Wed 9th Jan 2013
Corporation Tax – the last hurdle
9 January 2013
For many people the issue of reducing corporation tax in Northern Ireland has only been in the spotlight for about 18 months. Prior to HM Treasury issuing their consultation document on Rebalancing the NI Economy in March 2011, most people, even in the business community, had not considered the possibility of Northern Ireland having a low rate of corporation tax as a credible possibility. Indeed, those who had given it a passing thought, believed that there was no prospect whatsoever of the Northern Ireland Assembly getting the power to lower the rate of corporation tax in Northern Ireland.
However, for those of us who have argued strongly for a low rate of corporation tax for many years, the progress that this issue has made in the last 18 months has been enormous. This can be demonstrated by looking at several of the key issues which in the past have been trailed as reasons why Northern Ireland would and could never get a lower rate of corporation tax. Taking these one at a time:
Firstly, previous Westminster Governments did not wish to consider this policy lever as it could potentially destabilise the fiscal unity of the United Kingdom. Now however, with the recent granting of several tax varying powers to the Scottish Parliament, the path to fiscal devolution is now open and the sanctity of fiscal unity is no longer a tenable argument.
Secondly, there was the urban myth that the EU would not permit the UK to grant one its regions a separate tax varying power. However, when someone actually bothered to ask the EU about this issue, it became clear that as long as the UK complied with EU case law and the EU Treaty, it was indeed possible for a region such as Northern Ireland to be granted tax varying powers.
Thirdly, it was claimed that it would be administratively impossible for one part of the UK to have a differing rate of corporation tax to the rest of the UK. Once again, this proved not to be the case and HMRC have been able to come up with a credible and feasible structure so as to enable Northern Ireland to have a lower rate of corporation tax whilst at the same time protecting the overall tax structure of the UK.
Finally it was argued that the cost to Northern Ireland of introducing a lower rate of corporation tax would be totally unbearable to the Northern Ireland economy. Whilst this issue of cost is still not fully resolved, it is very clear that in order to comply with the EU requirements the cost of reducing the corporation tax rate to around 12.5%, whilst not being an immaterial number, is something that the Northern Ireland budget can cope with. Indeed, in business terms, the cost would amount to Northern Ireland spending somewhere between 2% and 3% of its public expenditure turnover in order to achieve a hugely significant marketing tool. As I have said before, the cost to the Northern Ireland economy of not taking this step would be hugely more significant than the cost of doing so.
For someone who has campaigned for a long time that a lower corporation tax rate in Northern Ireland is not only desirable but essential it has been very encouraging that this message has now been accepted not only by all of the main local business organisations but also by all of our main local political parties. Indeed, it is also apparent that the economic logic of this policy is very clear to the Government at Westminster and to HM Treasury. The enthusiastic support of this issue by the previous Secretary of State, Owen Patterson, was hugely instrumental in bringing this issue to the top of the agenda at Westminster. The continued support of his successor Teresa Villiers is also welcomed.
The responses to the Treasury consultation paper on rebalancing the Northern Ireland economy have been submitted and reported on. The Joint Ministerial Working Group that was set up last year has now issued its final agreed report to the Prime Minister. The last leg in this odyssey will take place at 10 Downing Street.
So now it is “show time”. The final decision on whether the Northern Ireland Assembly will be granted the power to vary corporation tax rests with the Prime Minister. It is clear, that he is wrestling with various devolutionary matters and that despite the strong economic case for Northern Ireland to have lower corporation tax, the Prime Minister’s decision is clearly made more difficult by matters in Scotland. Having said that, irrespective of what Mr Cameron decides, it is clear that Alex Salmond will try and make political capital out of that decision. If the answer from No 10 is yes, Mr Salmond will immediately seek similar powers in Scotland despite the fact that the Scottish economy is significantly stronger than the Northern Ireland economy and the case for lower corporation tax is far from proven. If the answer from Mr Cameron is no, then no doubt Mr Salmond will immediately hail this as a demonstration of London ignoring the needs of the devolved regions.
In 1997, Tony Blair talked about the momentous future impact of the Good Friday/Belfast Agreement being signed. In 2013, the devolution of corporation tax powers could be equally momentous for the Northern Ireland economy. Maybe it is time for Mr Cameron to feel the heavy hand of history on his shoulder as well.
Eamonn Donaghy, GROW NI