The Parliamentary Under-Secretary of State, Wales Office (Baroness Randerson) (LD)
My Lords, it is very appropriate that we are discussing this Bill on St Patrick’s Day. I take this opportunity to wish noble Lords a happy St Patrick’s Day.
I shall start by highlighting the history behind the policy enshrined in this Bill. Since 2010, the UK Government and Northern Ireland Executive have shared a common objective to rebalance the Northern Ireland economy away from overdependence on the public sector and to drive faster economic growth. In 2011 this Government published a consultation document Rebalancing the Northern Ireland Economy. Among other things, the consultation considered the possibility of devolving corporation tax powers to the Executive and Assembly. Responses to that consultation from the business community and Northern Ireland political parties nearly unanimously supported the devolution of corporation tax.
After considerable work on the detail and technical work needed to make this measure possible, this Bill was introduced in the Commons on 8 January. The proposals will allow the Northern Ireland Executive and the Northern Ireland Assembly to set a different rate of corporation tax from the rest of the UK for most types of trading profits arising in Northern Ireland. The tax base, including reliefs and exemptions, will remain under the control of the UK Government. The earliest financial year for which Northern Ireland could set its own rate is 2017. This will allow time for businesses and agents to become familiar with the new rules.
Lord Forsyth of Drumlean (Con)
Can my noble friend tell me why this Bill—unlike for example the measures that gave income tax powers to the Scottish Parliament—has been certified as a money Bill and therefore all its stages have to be taken at once?
Baroness Randerson
I understand the noble Lord’s point, and indeed there are clearly constitutional issues in relation to this Bill, but it has been certified as a money Bill by the Speaker of the other place. It is important to bear in mind that unlike the other legislation to which my noble friend refers, this is a simple measure that deals entirely with one issue. I am sure my noble friend will agree it is a highly technical Bill and therefore akin to many other money Bills this House deals with.
I will go briefly over the aim of this policy and the key measures within this Bill. Northern Ireland has a unique economic position within the UK. It shares a land border with the very low corporation tax environment of the Republic of Ireland. It is more dependent on the public sector, with around 30% working there, compared with about 20% in the rest of the UK. Economic prosperity—GVA per capita—is persistently some 20% below the UK average, and has been for a number of decades and it has to deal with the challenging legacy of the Troubles.
Devolving corporation tax recognises these unique challenges. The Northern Ireland regime has been carefully designed to enable the Executive to encourage genuine investment that will create jobs and growth, while minimising opportunities for avoidance and profit shifting. It balances this with the need to keep the costs of a reduced rate proportionate, both for the Executive and in relation to any additional administrative burdens for businesses.
The design of the regime builds on the principles agreed in 2012 by the Joint Ministerial Working Group which included Ministers from HM Treasury, the Northern Ireland Office and the Northern Ireland Executive. Companies trading in Northern Ireland will attract a Northern Ireland rate on their qualifying trading profits only. Companies will continue to pay the UK rate on their profits from non-trading activities which do not generate jobs or economic growth in the same way.
The rules are designed to deter businesses from seeking to exploit, through profit shifting and avoidance, a rate differential between Northern Ireland and the rest of the UK. The regime will not provide opportunities for brass-plating. Because they offer significant scope for profit shifting without the benefits of bringing substantial new jobs, the regime does not extend to profits from financial trading activity, such as lending and reinsurance. However, the policy recognises the genuine growth and employment potential for Northern Ireland offered by back-office functions, so companies with excluded profits from certain financial trades may make a one-off election to bring a notional profit attributable to the back-office functions of those excluded trades within the Northern Ireland rate.
To reduce the administrative burdens for SMEs, a special regime exists for them. A simple in-out test will mean that the majority of the companies will be spared the burden and cost of apportioning profits. More than 97% of SMEs operating in Northern Ireland meet the 75% employment test threshold and will benefit from the Northern Ireland regime.
Although this measure should go a long way in helping the Executive to encourage genuine investment that will create jobs and growth, the Government have been clear that devolving corporation tax is not an end in itself. For the full potential benefit of corporation tax devolution to be recognised, there are a number of other areas of reform that need to be addressed, such as education, skills and infrastructure.
The Stormont House agreement set out that the progress of this Bill through Parliament would proceed in parallel with implementation of key measures to deliver sustainable finances. These include agreeing and delivering a 2015-16 budget that works; progressing the Welfare Reform Bill in the Assembly; and taking the steps required to put the Executive’s finances on a stable footing for the long term. The Northern Ireland Executive agreed their budget for 2015-16, passing their Budget Bill on 24 February, and the Welfare Reform Bill also passed through further consideration stage of the Assembly on the 24 February. Sinn Fein has since withdrawn its support of the Welfare Reform Bill through its final stage in the Assembly. There can be no doubt that this decision was a setback, and the Secretary of State for Northern Ireland chaired a meeting of the party leaders last week in an attempt to help them to resolve the situation. The party leaders have since held further talks, and the Secretary of State proposes to convene another meeting with them later this week.
Changes to the welfare system in Northern Ireland were a key part of the Stormont House agreement and, as the Secretary of State has made clear, it remains pivotal that all aspects of the agreement are implemented. In simple terms, the Executive’s budget for 2015-16 does not balance without progress on these important issues. The Stormont House agreement was a major step forward and, although there has been good progress since the beginning of year, there were bound to be bumps in the road. The Government remain determined to implement the agreement and propose to continue with the progress of the corporation tax legislation through this House. The legislation contains a commencement clause, and commencement will not take place until the conditions set out in the Stormont House agreement have been met and changes to the welfare system in Northern Ireland have been implemented. This means the devolved power will be “switched on” for the planned start date of April 2017 only if the Executive are delivering their side of the agreement, including achieving sustainable public finances.
The unique challenges faced by Northern Ireland have been recognised by all parties. This Bill will allow the Northern Ireland Executive greater power to rebalance the economy towards a stronger private sector, boosting employment, growth and the standard of living in Northern Ireland, with benefits for the wider UK.
I therefore hope that noble Lords will give this Bill a Second Reading.
Lord Newby (LD)
My Lords, perhaps surprisingly, it was with a certain amount of affection that I looked at the possibility of speaking in this debate today because the first Question I answered from the Dispatch Box, nearly two and half years ago, was about the devolution of corporation tax to Northern Ireland. It was one of the most frightening experiences of my life. Despite that affection, I am not sure that I can share the worry, or sadness, of the noble Lord, Lord McKenzie, that we will miss the fun of Committee. There are many adjectives I could think of that would describe a Committee stage on this Bill, but I am afraid I am not sure that “fun” would be near the top of my list. Perhaps that shows a lack of imagination.
I am delighted to be able to congratulate the noble Lord, Lord Hay of Ballyore, on his excellent maiden speech. He brings with him a formidable reputation as someone who has been able to persuade people, in a quiet, effective way, to work together for the good of the community at large. It is clear that these qualities are still needed in Northern Ireland today, just as they ever were. Those qualities are going to be needed if we are going to see the kind of economic development that everybody who has spoken on the Bill wishes to see in Northern Ireland.
The noble Lord, Lord Bew, I think, stressed the key issue and the key difference that has characterised the debate today, which is one of expectation. Some in Northern Ireland have very high expectations for the Bill, while others, in your Lordships’ House, have very low expectations. There is very clearly, in this Chamber at least, no agreement on that. At one end of the spectrum we have the noble Lord, Lord Forsyth, and at the other, the noble Lord, Lord Browne of Belmont, but it is quite telling that the greatest enthusiasts for this legislation are those in Northern Ireland who, on a daily basis, are grappling with how to make the economy stronger. The political parties and the business community are extremely keen on this. To respond to the noble Lord, Lord Davies of Oldham, on whether we should do this or business rates, the business community have said that this is what they want. It is in response to a combination of the strength of feeling in the business community and of that in the political parties that the Government have entertained this measure.
Whatever view you take about the desirability of doing this, there is clearly a huge amount of uncertainty about what the outcome will be: there are many variables that we cannot possibly bottom out at this point, several years before it comes into force. However, for the rest of my time, I will deal with some of the concerns noble Lords have raised and clarify some of the issues which are clearly uppermost in people’s minds.
The noble Lord, Lord McAvoy, began by expressing the hope that there would not be brass-plating—companies just having a brass plate in Northern Ireland and doing business elsewhere. The rules in the Bill contain many features to protect against avoidance. In addition to the exclusion of investment income, the main one is the adoption of rules for large companies which are based on existing international principles. Pure brass-plating simply will not be possible because the rules require a physical presence in Northern Ireland and, more fundamentally, a calculation of Northern Ireland’s trading profits, as if the company were a stand-alone entity, so that concern should not be too great.
A number of noble Lords, starting with the noble Lord, Lord McAvoy, asked about the modelling of the impact of the different rates. The example that the Government have set is on the basis of a 12.5% rate of corporation tax in Northern Ireland, assuming a 20% UK rate. This is expected to be £325 million in 2019-20, which will be the first steady state year if implementation takes place in April 2017 and if the rate in Northern Ireland from April 2017 is 12.5%. Obviously, the Executive will have the power to consider the impact of setting the rate. The UK Government will continue to work with them on the detail of the block grant deduction.
The noble Lord’s question on modelling led into his second question about the impact on overall income for the Executive and what that could mean in terms of levels of public expenditure. This is a key question that the Executive will have to decide, but one way in which they might decide to progress—I am not saying that they will do this—rather than going through a very big change in one year, is to reduce the rate over a number of years, as we have done in the UK, so that you set a direction of travel, with a rate of 12.5% as the end-point. It would not be necessary to implement it all from year one. The reason why we have spread it over a number of years here is that it spreads the cost, while at the same time giving companies that are investing the UK a sense of where they are going to be in a few years’ time.
The other point in terms of how the Executive will be able to manage a potentially big reduction in their income is that the impact does not all come in in one go. Even if you were to reduce the rate to 12.5% from day one, the impact on the Executive’s budget would rise from £120 million in 2017-18 to £280 million in 2018-19, and then get to the steady state level of £325 million in 2019-20. So, in any view, you will have a phasing in.
My noble friend Lord Trimble pointed out that the Varney report suggested that there was a raft of other things just as important as this tax change for the viability and strength of the Northern Ireland economy, including the labour market, telecommunications and transport; obviously, that is true. We have, as a Government, been helping the development of high-speed broadband and the transport infrastructure in Northern Ireland. But if anybody thinks that we are going to get the full benefit of a reduction of corporation tax while standing still on all these other very important issues, they are clearly incorrect.
I believe that my noble friend Lord Trimble was the first to raise the issue of how the rest of the UK would see this change—a point very eloquently developed by my noble friend Lord Forsyth. As far as Scotland and Wales are concerned, the Smith commission did not recommend devolution of corporation tax, nor did the Silk commission in Wales. The suggestion that there will inevitably be the same kind of pressure from Scotland and Wales as there has been from Northern Ireland is not really borne out by the experience of the views of the political parties in those parts of the United Kingdom.
Lord Alderdice
I shall press my noble friend a little. There is a huge focus on what happens if this is introduced and all the modelling and so on. I emphasise to him that part of the purpose of this is so that those people who want to take Northern Ireland out of the United Kingdom and who want to harmonise the arrangements with the rest of the island are, by the device of this Bill, made to face the real political and economic consequences of any such process. The likelihood is that, whether because things would change or not, they will look at the situation, add up the sums and discover that going down this road is not what they want to undertake. This is a completely different thing from the situation in Scotland or Wales where there is not another country that people want to be part of that is a comparator or competitor. If Northern Ireland has this power and decides not to use it, that is a very strong pilot exercise to say to people in Scotland and Wales that there is no point in going down this road because it is not actually a serious economic goer. I want to emphasise that there is a political dimension to this in terms of Northern Ireland that is quite separate from any of the economic debate which has formed a large part of this debate.
Lord Forsyth of Drumlean
No, it is not accepted. My noble friend said that by giving more powers to Northern Ireland, and with it more responsibility, the case for breaking away from the United Kingdom will be blunted. That is precisely the argument which has been used by the Government in Scotland, where we gave more powers after we had won a referendum on independence, and the result is that the nationalists have surged. My noble friend says that no one in Scotland is crying out for corporation tax powers, but the Scottish nationalists are crying out for devo-max. In the past six months, they have gone up to 55% in the opinion polls, and the Labour Party, which has advocated more powers on the same argument as my noble friend has put, is facing annihilation. Can we not learn the lesson that by giving more powers to constituent parts of the United Kingdom, we break the unitary state which is the United Kingdom and give succour to those who wish to smash it up? When my noble friend says that Scotland is not like Ireland because there is no other country it can be, yes there is. It can be Scotland as an independent country outside the United Kingdom. That is the threat.
Lord Newby
I am not sure that is a threat in respect of Northern Ireland. I disagree with the noble Lord about both the principle of devolution and its effect. The SNP is at 55% in the polls today but, if I were a betting man, I would say that it will not be at 55% in the polls in 10 years’ time when we have seen how it manages taking responsibility for Scotland’s own income. It seems to me that one of the great weaknesses about the current settlement in Scotland is that the Scots Nats or the Government in Scotland wait to get a cheque from England but, however big it is, it is not big enough, and they do not have the responsibility for raising the money themselves. Now, they will have significantly greater responsibly for raising the money, and that will mean that they have to take more responsibility. I think that is wholly beneficial. I just disagree with the noble Lord, I am afraid.
The noble Baroness, Lady Blood, asked about building societies and credit unions. The effect and the design of the scheme is that in order to attract genuine economic activity, some mobile trades and activities are excluded, including lending and investing. The rules in respect of lending and investing do not distinguish between types of entity, so banks and building societies are treated on the same basis for that purpose. In respect of credit unions, the Northern Ireland corporation tax regime applies only to trading activity in order to encourage genuine employment. The income from the loans that credit unions make to their members is not currently taxed as trading income, so credit unions do not pay corporation tax on that income. Given those special rules already in place, this income from loans will remain outside the Northern Ireland corporation tax rules. Perversely, to bring the profits within the trading income rules, and so within the Northern Ireland regime, would likely result in them paying more tax. I do not think that credit unions are being disadvantaged by this.
Lord Trimble
I am going slightly off the noble Lord’s point on credit unions and back a little bit. I think it is a mistake to rule out financial services. Northern Ireland missed out completely on the changes that have taken place in financial services in the United Kingdom over the last 20 years. We do not have a significant financial service sector at all, yet that sector is much more profitable than nearly all the other sectors of economic activity in the United Kingdom. You are keeping the most valuable service sector, in which we do not have any significant representation, away from us. If you want to rebalance the Northern Ireland economy that really ought to be up at the top of the list.
Lord Newby
I am afraid that the Government have not taken that view in the way they have produced this. They have thought about it and decided that they did not want to go down that route.
The noble Lord, Lord Shipley, talked about the broader impact of the measure and of APD on the rest of the UK. I agree with him—he will not be surprised to know—in that these things need to be dealt with under a constitutional convention. Nobody could claim that the devolution picture across the UK is anything other than rather piecemeal and the time is long overdue for us to try to bring a bit more coherence to it, not least in terms of the English question.
The noble Lord, Lord Empey, talked about the necessity for the parties in Northern Ireland to agree on the budget reduction. Everybody agrees that the budget reductions should have been embarked on earlier, but the process has now started and we are determined to encourage and support the Executive in the future as they grapple with these issues. We are totally clear that the Executive must balance the budget and, to do that, welfare reform must go ahead.
The noble Lord, Lord Forsyth, ranged widely over our constitutional issues and problems. He did not mention that Yorkshire Day is in the middle of the Summer Recess and therefore I will be denied the possibility of getting a big set of powers devolved to Yorkshire, for which I am extremely sorry—but we cannot have everything. I think the noble Lord’s characterisation of the extent to which this would complicate the system and make life difficult for businesses was slightly overdone. The rules we are introducing for larger companies are based on existing OECD principles which companies already operate. As he pointed out, the design seeks to retain coherence within the corporation tax regime as whole. Only one variable is being affected and the whole system is being administered by HMRC, with which all the companies already have relationships.
The noble Lord, Lord McKenzie, asked a number of detailed questions, some of which I hope I can deal with. He asked whether the notional profit attributable to back office was creditable in the rest of the UK tax computation. This notional profit forms part of the attribution of trading profits to the Northern Ireland regime, so will not feature as mainstream—to use the language of the Bill—profit; that is, non-chargeable at the UK rate.
Lord McKenzie of Luton
I am sorry, but my question was about not whether they are creditable within the UK system but whether they would be creditable to a foreign investor.
Lord Newby
I shall have to write to the noble Lord on that point, but I suspect that the answer is yes. However, I am not confident, so I shall write to him.
The noble Lord asked about whether an SME that is determined to be within the Northern Ireland regime but has 25% of its activity within the UK has all its corporation tax charged at the Northern Ireland rate. The answer is yes—all its qualifying profits will be taxed at the Northern Ireland rate. It is estimated that more than 99% of the small and medium-sized businesses affected have 100% of their trading activity in Northern Ireland. That seems rather a large figure but, even if it was slightly less than that, the amount of potential tax forgone for the UK in one guise or another is very small.
The noble Lord asked how it would work in calculating the block grant. If and when this power is in place, the Executive’s funding will consist of three elements. The Barnett formula continues to operate, so there is the Barnett-based block grant. There is then a block grant adjustment, so there is a deduction from what they would otherwise have got, to reflect the CT revenues forgone. Then you put back in the CT revenues that you are collecting. That is the principle of it. I accept that actually doing it is quite complicated, but the principles are quite clear.
Lord McKenzie of Luton
I shall not make this a dialogue, but is the consequence that on day one the deduction from the block grant would effectively be at the current mainstream corporation tax rate and the benefit at the Northern Ireland corporation tax rate? Clearly there is a differential between the two, which is why you get a substantial negative in the block grant, at least on day one.
Lord Forsyth of Drumlean
Will the Minister just elaborate on that? Let us just say for the sake of argument that it is decided to drop the corporation tax rate to 12.5% on day one. The Government have made an estimate that that would cost £325 million. Would the block grant then have £325 million deducted on day one? Is it based on the estimate? Given that we know how volatile corporation tax is from year to year, how would that work? I do not want to be rude, but it does rather feel as though the Government are introducing a Bill without knowing how it will work in practice, or how much it will cost. It does matter, for reasons that the noble Baroness, Lady Blood, pointed out in her speech.
Lord Newby
First, Northern Ireland would not lose the £325 million on day one. As I said, there is a transitional period; it takes three years before the full effects work through, because of the time that it takes to get corporation tax returns sorted out. On the second point, on how it works out, the model that is being followed closely follows the model that has been agreed with the Scottish Executive in respect of income tax for Scotland. So a lot of work has been done on that, and the principles and the practice will follow from Scotland to Northern Ireland. I am happy to write to the noble Lord about it—it is extremely technical. But I can assure him that a lot of work has been done on the issue already.
I am well over time. I just say to the noble Lord, Lord Bew, that the double Irish arrangement is coming to an end, so he is right to the extent that the rate would go up there.
As I said at the start, this is a measure that is broadly supported in Northern Ireland by the political and business community. It has raised varying expectations. The view of the Government is that it has the potential to encourage genuine investment and help Northern Ireland to become competitive, boosting the entire UK economy and the standard of living of people across Northern Ireland. But it will be for those in Northern Ireland—business and politicians alike—to ensure that, if and when the Bill comes into effect, it has the desired effect.