Tag Archives: Scotland

Corporation Tax (NI) Bill – Overview

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?

Background

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.

3. Application

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).

4. Definition

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”.

8. Assets

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!

9. Credits

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.

10. Land

Profits and losses on land are treated similarly to assets and credits above.

11. Film

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”.

16. Partnerships

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.

18. Note

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.

19. Politics

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.

20. Economics

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!

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Notes on Smith Commission on Scottish Devolution

The Smith Commission’s report on Scottish devolution will prove a momentous change in the UK’s constitutional history. Unfortunately it defies the relatively simple headlines put forward by the media in this age of sound bytes; it deserves more scrutiny not just about what is in it, but about what it may mean including beyond Scotland.

Parliamentary Sovereignty

The momentous change is essentially the proposal that the Scottish Government and Parliament be made permanent in legislation – in other words that absolute Parliamentary sovereignty be ended and that, in the case of Scotland, national sovereignty effectively be pooled between Westminster and Holyrood. This constitutes a clear shift towards federalism, which may soon be matched in Wales (it is effectively already the case in Northern Ireland but in a different manner, as its devolved institutions are formed under an international agreement).

Tax/welfare structures

Structures under a Memorandum of Understanding are required to manage differential tax and welfare systems. Their establishment sets a precedent which could then be repeated in Northern Ireland and Wales.

Tax devolution

Income tax (on earned income, not dividends or savings), aggregates levy and air duty are fully devolved in the report. The latter of these was already the case in Northern Ireland, but Scotland may now compete. Income tax is not as dramatic as it first seems – it accounts for only about a quarter of all UK tax receipts and the likelihood is Scotland will not differentiate significantly (it hadn’t used its 3% option either way).

VAT and Corporation Tax, which had drawn attention in Northern Ireland, are not devolved. An announcement on the latter will follow next week, but it remains hard to see Corporation Tax being reduced in Northern Ireland without Scotland demanding and getting the same right soon after (as has happened with air duty).

However, the first ten points of VAT are assigned to the Scottish budget, which has the effect of raising the Scottish budget in the case of raised VAT receipts in Scotland comparative to the rest of the UK, and vice-versa – a similar system operates in Germany.

The National Minimum Wage remains reserved, so common UK-wide. This limits potential for “Living Wage” campaigns in any particular part of the UK.

Notably, Scotland takes full responsibility for any differential in administrative costs from applying different tax rates. That is a precedent which will be noted in Northern Ireland and Wales.

Welfare devolution

Scotland gets almost every individual aspect of working-age welfare devolved except the biggest, namely Universal Credit. It is entitled, even with Universal Credit, to use its housing powers and to vary the timing of payments. This is effectively the same as Northern Ireland, except Universal Credit is devolved there too in theory, right through to the requirement that Scotland meet any additional costs (administrative or otherwise) of doing things differently, although the concept of “parity” (making Scotland pay for its entire system if it does things differently) would not in effect apply.

Pensions and benefits to do with children/parenting are not devolved in the report. They are devolved to Northern Ireland but it is a convention (albeit one challenged by some Unions) that those powers are not applied and that pan-UK arrangements are maintained.

Scotland has discretion to introduce extra welfare payments in devolved areas with no prior consent necessary. A similar idea has been proposed using Northern Ireland’s powers to break the current welfare deadlock.

European Union

Other than pooled sovereignty, perhaps the most significant move in the report is the consultation with devolved Ministers on European issues and potentially even the representation of UK interests by devolved Ministers (thus access to the Council of Ministers). This applies to Northern Ireland (and, where appropriate, to Wales) just as to Scotland.

Super-majority

Most of the administration of the Scottish Parliament itself and of elections to it (and Scottish Councils) is fully devolved, but notably changes to some electoral arrangements (e.g. the number of MSPs) require a two-thirds super-majority to pass. That same super-majority has been proposed by some to replace “cross-community” (designation) votes in Northern Ireland.

Cross-border working

The role of the Joint Ministerial Committee is enhanced and a joint Parliamentary body is proposed. Are there lessons to be learned from the North-South Ministerial Council on the island of Ireland, which does something similar?

Election dates

The holding of Scottish Parliamentary elections in the same day as UK General elections (or any other elections) is prohibited. This is not the case in Wales or Northern Ireland, and indeed Northern Ireland Assembly Elections and Council Elections were held on the same day in 2011.

Consultative Roles

Scottish Ministers gain a consultative role in areas of broadcasting and regulation. These are markedly different across the UK. Regulation is devolved in Northern Ireland in some cases (Ofcom operates there but Ofgem does not; in the case of electricity, regulation is carried out on an all-Ireland basis in effect); S4C is a unique arrangement in broadcasting in Wales.

Comsumer advice and protection and certain aspects of supplier obligations with regard to energy efficiency are devolved to Scotland in the report. These are already devolved to Northern Ireland (often in the case of energy with a cross-border aspect).

Equality

Most aspects of employment are effectively devolved to Scotland in the report, but Equality is not. There is a view that abortion should be devolved to Scotland. Equality and abortion are both devolved to Northern Ireland.

Transport

Speed limits are proposed for devolution to Scotland in the report. They were already devolved to Northern Ireland.

Conclusion

The report is fairly comprehensive and sets some very interesting precedents. It is also notable for some omissions. It does set the scene for a Federal UK, yet significant powers remain reserved. Although the focus is on income tax, that may prove one of the least interesting aspects of how the new powers are devolved and used in practice.

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