Northern Ireland – decision time for Corporation Tax power

November 13, 2012 10:55 AM

TPA supporter, Richard Moorehead,  who is also Associate Director of Horwood & Holmes Corporate Finance in Belfast, writes about the urgent need to reduce Corporation Tax  in Northern Ireland.

The calls for the devolution of Corporation Tax powers to the Northern Ireland Executive are building to a crescendo, with the TaxPayers’ Alliance the latest organisation to throw its weight behind the campaign.

The Northern Ireland Chamber of Commerce, the CBI, the Federation of Small Business and the IoD, along with a host of local companies and business leaders have been lobbying both Stormont and Westminster to implement a policy that is badly needed if the Northern Irish economy is to lift itself out of the doldrums.

Fourteen years on from the signing of the Good Friday Agreement the Northern Irish economy continues to lag behind the rest of the UK.  Throughout the Troubles, the private sector was starved of investment and, as a result, we developed a dependency upon the public sector for employment. Throughout the boom years of the early 2000s, this created a veneer of prosperity and economic success. The downturn and need to rebalance the overall UK economy has forced a fresh perspective on the Northern Irish question.

Public spending per head has consistently been 20-24% higher than the UK average and is the highest of any UK region. As a result of this, Northern Ireland runs at an annual deficit, requiring circa £10bn of annual funding from Westminster, over and above the tax contributions made by individuals and companies within the province. Without decisive action on corporation tax, it is likely that the trend of economic dependence upon the rest of the UK will continue. During these times of austerity and repeated assertions from the government that we are all in this together, it is manifestly unfair and unreasonable for those of us in Northern Ireland to expect our countrymen in Great Britain to continue to subsidise us, whilst bearing the brunt of spending cuts in their own regions.

Despite a welcome reduction in corporation tax rates in recent years, the main rate at which the tax is charged remains almost double the 12.5% levied in the Republic of Ireland. Given that we share a border with the Republic, this differential places Northern Ireland in a uniquely uncompetitive position and begs the question: why would a company opt to invest or set up in Belfast ahead of Dublin?

As significant component in the success of the Celtic Tiger was the attractiveness of Ireland for Foreign Direct Investment (FDI).  Over recent years, the likes of Google, Facebook and LinkedIn have established European headquarters in Ireland, with the decisions to do so largely driven by the compelling corporate tax argument. Unless we are granted the power to lower corporation tax to a rate that is in line with that charged south of the border, we will remain at a disadvantage relative to the South and become ever more dependent upon HM Treasury.

By lowering corporation tax and making NI a more attractive destination for FDI,  it is estimated that in the region of 55-85,000 new jobs could be created over a 20-year period2. These new jobs will help to grow the private sector in Northern Ireland and, as a direct consequence, reduce the annual subsidy required from Westminster in the form of the block grant.

Opponents of the proposed cut have raised concerns over so-called ‘brass-plating’, where companies establish a notional head office in a low tax jurisdiction, but create few or no additional jobs. Given that we will bear the cost of a reduction in corporation tax through a commensurate reduction in the block grant, it is completely counter-intuitive to presume that brass-plating will be either welcomed or permitted under the initiative.

A further concern is that of displacement within the UK, i.e., will the initiative simply prompt companies to relocate from GB to NI, with no overall positive impact for the UK economy? However, this concern incorrectly supposes that corporation tax is the sole reason for a company’s choice of location. In practice, other factors such as proximity to a large city or access to markets are deemed as if not more important. It is unlikely that a company presently-based in England would derive sufficient financial benefit from the relocation of its operations and workforce to Northern Ireland to offset the cost and inconvenience of doing so.

Whilst the devolution of corporation tax powers should not be seen as a panacea for the Northern Ireland economy,  it is an important step in the right direction and it is vital that a positive decision on this is reached is announced in the chancellor’s economic statement on 5 December.

TPA supporter, Richard Moorehead,  who is also Associate Director of Horwood & Holmes Corporate Finance in Belfast, writes about the urgent need to reduce Corporation Tax  in Northern Ireland.

The calls for the devolution of Corporation Tax powers to the Northern Ireland Executive are building to a crescendo, with the TaxPayers’ Alliance the latest organisation to throw its weight behind the campaign.

The Northern Ireland Chamber of Commerce, the CBI, the Federation of Small Business and the IoD, along with a host of local companies and business leaders have been lobbying both Stormont and Westminster to implement a policy that is badly needed if the Northern Irish economy is to lift itself out of the doldrums.

Fourteen years on from the signing of the Good Friday Agreement the Northern Irish economy continues to lag behind the rest of the UK.  Throughout the Troubles, the private sector was starved of investment and, as a result, we developed a dependency upon the public sector for employment. Throughout the boom years of the early 2000s, this created a veneer of prosperity and economic success. The downturn and need to rebalance the overall UK economy has forced a fresh perspective on the Northern Irish question.

Public spending per head has consistently been 20-24% higher than the UK average and is the highest of any UK region. As a result of this, Northern Ireland runs at an annual deficit, requiring circa £10bn of annual funding from Westminster, over and above the tax contributions made by individuals and companies within the province. Without decisive action on corporation tax, it is likely that the trend of economic dependence upon the rest of the UK will continue. During these times of austerity and repeated assertions from the government that we are all in this together, it is manifestly unfair and unreasonable for those of us in Northern Ireland to expect our countrymen in Great Britain to continue to subsidise us, whilst bearing the brunt of spending cuts in their own regions.

Despite a welcome reduction in corporation tax rates in recent years, the main rate at which the tax is charged remains almost double the 12.5% levied in the Republic of Ireland. Given that we share a border with the Republic, this differential places Northern Ireland in a uniquely uncompetitive position and begs the question: why would a company opt to invest or set up in Belfast ahead of Dublin?

As significant component in the success of the Celtic Tiger was the attractiveness of Ireland for Foreign Direct Investment (FDI).  Over recent years, the likes of Google, Facebook and LinkedIn have established European headquarters in Ireland, with the decisions to do so largely driven by the compelling corporate tax argument. Unless we are granted the power to lower corporation tax to a rate that is in line with that charged south of the border, we will remain at a disadvantage relative to the South and become ever more dependent upon HM Treasury.

By lowering corporation tax and making NI a more attractive destination for FDI,  it is estimated that in the region of 55-85,000 new jobs could be created over a 20-year period2. These new jobs will help to grow the private sector in Northern Ireland and, as a direct consequence, reduce the annual subsidy required from Westminster in the form of the block grant.

Opponents of the proposed cut have raised concerns over so-called ‘brass-plating’, where companies establish a notional head office in a low tax jurisdiction, but create few or no additional jobs. Given that we will bear the cost of a reduction in corporation tax through a commensurate reduction in the block grant, it is completely counter-intuitive to presume that brass-plating will be either welcomed or permitted under the initiative.

A further concern is that of displacement within the UK, i.e., will the initiative simply prompt companies to relocate from GB to NI, with no overall positive impact for the UK economy? However, this concern incorrectly supposes that corporation tax is the sole reason for a company’s choice of location. In practice, other factors such as proximity to a large city or access to markets are deemed as if not more important. It is unlikely that a company presently-based in England would derive sufficient financial benefit from the relocation of its operations and workforce to Northern Ireland to offset the cost and inconvenience of doing so.

Whilst the devolution of corporation tax powers should not be seen as a panacea for the Northern Ireland economy,  it is an important step in the right direction and it is vital that a positive decision on this is reached is announced in the chancellor’s economic statement on 5 December.

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