Corporation Tax (Northern Ireland) Bill

Baroness Ritchie of Downpatrick Excerpts

Tuesday 27th January 2015 Commons Chamber

[Mrs Villiers]

As the hon. Lady will hear when I get further into my remarks, the approach in the Bill is to focus on genuine economic activity which generates jobs. We want to minimise the risks of matters such as brass-plating and artificial avoidance schemes, so the Bill maintains the coherence of the corporation tax system as a whole and also provides an incentive to bring genuine economic activity to Northern Ireland and assists in that rebalancing process.

The Wales Act 2014 came into effect on 6 January, providing the legislative framework to support the implementation of recommendations made in the first report of the Silk commission. As my right hon. Friend the Secretary of State for Wales has told the House, he continues to take forward discussions on the next steps for devolution in Wales. The debate continues on the most effective way to ensure that devolution operates in a fair way with regard to England, as one of the component nations of the United Kingdom.

Turning back to Northern Ireland matters, the devolved system for corporation tax rates set out in the Bill reflects the following overarching Government goals: we want to attract genuine economic activity to Northern Ireland, minimise additional administrative costs for business, keep the costs of a reduced rate for the Executive at a proportionate level, and ensure as much consistency as possible between the new NI provisions and the main UK corporation tax regime—and of course we need to comply with legal requirements.

The legislation does not cut off Northern Ireland from the rest of the UK tax system or establish a separate and distinct corporation tax regime for Northern Ireland. Control over what is taxed remains a matter for the UK Government and this House. The Bill devolves only the power to vary the rate, so Northern Ireland’s trading regime remains firmly and clearly within the overall UK corporation tax system. The Bill will insert new part 8B into the Corporation Tax Act 2010 and amend the Capital Allowances Act 2001. These changes would give the Assembly the power to set a rate of corporation tax for certain trading profits, based on a proposal from the Northern Ireland Executive. That would be a decision for Northern Ireland, independent of the UK Government or this House. It will give the Assembly and the Executive a powerful economic lever to drive potential growth and enable it to be exercised on the basis of the wishes of Northern Ireland voters, taxpayers and businesses.

Efforts are made to minimise the scope for artificial tax avoidance, as I said in response to interventions. Existing anti-avoidance measures will continue to apply, including the UK targeted anti-avoidance rules and the general anti-abuse rule, and further protections may be introduced before implementation. The overall structure of the devolved regime has been designed to limit the opportunities for avoidance, as I told the House in response to interventions.

A new Northern Ireland rate would cover trading profits, such as those associated with manufacturing and providing services. Other profits—non-trading profits, such as those associated with property income—that do not generate jobs or economic growth in the same way will continue to be subject to the UK-wide rate. Similarly, activities such as lending, leasing, and reinsurance offer significant scope for profit shifting without the benefits of bringing substantial new jobs, so these, too, will be excluded from the Northern Ireland provisions.

To promote continued success in Northern Ireland in attracting back-office functions, companies with excluded trades and activities may make a one-off election for the back-office functions of those excluded trades or activities to qualify for the Northern Ireland Office regime. This is an example of the UK Government’s responding specifically to areas of activity where Northern Ireland has demonstrated its great strength in attracting inward investment. It will not apply to the oil and gas or long-term insurance sectors, which have their own separate regimes and will not be included in the new devolved arrangements. Allowances and credits remain reserved to Westminster to help to maintain a common tax base across the United Kingdom and to prevent unnecessary new complexity from being added to the tax system.

However, a number of rules will be amended to reflect the new circumstances. For example, if there is a lower rate of tax in Northern Ireland, research and development tax credits, capital allowances and creative reliefs for the film, TV and computer game industries will be adjusted to ensure that they continue to be broadly equivalent in value to those in Great Britain. That means that Northern Ireland can continue to be just as attractive a location for successful projects such as “Game of Thrones” and other film and television productions.

The devolved tax regime will also operate differently for larger and small businesses. Larger businesses will need to divide their profits between Northern Ireland and Great Britain, as they do now between the UK and other countries. This effectively means that they will treat their Northern Ireland trading activity as a separate business from their activity in the rest of the UK and allocate the appropriate amount of profit to Northern Ireland. We recognise, however, that this would be burdensome for smaller businesses. Indeed, the issue of potential administrative burdens on small business was one of the key concerns brought out by the 2011 consultation, and the matter was raised by Northern Ireland Executive Ministers on a number of occasions at the ministerial working group. Therefore, if at least 75% of such a business’s staff time and staff costs relate to work in Northern Ireland, then all their trading profits will be chargeable at the Northern Ireland rate. If not, they will be chargeable at the UK corporation tax main rate. This simple in/out test will mean that the majority of small and medium-sized enterprises are spared the burden and cost of apportioning profits.

As I made clear in my previous statement to the House, the Bill’s progress through Parliament is dependent on the Executive parties delivering on their commitments in the Stormont House agreement. Those include agreeing and delivering a 2015-16 budget that works, legislating for changes to the welfare system, and taking the steps required to put the Executive’s finances on a stable footing for the long term. I warmly welcome the progress that is under way on those three crucially important matters, with, for example, the recent agreement on a budget for 2015-16. Given the practicalities of implementation, the earliest point at which reduced rates could come into effect is April 2017. The Bill contains a commencement clause meaning that these devolved powers will be switched on for the planned start date in 2017 only if the Executive can demonstrate that they have succeeded in the third goal of achieving sustainable public finances. This is in line with the approach used for other tax devolution measures in other parts of the UK.

The Government have been very clear that devolving corporation tax rates is not an end in itself. Certainly, on its own, it is clearly not the answer to all the economic challenges facing Northern Ireland. If the full potential benefit of corporation tax devolution is to be realised, a number of areas of economic reform need to be addressed, such as planning, skills and infrastructure. However, given the land border that Northern Ireland shares with a lower-tax jurisdiction, it is difficult to think of any one policy which, on its own, may potentially have such a transformational impact on the Northern Ireland economy—

[Ms Margaret Ritchie (South Down) (SDLP)]

rose—

[Mrs Villiers]

And, I believe, on the hon. Lady’s constituency.

[Ms Ritchie]

Does the Secretary of State agree that, as regards potential visits and potential locations for foreign direct investment, there is a need to address the historical legacy of under-investment and regional imbalance if the issue of corporation tax is to have any meaningful benefit in pump-priming the local economy?

[Mrs Villiers]

I know that the Northern Ireland Executive are committed to doing all they can to ensure that the effects of boosting the private sector and enhancing prosperity are felt throughout Northern Ireland. All Administrations grapple with the difficult problem of how to ensure that economic prosperity is appropriately spread. I believe that corporation tax devolution—coupled with a focus on other areas of economic reform such as skills, planning reform and investment in infrastructure—is a crucial way to enhance the private sector and boost prosperity throughout Northern Ireland. I am sure that the hon. Lady will be aware of some of the many difficulties that have been experienced in border areas over the years. People living in border areas stand to benefit as much as everyone else in Northern Ireland from a potentially significant and welcome impact in achieving the rebalancing of the Northern Ireland economy that we all want to see.

Members of the business community have told me on very many occasions that they are convinced that this is the right measure for Northern Ireland. They believe that it will boost the indigenous private sector, both large and small, as well as attract foreign direct investment, and will provide an effective means of rebalancing an economy which for decades has been over-dependent on the public sector. They have therefore strongly welcomed the Government’s introduction of this Bill. I am very grateful for the support for this measure shown within the Northern Ireland business community.

The Government will use our very best endeavours to get the Bill on to the statute book before the Dissolution of Parliament. This legislation has strong support in Northern Ireland. Moreover, the whole of the UK will benefit if corporation tax devolution can help to drive economic growth and rebalancing, and help to deliver a prosperous and stable Northern Ireland.

--- Later in debate ---

[Sammy Wilson]

I seem to have hit a sore spot or at least the tender parts of the body politic among those parties that have engaged in such activity.

We have to get the welfare reform proposals through the Executive, but agreement has been reached and I hope that, as this Bill makes progress, we will also see the passage of the welfare reforms in Northern Ireland, albeit with changes—mostly secured by my party—to the Welfare Reform Bill that will make it less draconian. Indeed, I think that some of the changes in the Welfare Reform Bill will have to be revisited by this Parliament at some stage.

[Ms Ritchie]

Will the hon. Gentleman give way?

[Sammy Wilson]

I will, because I know that the hon. Lady is feeling sore from some of my remarks.

[Ms Ritchie]

I assure the hon. Gentleman that I am not feeling sore in any way. He is avoiding the reality to suit a certain political situation. He used to be a sceptic about corporation tax, but he has had a damascene conversion. Notwithstanding that, can he tell us what measures will be introduced to achieve the benefits of welfare reform for the people of Northern Ireland?

[Sammy Wilson]

If the hon. Lady is not feeling sore from some of my remarks, she is more brazen than I thought she was—[Laughter.] As she has not yet heard the rest of my speech, she does not know what I am going to say or the balanced arguments that I am going to make about corporation tax.

Everyone who has spoken so far has suggested that there is widespread support for the Bill in Northern Ireland. That is, of course, not true. The Green party opposes it, but then that party opposes economic growth apparently, according to its latest manifesto. I can understand, therefore, why it would not want to see any measures that would encourage economic growth in Northern Ireland. I do not know how the Green party expects us to tackle our unemployment or standard of living problems with no economic growth, but in any event it opposes the Bill.

The other opponents of the Bill are the trade unions, which are organising a one-day strike against it and other measures some time in March. At the same time as they complain about youth unemployment and the low-wage economy, they oppose a measure that has the potential to address all of those issues and want to strike against it. I do not understand their logic.

The only other party that opposes the measure is the traditional Unionist voice, but I think that is because we support it. That seems to be the rationale for anything it does.

All parties in this House are agreed that tax incentives can be beneficial in stimulating business growth. Some may disagree about the actual form the tax incentive should take or the degree to which it should be used, but there is an undeniable correlation between such incentives—be they small business rates relief, corporation tax reductions or oil industry taxes—and growth. Shareholders are attracted to putting money into businesses, which in turn have more profits to plough back into investment. Tax incentives can also give businesses a competitive edge over those in other countries. That is the rationale behind the Bill and no one can deny that it will have an effect.

In Northern Ireland there is an additional reason to make the change in that we share a land boundary with a country that has had a lower corporation tax rate. Some people say that this will not have a beneficial effect, but it is significant that, even when the Government of the Irish Republic were having to slash public expenditure and incur the wrath of the population by reducing wages in the public sector, putting up taxes, introducing new charges for water and so on, the one area for which they were fiscally responsible and did not make any changes was corporation tax. They had obviously judged that when it came to fighting for business, corporation tax—albeit along with other measures—was a shock and awe tactic they could use to try to attract businesses to the Irish Republic. That is a significant argument.

I have a degree of scepticism about economic modelling. As I am sure the Financial Secretary would tell us, we can put whatever finely tuned assumptions we want into economic models, but they can be upset fairly quickly. In the next 15 years, it is estimated that output in the Northern Ireland economy will grow by 11%, creating about 37,500 jobs. Any economic model must come with a warning that the assumptions on which it is based can change fairly rapidly. However, the estimate has been made using the economic data we have at present: assumptions, past trends, information from other economies and so on. In Northern Ireland, we cannot afford to ignore that estimate, even if it is not totally correct, especially if it will grow the private sector and bring in well-paid, above-average jobs.

We had concerns about a number of issues. We did not want a Bill for people who simply moved their profits to Northern Ireland and did not create jobs. There is no benefit to us in having companies with just a brass plate outside the door, but no substance. I believe the Bill addresses that issue, as much as it can, by indicating that it will benefit trading profits only. In addition, there will be strict investigation by the Treasury of companies who try to move profits. As I understand it, there will be a charge for ensuring that compliance measures are put in place to avoid such scenarios.

If we do that, what about small businesses? Many small businesses, especially in the construction industry, have a substantial amount of work in Great Britain because of the decline in the construction industry. We did not want small businesses to have huge administrative costs imposed on them for differentiating where they made their profits. I welcome the proposal in the Bill that businesses based in Northern Ireland with 75% of their activity and employment there, will be exempt on all their profits. That should cover 99% of small businesses in Northern Ireland so there should not be administrative costs for small businesses.

Oil and gas is excluded from the legislation. I hope that very shortly, despite the endeavours of the Social and Democratic and Labour party Environment Minister, we will have a substantial oil and gas industry that can exploit the shale gas resources that we believe are buried under the ground in Northern Ireland. There may be some who play the populist line and say, “Let’s just keep those resources there. After all, they’re nasty CO₂-producing fossil fuels.” I want them to be exploited for the benefit of the people of Northern Ireland and the United Kingdom. The profits from those companies would not currently be subject to the corporation tax arrangement, but I hope that if and when we develop such an industry, Northern Ireland will benefit from the kinds of promises that have been made to the north-east of England, including a sovereign wealth fund to take in part of the profits from those businesses and plough them back into public expenditure projects. I understand, however, why that has not been included at present.

On financial sector profits, there were two issues. I was not all that supportive of the argument about why those nasty banks, who nearly destroyed our economy, should benefit from reductions in corporation tax, paid for by reductions in the block grant. I understand the emotional rhetoric in that argument, but I am more concerned that the profits of banks and other financial institutions are much more volatile and more easily moved without detection than the profits of manufacturing or other companies. One has only to look at the difference between 2007-08 and 2008-09, when banks’ profits changed from £255 million to £45 million. That kind of volatility in tax revenue was a compelling reason why we should not include the profits of financial institutions in the Bill. I am glad that the Government have responded to that.

--- Later in debate ---

[Ms Margaret Ritchie (South Down) (SDLP)]

Like other right hon. and hon. Members, I broadly welcome the devolution of the power to vary the Northern Ireland rate of corporation tax. I cast my mind back to 2006, when I was a Member of the Northern Ireland Assembly while it was a shadow Assembly. My hon. Friend the Member for Foyle (Mark Durkan), who was my party leader at the time, appointed me to an all-party committee dealing with building and growing the economy in Northern Ireland. We took evidence, in sessions spanning a six-month period, from a range of people, some of whom were pivotal in raising the issue of the Northern Ireland Executive and Assembly having the ability to set our own rate of corporation tax. Central among them were the late Sir George Quigley, and Mr Hewitt from the Economic Research Institute of Northern Ireland. From the research that we carried out, we found that one of the impediments to a prospective Northern Ireland Executive setting corporation tax was the Azores judgment. We had to consider how the principle that it established could be circumvented so that we could achieve that power.

It was agreed in the committee’s report that other incentives were required to pump-prime the local economy. Chief among them were incentives in how small and large-scale developments were dealt with in the planning process. We said that we needed to equip our young people with skills and expertise, and that we needed manufacturing and industry to locate in Northern Ireland. I represent a constituency that was outside the area where foreign direct investment was located, and we said that we needed the visits that are normally the precursor to such investment. We wanted to see a balanced approach to regional development in the location of manufacturing, business, the financial sector and new types of infrastructure, so that we could underpin and grow our economy. Those factors remain the same and are still important to growing our economy.

As the shadow Secretary of State indicated, we still have a youth unemployment level of about 19%, and we still have a high level of economic inactivity. Our education and further education sectors are therefore important in making a contribution to growing our economy. Above all that, as my hon. Friend the Member for Foyle and the hon. Member for Upper Bann (David Simpson) said, is the need to ensure that our young people stay in Northern Ireland, are educated there, gain their vocational training and academic qualifications there, and invest that training, knowledge and know-how in developing our economy. Nobody would disagree with that.

Other measures are required because while we are a public sector economy, tourism is also a principal economic driver in my constituency. I have talked to the Minister about this on several occasions, but I repeat my request for a reduction in VAT on tourism and tourism products, which I see as a UK measure. Such a reduction would pump-prime the sector and create the necessary jobs. The economic modelling for such a change was carried out by the Treasury, so the research is available.

We also have the evidence of the south of Ireland, which—notwithstanding its economic difficulties—has been able to keep its rate of VAT on tourism at 9%, compared with ours of 20%. Representing a border constituency in the north of Ireland, I have many constituents who are involved in tourism and other businesses and have to compete with that VAT rate. That is extremely difficult with mobile investment and people who live in the north but work in the south, and vice versa. Those issues must be addressed.

Another issue within the remit of the Department of Enterprise, Trade and Investment and BT is proper and adequate access to broadband. Preference should be given to business centres so that they have immediate access to superhighway broadband, which they need to help build small to medium-sized businesses. That should be a priority.

I have several questions about the Bill. No doubt the details will be teased out in amendments to the legislation, but I also wish to raise them now. The Bill is 87 pages long and I have no doubt that it was drafted well in advance of the outcome of the Stormont House agreement. Is the engagement on the details between the Northern Ireland Executive, especially the Finance Minister, and Treasury Ministers still ongoing, or was the examination of the detail of the Bill carried out by the cross-ministerial working party on corporation tax? Or was the work solely done by the Treasury? I would also like to know what discussions were held with Northern Ireland authorities about applying the EU definition of small and medium-sized enterprises. We need clarity about the discussions and the agreement that was reached about the 75% threshold to be applied to determine what constitutes a Northern Ireland regional enterprise. We need that clarified in case any traps or restrictions are buried in the detail of the Bill.

At the moment, our principal economic lever is public expenditure and we all know that we face budgetary challenges, whether in the broader UK or in the Northern Ireland context. We all need to be aware of what will confront us down the road. My questions also concern implementation and the cost to the block grant. While the rate will be set by the Northern Ireland Executive and Assembly, what modelling and analysis did the Treasury do on the impact on jobs and the cost to the block grant of differential potential rates? I find it hard to believe that such work has not been carried out: if it has, when was it carried out and can that analysis be made available in the Library and that information be communicated to Members?

As a result of undertaking research for this debate, I know that way back in February or March 2011 the Minister came to Lisburn and presented a Government consultation paper, which stated:

“In order to meet the fiscal autonomy condition, the NIE would need to bear the full fiscal consequences of changes in tax revenues resulting from a new Northern Ireland corporation tax rate. This means that Northern Ireland’s block grant would be adjusted to reflect the fiscal costs of a reduction in the rate of corporation tax.”

Has any modelling been done in that respect? What specific work has been done?

The Treasury paper suggests that critics of corporate tax devolution have pointed out that receipts from corporation tax are one of the most volatile categories of tax revenue. As the Institute for Fiscal Studies has observed, over time they vary substantially more than total receipts or national income, and replacing an element of the block grant with these revenues carries a considerable risk to the devolved Administration. Has modelling been done in that respect?

About four months ago, in October 2014, Her Majesty’s Revenue and Customs published more detailed estimates for the shares of UK taxes arising in England, Wales, Scotland and Northern Ireland. Those estimates suggested that Northern Ireland’s share of corporation tax revenues had declined in the past few years and is now at about 1.2% of UK onshore corporation tax receipts. To increase those receipts and ensure they are invested in our local economy and in the businesses the hon. Member for East Antrim (Sammy Wilson) talked about, does the Minister not agree that there is a need to ensure not only that there is a greater regionally balanced location of foreign and direct investment, but that existing businesses are sustained in the local economy?

The Treasury paper also looked at the potential long-term impact of a cut in corporation tax boosting profits and consumption, thus increasing receipts based on consumption, and indicated that risks would be attached. It stated that if the tax cut failed to attract as much investment as expected, the Northern Ireland Executive would need to make up the difference. I am conscious of the challenging budgetary difficulties. Similarly, the risk associated with profit shifting from the rest of the UK would lie with the Northern Ireland Executive. Has that possibility been investigated fully, and what is the current prevailing view of the Treasury and the Northern Ireland Office? Have fluctuations in tax revenues for a small corporate base been factored in?

Professor Trench, professor of politics at Ulster university, gave evidence to the Northern Ireland Affairs Committee in 2011. He stated then that,

“to comply with EU law, a substantial and irrevocable cut in the block grant will have to be made, based on present tax receipts.”

Has that perspective been considered and is it reflected in the proposed legislation?

The hon. Member for Belfast East (Naomi Long) and the hon. Member for East Antrim referred to the issue of brass-plating, which has been factored into the Bill. I would hope that whatever is factored in is vigorous and robust. Chapter 17 relates to businesses excluded from claiming the new tax rate, including those lending and making investments, those undertaking investment management and those engaged in reinsurance. In addition, any back-office activity is excluded. What is meant by back office? The Bill does not say and just gives the Treasury the power to define it. It is a pretty fair bet, however, that some of the most mobile activities in the UK, such as accounting, data processing and even many call centres, will be back-office activities and so excluded. Further clarification is needed in that area.

In welcoming the Bill, I must add that we intend to table amendments in Committee to reflect our various concerns. We want a Northern Ireland economy that continues to grow and ensures that young people who have emigrated can come back and invest in the local economy, and that those with academic, degree-level educations or vocational training can deploy their skills and expertise in our economy for the betterment of the people. The litmus test for the Bill will be whether it brings continual benefit to the local population.

In conclusion, I welcome the devolution of corporation tax. I hope that, along with other incentives, it brings significant benefit to the people of Northern Ireland; that our local economy grows; that our people stay; and that business is underpinned and promoted. I can think of two areas in my constituency, Kilkeel and Warrenpoint, with significant entrepreneurial skill and activity. One is a harbour importing and exporting and the other is a fishing port seeking proper port status, because it is now involved in an initiative to utilise its marine and engineering skills. I hope that the Bill, along with other incentives from other Departments here at Westminster and in the Northern Ireland Executive, will achieve that better deal for the people I represent.