likely result in them paying more tax. I do not think that credit unions are being disadvantaged by this.

Lord Trimble: I am going slightly off the noble Lord’s point on credit unions and back a little bit. I think it is a mistake to rule out financial services. Northern Ireland missed out completely on the changes that have taken place in financial services in the United Kingdom over the last 20 years. We do not have a significant financial service sector at all, yet that sector is much more profitable than nearly all the other sectors of economic activity in the United Kingdom. You are keeping the most valuable service sector,

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in which we do not have any significant representation, away from us. If you want to rebalance the Northern Ireland economy that really ought to be up at the top of the list.

Lord Newby: I am afraid that the Government have not taken that view in the way they have produced this. They have thought about it and decided that they did not want to go down that route.

The noble Lord, Lord Shipley, talked about the broader impact of the measure and of APD on the rest of the UK. I agree with him—he will not be surprised to know—in that these things need to be dealt with under a constitutional convention. Nobody could claim that the devolution picture across the UK is anything other than rather piecemeal and the time is long overdue for us to try to bring a bit more coherence to it, not least in terms of the English question.

The noble Lord, Lord Empey, talked about the necessity for the parties in Northern Ireland to agree on the budget reduction. Everybody agrees that the budget reductions should have been embarked on earlier, but the process has now started and we are determined to encourage and support the Executive in the future as they grapple with these issues. We are totally clear that the Executive must balance the budget and, to do that, welfare reform must go ahead.

The noble Lord, Lord Forsyth, ranged widely over our constitutional issues and problems. He did not mention that Yorkshire Day is in the middle of the Summer Recess and therefore I will be denied the possibility of getting a big set of powers devolved to Yorkshire, for which I am extremely sorry—but we cannot have everything. I think the noble Lord’s characterisation of the extent to which this would complicate the system and make life difficult for businesses was slightly overdone. The rules we are introducing for larger companies are based on existing OECD principles which companies already operate. As he pointed out, the design seeks to retain coherence within the corporation tax regime as whole. Only one variable is being affected and the whole system is being administered by HMRC, with which all the companies already have relationships.

The noble Lord, Lord McKenzie, asked a number of detailed questions, some of which I hope I can deal with. He asked whether the notional profit attributable to back office was creditable in the rest of the UK tax computation. This notional profit forms part of the attribution of trading profits to the Northern Ireland regime, so will not feature as mainstream—to use the language of the Bill—profit; that is, non-chargeable at the UK rate.

Lord McKenzie of Luton: I am sorry, but my question was about not whether they are creditable within the UK system but whether they would be creditable to a foreign investor.

Lord Newby: I shall have to write to the noble Lord on that point, but I suspect that the answer is yes. However, I am not confident, so I shall write to him.

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The noble Lord asked about whether an SME that is determined to be within the Northern Ireland regime but has 25% of its activity within the UK has all its corporation tax charged at the Northern Ireland rate. The answer is yes—all its qualifying profits will be taxed at the Northern Ireland rate. It is estimated that more than 99% of the small and medium-sized businesses affected have 100% of their trading activity in Northern Ireland. That seems rather a large figure but, even if it was slightly less than that, the amount of potential tax forgone for the UK in one guise or another is very small.

The noble Lord asked how it would work in calculating the block grant. If and when this power is in place, the Executive’s funding will consist of three elements. The Barnett formula continues to operate, so there is the Barnett-based block grant. There is then a block grant adjustment, so there is a deduction from what they would otherwise have got, to reflect the CT revenues forgone. Then you put back in the CT revenues that you are collecting. That is the principle of it. I accept that actually doing it is quite complicated, but the principles are quite clear.

Lord McKenzie of Luton: I shall not make this a dialogue, but is the consequence that on day one the deduction from the block grant would effectively be at the current mainstream corporation tax rate and the benefit at the Northern Ireland corporation tax rate? Clearly there is a differential between the two, which is why you get a substantial negative in the block grant, at least on day one.

Lord Newby: Yes, it is the difference between the 20% and the 12.5%.

Lord Forsyth of Drumlean: Will the Minister just elaborate on that? Let us just say for the sake of argument that it is decided to drop the corporation tax rate to 12.5% on day one. The Government have made an estimate that that would cost £325 million. Would the block grant then have £325 million deducted on day one? Is it based on the estimate? Given that we know how volatile corporation tax is from year to year, how would that work? I do not want to be rude, but it does rather feel as though the Government are introducing a Bill without knowing how it will work in practice, or how much it will cost. It does matter, for reasons that the noble Baroness, Lady Blood, pointed out in her speech.

Lord Newby: First, Northern Ireland would not lose the £325 million on day one. As I said, there is a transitional period; it takes three years before the full effects work through, because of the time that it takes to get corporation tax returns sorted out. On the second point, on how it works out, the model that is being followed closely follows the model that has been agreed with the Scottish Executive in respect of income tax for Scotland. So a lot of work has been done on that, and the principles and the practice will follow from Scotland to Northern Ireland. I am happy to write to the noble Lord about it—it is extremely technical. But I can assure him that a lot of work has been done on the issue already.

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I am well over time. I just say to the noble Lord, Lord Bew, that the double Irish arrangement is coming to an end, so he is right to the extent that the rate would go up there.

As I said at the start, this is a measure that is broadly supported in Northern Ireland by the political and business community. It has raised varying expectations. The view of the Government is that it has the potential to encourage genuine investment and help Northern Ireland to become competitive, boosting the entire UK economy and the standard of living of people across Northern Ireland. But it will be for those in Northern Ireland—business and politicians alike—to ensure that, if and when the Bill comes into effect, it has the desired effect.

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.

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Supply and Appropriation (Anticipation and Adjustments) Bill

Supply and Appropriation (Anticipation and Adjustments) Bill

Second Reading (and Remaining Stages)

6.30 pm

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.

Modern Slavery Bill

Returned from the Commons

The Bill was returned from the Commons with certain amendments agreed to, with the remaining amendment disagreed to, and with amendments in lieu thereof. It was ordered that the Commons amendments be printed.

House adjourned at 6.31 pm.