News

Corporation Tax Consultation

25 May 2011

Northern Ireland has long been disadvantaged in competition with the Republic of Ireland by a corporation tax rate that is around twice the rate of our near neighbour's. There would be a significant positive benefit in reducing our rate to at least match the rate in the south.

The Treasury has published a consultation document outlining the possible mechanisms for devolving corporation tax rate varying powers to Northern Ireland. The aim would be to increase local private sector investment and foreign direct investment leading to increased growth and employment, and contributing to the rebalancing of the NI economy.

NIHF supports the devolution of corporation tax varying powers to the NI Assembly and urges all members to submit their views on how a reduction in corporation tax would benefit their business by the 1st July 2011 deadline to Richard Williams, Room 2/N2, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ or niconsultation@hmtreasury.gsi.gov.uk

Even a one page response is important, outlining:

1. Why a reduced rate of corporation tax would make a difference to NI
2. Why a reduced rate of CT would make a difference to your business
3. What impact a reduced rate would have on employment in your business
4. What impact would it have on turnover and profit

Aside from the direct benefit to profits, the indirect benefits from increased foreign investment would mean more accommodation and meeting requirements and more disposable income in the Northern Ireland economy.

Below is a short outline of the case for reducing corporation tax.

Reducing the Rate of Corporation Tax in NI - What you need to know.

1. Current Corporation Tax Position
From 1 April 2011, companies and groups with profits up to £300k will pay corporation tax at a rate of 20%, companies and groups with profits over £1.5m will pay corporation tax at a rate of 26% (This rate will fall to 25%, 24% and the 23% over the next 3 years) and companies with profits between £300k and £1.5m will pay corporation tax at a rate between 20% and 26%.

In the Republic of Ireland the corporation tax rate is 12.5% for all trading companies and this rate is attributed to having attracted a large amount of foreign direct investment (FDI) into the Republic of Ireland over the last 20 years.

2. What has happened recently?
On Thursday 24th March 2011 the Treasury published a consultation document on rebalancing the NI Economy. This document considers possible mechanisms for devolving corporation tax rate varying powers to NI. The document confirms that a lower corporation tax rate would be likely to have a positive effect on local private sector investment and FDI. Increased investment typically leads to increased growth and employment, and could contribute to the rebalancing of the NI economy.

The consultation paper does not make recommendations, it aims to gain a fuller understanding of the costs and benefits that a separate rate would involve. The Government will make decisions on the way forward in light of responses to the consultation.

3. What are the main benefits of reducing the corporation tax rate in Northern Ireland?
The document outlines the main benefits as being additional investment into Northern Ireland by new foreign owned firms and by existing firms. The document estimates that FDI will grow by over £300m per annum within 10 years of reducing the rate of tax to 12.5%. This will lead to increased economic growth and a stronger private sector to help contribute to the rebalancing of the NI economy. Ultimately the main benefit will be the creation of long term employment and a stronger private sector. This will provide a significant boost to all businesses in NI.

The consultation document does not quantify the potential number of new jobs, however a report from the NI Economic Reform Group last year estimated that a reduction in the rate of corporation tax to 12.5% could lead to the creation of 90,000 new jobs over a 20 yr period. Whilst the number of new jobs cannot be guaranteed and is based on certain assumptions, the clear overall principal is that a reduction in the rate of corporation tax to 12.5% would result in a very significant number of jobs being created over the long term.

4. What are the possible downsides?
If the NI Executive were to obtain the power to vary the corporation tax rate and reduced the rate downward, then in order to comply with EU rules, any reduction in tax collected would have to be borne by the NI Executive. However as noted below the impact of bearing such a cost can be spread out over an appropriate period so as to give the benefits of a reduced rate the opportunity to kick in.

There is also a UK exchequer risk from artificial profit shifting by GB companies seeking to solely benefit from a lower corporation tax rate in NI by either setting up brass plate companies or by manipulating transfer pricing rules. In addition there may be additional administrative and collection costs that may have to be borne by the NI Executive and some additional administrative burdens for businesses. However none of these issues are insurmountable and with the appropriate legislation and monitoring, additional costs should be marginal.

Finally it should be noted that if the NI Executive does pick up the costs of varying the corporation tax rate then the EU Commission are unlikely to object to the variation of the corporation tax rate in NI.

5. How can the corporation tax rate be reduced?
Implementing a reduction in the rate of corporation tax on to 12.5% on day one would result in an immediate cost to the NI block grant. The consultation document estimates this cut would average £225 million per annum over the first 5 years of implementation. In the context of a block grant of over £10 billion pounds, this amounts to a cut of just over 2%.

The consultation document considers alternative measures to reducing the corporation tax rate reduction. These include phasing in the rate cut over a 5 year period (so that the rate reduces by 2.5 % per annum until it reaches 12.5%) and also only applying the reduced rate to trading profits. By combining these alternative measures this would significantly cut the initial annual costs to the block grant. Based on the figures in the consultation document the cost of combining these alternatives would amount to an average cost of less than £60 million per annum over the first 5 years of implementation. In the context of a block grant of over £10 billion pounds, this amounts to a cost of only 0.5% of the NI block grant.

In summary if the NI Executive was to phase in the reduction of the corporation tax rate and were to only apply the reduction to trading profits, the cost to the block grant would be reduced by over 75% in the first 5 years. This would allow more time for local and foreign investors to generate jobs, increase profits and grow the private sector.

Additional investment will lead to extra corporation tax arising from the increased taxable profits and to additional payroll taxes and VAT. Ultimately the extra taxes raised will exceed the costs of the corporation tax rate reduction and thus the lower corporation tax rate should ultimately pay for itself.

6. How can you have a say in this process?
To comply with EU rules, Parliament will have to devolve the power to vary corporation tax to the NI Executive before a reduction in corporation tax in NI could be introduced. The current consultation document seeks opinion from NI stakeholders on whether such tax varying powers should be devolved.

Business in NI has the opportunity to respond to the consultation document and to tell Treasury whether the NI Executive should get the necessary tax varying powers and then to comment on when the rate reduction should be introduced, how the rate reduction should take place and what the final reduced rate should be.

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