Devolving Corporation Tax Powers

Posted on August 4, 2015 · Posted in Belfast Telegraph

After years of lobbying, the devolution of Corporation Tax to Northern Ireland has arrived.  Or rather, it almost has – subject to very important ‘ifs and buts’.

The most important is that the political parties on the Northern Ireland Executive must resolve their differences on the budget, welfare reform and many other problems.  As Northern Ireland secretary Theresa Villiers pointed out a few days ago, the signs are not good.

Even with Corporation Tax devolution, there will be no instant results.  It will probably be a few years before a lower rate – matching that of the Irish Republic – is in place.  This will allow for the gradual reduction of Northern Ireland’s spending on other things – the UK government’s block grant will be cut by at least £200m a year to comply with EU state aid rules.

Nor will a reduction in Corporation Tax be enough to attract substantial inward investment.  For Ireland, success came from a low tax rate and the creation over many years of a highly skilled labour force comprising a high proportion of graduates and strong vocational skills.

In Northern Ireland, many people leave school without good basic skills in English, maths and IT.  Much of our further education spending provides those basic skills – instead of advanced vocational training.

Meanwhile, we have the smallest university sector in the UK.  Without enough graduates, it is difficult to attract the high value investment that would genuinely turn our economy around.

The UK’s Corporation Tax rate of 21% – falling to 20% in April – is certainly a disincentive to foreign direct investors considering whether to put their money South or North of the border.  In the Republic, profits are taxed at 12.5%.  But that is just one factor in the decision.

What is more, Corporation Tax rates are of decreasing importance.  In 2005, the largest 100 UK companies paid roughly equal amounts of corporation tax and other taxes.  By last year for every pound they paid in Corporation Tax, they paid £2.86 on other taxes – such as national insurance, VAT and business rates.  Global competition on Corporation Tax has pushed governments to raise taxes in ways that are more difficult to avoid.

Moreover, there is a significant difference between headline rates of Corporation Tax and the rate corporates actually pay.  This is not only because of tax avoidance, but also because of the availability of such things as research and development tax credits and relief on profits arising from patents.  On this basis, the UK is already internationally competitive on its tax rates – though not matching those in Ireland.

So while there is a strong, perhaps unanswerable, argument in favour of matching the Corporation Tax rate on offer in the Republic, doing so will not in itself turn our economy round.  To do that, Northern Ireland also requires a skills revolution.  With the draft Budget proposing significant cuts to our further education colleges and universities, the signs are that our ministers have not noticed.