The draft Corporation Tax (Northern Ireland) Bill was published last week, with the Secretary of State pledging her best endeavours to have it on the statute book by May’s election (in other words, by the end of March). This is an extremely challenging timescale, but any new government would be bound by the spirit of the Stormont House Agreement to proceed with it anyway. So, what is it?
The Republic of Ireland’s economy grew rapidly from the early 1990s to the early 2000s, moving from GDP/capita 20% below the EU average to 40% above in just over a decade. Campaigners, particularly businesses, argued that one of the key components of that success was its rate of Corporation Tax (i.e. the tax incorporated businesses pay on their profits), which were placed at much lower than the EU mainstream and were thus seen as an easy way of promoting inward investment from North America. It was suggested by them, in Northern Ireland and elsewhere, that a similar policy should be tried. This analysis is, however, contested – for example, the Republic of Ireland also made use of tax loopholes so that some large investors were able to avoid paying any Corporation Tax at all. There are also questions over the long-term sustainability of the policy and whether “GDP/capita” is a sensible measurement of economic progress in any case.
The proposal is generally referred to in Northern Ireland discussion simply as “Corporation Tax”, understood to mean the reduction of Corporation Tax in Northern Ireland to match the rate across the border.
In fact, the proposal is specifically to transfer the power to set the rate of Corporation Tax to the Northern Ireland Assembly, and then only for companies with a presence in Northern Ireland on profits attributable to trade in Northern Ireland outside the broad finance and oil industries. It is noted also that the power to move the rate downwards would require the Northern Ireland Executive itself to find, from Departmental Budgets, money to pay back to the Treasury to make up the difference. (It is commonly stated that this comes about because of “EU rules”, and indeed it does; but in fact it also comes about under the existing UK financial policy known as “Parity”, which is currently topical due to Welfare Reform).
The assumption is that the Assembly would immediately use this power to reduce the rate to the current rate across the border, i.e. from 20% (the UK rate from April 2015) to 12.5% (the Irish rate). However, that is not contained in the Bill. The Assembly could in theory (as has been mooted already by the Enterprise Minister) reduce it further, perhaps to 10% or even nil; on the other hand, there is an increasing body of opinion which supports transfer of the powers but does not support using them immediately, given the Executive’s ongoing Budget difficulties.
1. Rate Application
After passage of the Bill, there would be a “Northern Ireland Rate” (of Corporation Tax) and a “Main [i.e. UK] Rate”.
The “Northern Ireland Rate” would apply to trading profits of SMEs whose costs and employee time are largely (75%) in Northern Ireland and to the profits of a large company attributable to a presence in Northern Ireland, and also excludes certain industries.
This is designed to stop large companies simply shifting their nominal HQs to Northern Ireland from elsewhere in the UK.
2. Rate Setting
The “Northern Ireland Rate” would simply be set by resolution of the Assembly at any time before the start of the financial year. If one is not set, the existing rate continues to apply.
In practice, this would appear to make the setting of a lower rate for 2017/18 unlikely but conceivable.
The Bill distinguishes between “Northern Ireland profits” (i.e. profits due to activity based in Northern Ireland) and “mainstream profits”. The former is taxed at the “Northern Ireland Rate”, and the latter at the “Main Rate”.
Losses are relieved as far as possible against the relevant rate.
The objective here is that the “Northern Ireland Rate” would be paid on profits due to trade attributable to activity in Northern Ireland. This is designed to encourage local employment and, again, to stop companies simply shifting nominal HQ from elsewhere in the UK (or anywhere else, for that matter).
To qualify to pay the “Northern Ireland Rate”, a company must be a “Northern Ireland Company”. To do this, it must meet the aforementioned conditions concerning trading and presence in Northern Ireland and must be in a “qualifying trade” (although a “Northern Ireland Company” may pay the “Northern Ireland Rate” on profits from “back-office functions” even of a non-qualifying trade).
A “Northern Ireland Company” may be a “Northern Ireland SME” or a “Northern Ireland Large Company” (or a large company with a “Regional Establishment”, see 5 below).
This is primarily designed to encourage local entrepreneurship across the board, but to stop any threats to London or Edinburgh as the UK’s prime financial centres (finance is a non-qualifying trade).
5. Regional Establishment
Large companies may qualify to pay the “Northern Ireland Rate” (if the above conditions are met) on profits from a Northern Ireland trading arm. To do this, they will formally have to set up a “Northern Ireland Regional Establishment” – essentially a devolved part of the company meeting the trading and presence requirements.
This is designed to enable investors to pay the “Northern Ireland Rate”, but only on Northern Ireland activity.
6. Profits and Losses
Where a company is in a non-qualifying trade (notably finance) but has some back-office functions, it may declare its profits (and losses) separately – paying the “Main Rate” on front-line (non-qualifying) activity, and the “Northern Ireland Rate” on back-office activity.
This is complex, but seems designed to boost Northern Ireland’s growing back-office finance industry.
7. Other Provisions
Other provisions include the allowance of relief against establishing a “Northern Ireland Regional Establishment”; the payment of royalties at the “Main Rate”; makes the “Northern Ireland Regional Establishment” effectively a separate but not independent enterprise; and distinguishes “back-office activities”.
Essentially, assets used for the purpose of making a profit payable at the “Northern Ireland Rate” are set against the Northern Ireland Rate.
This is extraordinarily complex, depending on the type of company, its trade, the location of its activities, the date of establishment of the asset, the purpose of the asset, and so on. Accountants and lawyers will have a field day!
R&D credits are assessed against the “Main Rate” (generally and where possible). The adjustments required to achieve this are, again, extraordinarily complex.
The idea is to ensure no one loses out (or is dissuaded) from R&D activity.
Profits and losses on land are treated similarly to assets and credits above.
Film tax credits remain in place and the system is designed to ensure they are unaffected by film companies paying the “Northern Ireland Rate” or “Main Rate” as appropriate.
As this is a key industry for Northern Ireland currently, the objective is clear.
12. Television Production
Television Production is treated as film above.
13. Video Games
Video Games are treated as Film and Television Production above.
14. Theatrical Production
Theatrical Production is treated as Film, Television Production and Video Games above.
15. Intellectual Property
Intellectual Property deductions from Corporation Tax payments are separated into “Mainstream Deductions” and “Northern Ireland Deductions”.
Partnerships will be dealt with similarly to companies (although a new term, “Northern Ireland Firm”, is used for them).
17. Non-qualifying trades
Non-qualifying or “excluded” trades include lending, investment, investment management, re-insurance, long-term insurance, and oil and gas exploration. The Treasury has the right to amend this list, and to define “back-office activities”.
This is designed to protect key sectors elsewhere in the UK. The specific omission of oil and gas exploration (and any activities around the UK’s Continental Shelf) may also be preparation for the day a similar Bill is demanded for Scotland.
The Stormont House Agreement sets the year from transfer of powers at 2017, but does not say exactly when that year (this is relevant, because the Northern Ireland Assembly has to pass a resolution to change the rate before the beginning of the financial year).
The Bill does not clarify this, and indeed does not even reference 2017. It merely gives the power to the Treasury to declare when the transfer of powers applies.
The Bill is highly complex, filled with highly technical language and even complicated mathematical formulas! This does demonstrate that a lot of work has gone into it and it is a serious attempt at offering Northern Ireland a central tool to “re-balancing its economy” away from dependence on the public sector (i.e., crudely, subvention from Great Britain).
The Bill does its best to ward off any threats from the rest of the UK, removing from the equation in particular key Scottish industries (finance and oil). Nevertheless, it is inconceivable that the Scottish Government would not demand the same powers if Northern Ireland were ever to use them and be seen to benefit; and it is equally inconceivable in the current climate that they would not get them (indeed, as noted at 17 above, the Bill seems already written for that inevitability).
An increasingly widespread view is that the powers should be transferred but not necessarily used (and certainly not immediately). This carries a degree of risk, as the UK Government sees the Bill as a generous devolution uniquely to Northern Ireland of a highly useful economic tool. There is a risk, therefore, that the UK Government’s response to any future “begging bowl” would be simply to recommend to the use of that economic tool. This risk may not be significant, as the UK Government effectively rejected the “begging bowl” at Stormont House last month in any case.
There is also an increasingly apparent tendency for Nationalist parties in Northern Ireland to be swayed by broadly “left-wing” views, which oppose this tax reduction at the expense of a loss to funds for public services.
The actual economics of using the powers in the Bill to reduce the “Northern Ireland Rate” to 12.5% are highly contested.
The case for is that it would make Northern Ireland a uniquely appealing location to invest – within the UK but with lower corporation tax and property costs; within the Irish Corporation Tax zone but with lower housing costs, lower VAT and more favourable income tax bands (reducing employee costs). As a headline alone, reduced Corporation Tax would be a significant advantage to those promoting Northern Ireland.
The case against is that those benefits may be outweighed by the loss to the funding of public services and the uncertainty around what the actual cost to Northern Ireland Departments would be. Already, the sense is that Northern Ireland’s government structures are simply not up to the challenge of managing spending reductions; to add further strain by using the powers transferred would have unpredictable (and surely disadvantageous) results.
It is a finely balanced case, also prone to external shocks (such as the potential eventual devolution of Corporation Tax to Scotland, and what it would mean if the Scottish Government used it either to go to 17%, as the SNP has advocated, or even to 12.5% to match Ireland). The outcome of the debate, as with the outcome of actually using the powers transferred, is unpredictable!