The government has announced the Bill to grant Northern Ireland the right to set its own corporation tax rate.
For those who want to reduce admin burdens (and those who have promoted this idea also claim to be firmly in this camp) this Bill is akin to a nightmare: it is 87 pages of new legislation covering everything down to calculating dredging allowances in Northern Ireland under the new tax regime. There are also enough formulas on profit and loss allocations to keep any accountant busy and in nice fee income for years to come: you can see just why KPMG Belfast was so keen to promote this idea.
But, the key point is that this new law was supposed to lure new business into Northern Ireland and yet at its heart is a provision that guarantees it cannot do that. Chapter 17 of the Bill relates to businesses excluded from claiming the new tax rate. These include those lending and making investments, those undertaking investment management and those engaged in reinsurance. In addition any 'back office activity' is excluded.
So, it's pretty unlikely that financial services will be relocated to Northern Ireland to get this advantage, and that's one of the biggest and most mobile sectors in the UK. And what's 'back office'? The Bill does not say and just gives the Treasury the power to define it, but it's a pretty fair bet that again some of the most mobile activities in the UK, like accounting, data processing and even many call centre activities will be 'back office activities' and so be excluded.
There is no surprise in this: EU law requires these exclusions, but has been ignored throughout by those promoting the arrangement. The consequence is, however, that a tax rate cut designed to lure business in is stopped from the outset from doing that for the businesses most likely to come. You really could not make up something quite so inept.
So, the net outcome of this new arrangement is that there will be a tax cut in Northern Ireland from which over 30,000 existing businesses may benefit, no new work will be attracted because it is nigh on impossible for that to happen, costs will sky rocket because of the admin this will impose on business in Northern Ireland and the people of Northern Ireland will suffer major cuts in pubic services because the block grant from the UK will have to be cut by as much as this tax cut will cost - imposing a double whammy on the region. This is, of course, all as I predicted, but to see it now being spelt out as a plan to add to the woes of Northern Ireland makes my heart sink.
There is a madness in the form of a belief in tax competition at the heart of this proposal, coupled with faith in trickle down which in this case will undoubtedly be trickle up from those least able to afford it. Northern Ireland will come to deeply regret the day it got this power. We all will if Scotland gets it as well. Dogmatic hatred of tax and all that it can do for society is driving reform here from which only harm can result. I can only say I did my best to stop it but the Big 4 accountants who appear to be behind this have won the day. It's another cost they have imposed on society.
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For the second time in only a few months I have to say “I agree with Richard”. This is very worrying, I am obviously losing my touch, good job that I retire in a couple of months…
I’d go further: I’ve only had a chance to look at this Bill quickly, but I suspect that it will be possible to artificially get profit from some one-person SME companies into the definition of NI profits by using the 75% test.
Somewhere in the combination of a director-shareholder rewarded primarily by dividends, and the finessing of some existing NI call-centre services into the SME’s “workforce” according to the definition, there is a bit of tax planning that probably won’t have a significant effect on the NI economy, but might conceivably not be caught by the GAAR, because who can say it fails the double reasonableness test if the concept is so flawed in the first place?
Mike
One person SME’s should qualify – they need only have a Norther Ireland employee – and owner / director – as far as my quick reading suggests
This is madness
Ond no, you’re not going mad. It’s wisdom….. 🙂
Richard
Am I being naive in thinking the NI rate will not create any more wealth overall but merely move it from one place in the UK to another?
KPMG et al claim it will make the economy flourish
I think it will just encourage trickle up in NI
Yes indeed and Stormont will have to compensate the UK Treasury for any loss in revenue which occurs if a company relocates to NI from another part of the UK.
But in any situation where the Tories need coalition partners after the election they can now count on the unionists, Richard (which they probably could have done anyway), because this is their “reward”.
Interesting what you say about the ‘back office’ exclusion. That would rule out the kind of arrangement Google, Amazon and others currently run in this country and elsewhere. And I can’t see why any company currently located in Eire for tax purposes would relocate either.
Ultimately, of course, despite what politicians and their advisers in NI might think, for the Tories tax is only a secondary policy objective here. The primary one is exactly the same as we saw with the post independence “settlement” for Scotland, which is, in turn, simply a variant of the approach to local government the Tories have pursued since 2010. That is, to devolve responsibilities for key services to other tiers of government while at the same time retaining exclusive control of funding. The funding is then savagely cut – and will of course continue to be cut if the Tories win the next election – while Ministers and government spokespersons are simultaneously vociferous in promoting the view that whatever dire impact arises from those cuts is the responsibility of the councils (and other public services) who control/deliver the service.
We see and hear this message day in day out and have done for years now and Tory politicians stick to it like glue whenever interviewed. I heard it yesterday on our local news. A very well known and used museum and cultural centre in north Leicestershire is set to be closed by the County Council, and up pops Savid Javid and says it should stay open but it’s the County Council’s fault it has to close. The reality is, of course, that the arts grant to the county has been cut as have all other budgets and the Council now has to make a choice between the services it is legally bound to provide and those that are discretionary, such as museums, youth services, libraries and much else that we once took for granted as a mark of a developed and civilised country.
Of course, that’s only a relatively minor, local example. But note that yesterday the finger for the bedblocking problems in the NHS was also pointed at local councils for not putting in place sufficient social/community care arrangements. And yet people in local government will tell you that, a. they don’t have the necessary resources, and b. central government’s scattergun approach to policy has meant that for several years now huge amounts of time and money have been spent on senseless reorganisations, fire fighting the impact of cuts, and so on, when it could have been spent on developing planned and coordinated services.
And then we have the government of NI walking straight into the same situation (trap), albeit significantly scaled up. Still at least when the shite hits the fan in a few years time they can’t say they weren’t warned.
I agree: they have walked straight into a trap
Am I right in reading the Bill and Explanatory Notes to mean that NI could vary Corporation Tax (albeit with no limit on the degree of variation) within these narrow limits and to require it to shoulder the costs, but that it wouldn’t control the revenue from Corporation Tax within said limits outright? And is that halfway house allowed under EU law?
If so, at least that means that the volatility which the NI Budget would have incurred without changing the rate is avoided – but then how would the NI Budget benefit from a gain in revenue from increased economic activity, even theoretically? Wouldn’t you have to carry out some horribly complicated modelling to estimate any gains?
I apologise if I’m missing something fundamental here.
For clarity – I mean that if the NI Assembly had (some of) Corporation Tax in NI as a revenue stream, rather than just being able to vary the rate if it paid for it, it would have to shoulder a lot of volatility in revenue even if it kept the rate the same.
I agree: they do not seem to have thought about this, and have very limited borrowing powers
The plan is that the revenue will go to Stormont and using Laffer principles is supposed to increase
Increases in PAYE will also be at least notionally credited back if employment rises
This supposedly compensates for the cut in block grant
That is in their widlest dreams
Thanks very much for replying.
Does that mean Stormont would get all the Corporation Tax revenue which comes within the Bill’s definition (and a reduced block grant), or that it would only pay for or profit from the changes in revenue which result from any change in the rate? In other words, if the rate went down to 15%, would Stormont have all the revenue from that, or would it have the revenue equivalent of a cut by six percentage points? And would Stormont have the revenue even if it stayed at 21%?
The reason I ask, apart from the significantly different degrees of volatility imported into the NI Budget, is that the Impact Assessment in the Explanatory Notes says: “Devolving the rate-setting power will not of itself have any impact on the Exchequer. If the Northern Ireland Assembly, upon receiving the power, chooses to change the rate of corporation tax in Northern Ireland, any Exchequer impact will depend on what rate is established.”
If this revenue is going to be a devolved stream whether or not the Assembly sets a different rate, surely this statement can’t be correct even on the narrowest possible interpretation.
The impact only arises when the rate is changed by NI
I think that is what that is trying to say
I think that’s also a correct interpretation
Hi Richard, I’ve followed your work on this just wondering about the intention of reducing the rate. In that I believe the Executive is seeking to encourage companies in manufacturing and high tech to set up in Northern Ireland as opposed to finance. Do you think a cut in the rate would attract such industry and what effect would that possibly have on the local economy?
Many thanks.
They have no choice but target these company
But as Andrew Baker of Queen’s Belfast and I have shown, the private sector in NI has to grow by more than 30% to repay the loss of block grant
And that would be world record breaking by a long way
It’s not going to happen