Corporation Tax (Northern Ireland) Bill

Naomi Long Excerpts

Tuesday 27th January 2015 Commons Chamber

[Mrs Villiers]

I emphasise that the new system is designed to deal with artificial avoidance. A number of measures are in place to prevent abuse of the new system; I will come to those in a moment. In relation to voting on taxation matters, my hon. Friend will be aware that ensuring that the devolution settlement is fair to the English as well as to the rest of the United Kingdom is an important matter under consideration by the House and by the political parties. I am sure it will be extremely important that we get the right outcome to ensure that the devolution settlement is fair across the board, but it is also crucial that we have a coherent and unified tax system.

[Naomi Long (Belfast East) (Alliance)]

I take on board the issue raised by the hon. Member for Amber Valley (Nigel Mills). Does the right hon. Lady agree with me, though, that Northern Ireland would want to avoid corporation tax devolution and any subsequent reduction by the Assembly leading merely to brass-plating of companies in Northern Ireland? For us to benefit from the economic out-turn of investment, we need people who are involved in creating employment and raising skills levels as well.

[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—

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[Sammy Wilson (East Antrim) (DUP)]

I trust that I will do what the shadow Secretary of State did and give a balanced view, from a Northern Ireland perspective, of where we see the Bill taking the Northern Ireland economy and the impact that it will have on the economy.

It would be churlish if we did not acknowledge that considerable work has gone into the proposal. It has taken many years, and as the right hon. Member for North Shropshire (Mr Paterson) indicated, a large number of people have been involved in making the case for the devolution and then doing what was necessary to bring it about.

I pay tribute to the right hon. Gentleman for the role that he has played in this change, although I would point out that the cudgels were first taken up by the leader of my party, who was then Finance Minister in Northern Ireland and was convinced that the decision made after the Varney report was published was incorrect. He started the ball rolling on this issue in Northern Ireland. Many businesses also supported the campaign.

I also pay tribute to the work done by the Financial Secretary and his officials during the time that I was the Finance Minister in Northern Ireland. I know that sometimes we made progress and then were knocked back a bit, and it was frustrating at times. But many of the issues addressed during those discussions were essential if the issue was not to fall foul of European legislation or decisions by the European Court. Much of that groundwork was very necessary.

One of the things that drives this change is the desire in Northern Ireland to transform our economy. Our region has not always been in the economic doldrums. In fact, for a long time during the 20th century, Northern Ireland was a driver in the UK economy. We had world-leading, world-renowned industries that drove a healthy economy. Many of those industries declined because of changes in world demand, distribution patterns and global trends, which also coincided with the start of the troubles. As a result, major industries declined and Northern Ireland was an unattractive place for new private sector companies, resulting in an unhealthy increasing dependence on the public sector.

One of the aims of the Northern Ireland Executive is to rebalance the economy as well as to grow it. To do that we need the right economic levers, but—as the Secretary of State said and the shadow Secretary of State alluded to—there is no point having those levers in our hands if the right conditions do not exist. I agree with the Government—although some frustration is felt back home on this point—that it was right for them to insist that the Executive have a budget that showed the tax change was sustainable and that we could absorb its impact. It was right that we should not pay money annually to the Treasury because we had not concluded the welfare reforms, because that was of course a drain on the resources that were available to the Executive.

The conditions that were laid down were correct and the Executive has now proposed a budget, although it has not been supported by all the parties. Some parties, even though they are in government and their Departments would benefit from the savings in the budget, have taken an irresponsible attitude. They think they can benefit from the budget and at the same time distance themselves from the more difficult aspects of it—

[Naomi Long]

And you would never have done that.

[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.

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[Sammy Wilson]

Given the comments from the hon. Gentleman’s party and the Labour party, I suspect the grant will not be higher. Furthermore, we still have to deal with our dependence on public sector expenditure. It is being squeezed all the time, and therefore we need to look at rebalancing the economy.

[Naomi Long]

I agree that public finances will continue to be under pressure and that therefore we need to grow the private sector to counterbalance that. Does the hon. Gentleman agree, however, that Northern Ireland’s reliance on the public sector is even worse than the Secretary of State mentioned, because many of the privately owned companies are almost entirely reliant on Government contracts? It is not just about those directly employed in the public sector; it is about the number of private businesses that rely on the public sector for their employment.

[Sammy Wilson]

That is one of the reasons, of course, that some people say the public sector accounts for as much as 62% of employment in Northern Ireland. Some of it is disguised in the way the hon. Lady suggests.

We have to consider whether we can simply sit on our hands. However, there is a second consideration for the Northern Ireland Executive. Yes, there is some risk attached to the policy; all economic policies carry some risk, but in measuring and trying to balance that risk, we have to consider the impact of the policy elsewhere, especially in areas similar to Northern Ireland. I have already mentioned the approach of the Republic of Ireland Government.

As the changes to the rules on accounting and disclosure come forward, I know that some of the financial services issues might be addressed, but we have not touched on the ongoing cost of the devolution of corporation tax, which is currently reckoned to be about £300 million. However, as the economy grows, a formula will be imposed in respect of the loss of revenue, and given that there could be a substantial reduction in corporation tax in Northern Ireland, the formula must not be draconian. For example, if it was set at an unrealistic rate, based on the performance of better performing regions or of the UK economy as a whole, the burden could become substantially higher as time goes on. We need clarity on that issue.

The right hon. Member for North Shropshire said that from this day on the Executive should be proceeding with this matter, but we cannot do so because the Bill has not yet been passed. I know he is enthusiastic, but I think his enthusiasm has run away from the reality: the Bill has to pass its stages as normal.

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[Naomi Long (Belfast East) (Alliance)]

I am pleased to be able to speak in support of the Bill. Much has already been said and I do not want to repeat the points that have been made; rather, I want to set out why I believe the Bill will be good for Northern Ireland. I also want to sound a note of caution on those issues to which we will need to give some thought here in Westminster and in the Assembly, in order to ensure that we maximise the Bill’s impact on economic growth.

We are all aware of the need to rebalance the Northern Ireland economy. At the moment, we are more reliant than any other part of the United Kingdom on the public sector, and our private sector often struggles to be competitive because of particular disadvantages. For example, the private sector companies that compete internationally are often at a significant disadvantage because of energy costs. So there are a number of issues that put us at a competitive disadvantage compared with our nearest neighbours, but despite that, we are one of the best-performing regions in attracting foreign direct investment, and we do an excellent job of getting those companies to come to Northern Ireland.

One of the issues that corporation tax might assist us with is ensuring that with those companies come with not just back-office jobs but jobs with good salaries, and good profits that will then be out-turned and benefit the wider economy. So there are real opportunities to change the kind of foreign direct investment we can attract and to build on the reputation we have been able to grow overseas for being a good destination for investment.

As others have said, Northern Ireland is unique in having a land border with another country, the Republic of Ireland, which has a much lower rate of corporation tax. It is right that we should seek to be competitive with that country, but we should also not forget that we have other advantages that it may not. So we should not always seek simply to balance our taxes against its taxes; we should look to be competitive on a range of fronts. When companies are coming to make their investment, they will look at not only tax regimes, but a host of other issues that will influence their decision. I want to focus briefly on some of those towards the end of my remarks.

Devolving corporation tax rate-setting powers to the Northern Ireland Executive, when complemented by other measures, has the potential to help transform our economy, increasing growth, productivity and exports. So the Bill is a timely move to facilitate that growth. When the Northern Affairs Committee dealt with the issue, we found strongly that not only business, but local politicians, particularly those represented in the Executive but also some outside the Executive, were in favour of this measure. I must pay tribute to the hon. Member for East Antrim (Sammy Wilson), in that, although he has been sceptical about the issue, he has today given reasons why there needs to be caution about the fiscal modelling on which people have based their projections for the future. Although we may be able to address corporation tax, we cannot control the global economic picture, which will also dictate the amount of foreign direct investment we can achieve. So we should not set our sights too high in terms of the number of jobs that that may create. We have projections we can use as a basis and we can look at the evidence from other regions, but we have to accept that other factors will influence how big an impact this measure will have.

It is important that we weigh those factors carefully when setting the rate—that will be a matter for the Assembly, which will need to give them due consideration. I agree with other Members who have said that we would want to do that quickly, I also think we need to carry out due diligence in setting the rate, to ensure that we know exactly what it will cost the Northern Ireland Assembly in block grant and exactly how we will manage the bridging period between making the cut to the block grant and seeing some reward from the economic investment that will follow. We will also need carefully to examine the long-term impact this measure will have on the wider economy. So although it is good that we are making these moves today—I commend the Secretary of State and her team for upholding their part of the Stormont House agreement at this stage, while, almost simultaneously, the Assembly is today upholding one of its parts of the agreement on the budget issues—I hope we will see an opportunity for the Assembly to take more responsibility over its financial measures.

I also wish to commend the Secretary of State for her work on the Bill, which will ensure that if the Assembly does not show a responsible way forward on the budget and if we are not able to get our finances in order in the next few years, this move will not go ahead. It is quite simple: we cannot continue with a situation where we make promises beyond the money we have to fulfil them and where we make commitments on public sector expenditure that are not covered by the block grant or by revenue raising that is available to us already. We need to get our financial house in order, so that we are able not only to make the corporation tax reduction, but convince the people of Northern Ireland that we have the capability to manage our finances in a way that is for their benefit. There is a gap between what the politicians would like to be able to do and what the Northern Ireland public trust them to do, particularly on financial matters. That gap needs to be closed quickly over the next few years, by dealing with the budgetary matters before the Assembly both today and over the next few weeks.

It is important that after the Stormont House agreement we have bought some more time in which to be able to make those transformations to the economy, but all parties will have difficult decisions to make. Where the money comes from to pay for the corporation tax devolution will be one of a number of difficult decisions that will have to be taken. Whatever the colour of the Westminster Government after the next election, it is clear that nobody is arriving with a pot of gold and none of us can expect that huge amounts of money will be available that are not available now for public sector investment. I accept that some in this House wish it were otherwise.

It is hugely important for us to be realistic in our projections and in the promises we make to the public we represent, and to recognise that corporation tax is only one of a number of avenues we can pursue to grow our private sector. A low rate of corporation tax alone will not attract all the investment needed to grow Northern Ireland’s economy. Other corresponding measures will need to be taken in order to make Northern Ireland an attractive place in which to base a business or company, so let me briefly discuss some of them. Some are relevant to Westminster, whereas others will ultimately be dealt with by the Assembly. It is important for us to consider them, because that mix will allow companies to have the confidence to come to Northern Ireland.

The first and foremost issue is stability and good governance. The Stormont House agreement offered us an opportunity to deal with some of the issues associated with political stability, but, as hon. Members know from my response, I believe many of those were, unfortunately, parked and could still be the undoing of the good progress made thus far. I want local parties to commit to dealing maturely with those issues, which are politically sensitive, so that we do not have the kind of situation we have had recently, where lots of years of talking to companies and encouraging them to come to Northern Ireland and consider us as an inward investment opportunity are written off on the basis of a few nights of rioting, which is projected worldwide and damages our reputation irrevocably.

We need to have stability and maturity around political decision making. The opportunity is there for that to happen, and I hope that all parties will grasp it. They should stop the petty arguments over peripheral issues and try to pull together to create the sort of stability that is beneficial for business, public sector growth, and small and medium-sized enterprises. Those SMEs suffer greatly when we have traffic disruptions as a result of bomb alerts and bomb hoaxes. Such an incident happened in my constituency just this week. The whole city, including the train service and local roads, was brought to a standstill. We cannot afford for that to continue, so we must deal with the politics to bring about that stability.

We also need to ensure that there is good governance. As I have said, the Stormont House agreement has given us an opportunity to look at right-sizing our civil service and to do so in a way that will not force people into compulsory redundancy. That agreement was good for Northern Ireland, but we still have to find other employment for people, which is where corporation tax could play an important role.

There are other issues to consider. Members have mentioned infrastructure and planning, and, as a civil engineer, it would be wrong of me not to address that matter. We need not just significant investment in that area, but reform, because we cannot deliver the infrastructure investments that are needed in Northern Ireland with the current amount of money that we receive from the block grant and the emphasis that the Assembly gives to the matter. Some restructuring will be required if we are to ensure that our infrastructure is not an impediment to further economic growth.

We also need to consider issues of connectivity. The challenge rests not just with the Northern Ireland Assembly, but with the Treasury and other Departments here at Westminster. The hon. Member for East Antrim mentioned the fact that, for a long time, Northern Ireland was a driver for the UK economy. In my constituency, we had the largest shipyard anywhere in these islands and the world’s largest roadworks. We were not in any way regarded as peripheral because, at that time, connectivity was largely through ports, and we had an excellent port in Belfast. The situation has now changed and most of our exports go by plane. We are reliant on air transport. Heathrow is the main cargo hub for the UK and the main cargo export point for goods and services going from Northern Ireland. Unless we resolve the situation at Heathrow, no amount of reduction in corporation tax will encourage people to invest in Northern Ireland.

We need to retain our connectivity to London, and also through London and beyond to other business destinations so that we are not remote for those who wish to come and invest and do business in Northern Ireland. It is crucial that decisions about airport and runway capacity in the south-east are resolved, because it is a matter of importance for the country as a whole and for Northern Ireland in particular. Being on an island and off an island, we are absolutely reliant on air transport for our connectivity.

It would be remiss of me not to mention air passenger duty since I have repeatedly complained about it. We are double taxed with air passenger duty, which has an impact on our connectivity and on the cost of doing business. Although the problem needs to be addressed UK wide, it has a much greater impact on Northern Ireland than on any other region. We have no alternative way to make our way to London, to the main hub, other than to use air transport, and we are penalised for that because of the lack of through carriers. We have to pay air passenger duty twice: once to get to London and then onwards to whatever destination we take.

Another area of concern is brass plating, which the Bill tries to address. Northern Ireland does not want to become simply a front for companies that are doing business elsewhere and creating economic growth and employment elsewhere but benefiting from the low tax regime in Northern Ireland. There is no benefit to us or to the UK from that. We want to encourage companies that will set up their main operations in Northern Ireland and create employment and real economic growth. Those companies will not be the only ones to benefit; all of the firms that service those companies that pay the corporation tax will also potentially benefit from being able to attract those larger companies in. It is important that we deal with actual economic activity, and I welcome the fact that work has been done on that.

Another brass-plating issue of interest to me and to the hon. Member for Foyle (Mark Durkan) is international tax transparency. I do not want to stand over any system that would allow people from other regions to create a false front in Northern Ireland that would result in money being taken out of other economies in need of funds, whether they are in the third world or other parts of our own country. That is not good for international development, and it is important that there is tax transparency at the heart of the measure. We want real investment and real economic growth, and we want real jobs to be created as a result. I am glad that that has been acknowledged and considered in the Bill.

Something else that is required is skills. If we do not have the right skill set we will not be able to attract the quality jobs that we seek to attract, and it is hugely important that we do that. My colleague, Dr Stephen Farry, is doing that very effectively through the Department for Employment and Learning, and there is a mechanism that would allow a small levy—about 0.6%—to be placed on those companies that benefit from the corporation tax reduction. The levy could be ring-fenced to pay for skills investment. Companies could draw down some of that money for in-house training and partnership training with universities, and the remainder could be used for other skills investment. That should be a consideration in the way in which the Bill is structured. No one will want to benefit from our tax laws if they have to pay something towards investment in skills unless they intend to have employment and training as part of the work they do when they come to Northern Ireland. Those are the kind of added-value jobs that we need and want, and some form of skills levy would be helpful to avoid brass-plating and to support the Executive’s emphasis on skills investment and development.

Finally, the Chairman of the Select Committee on Northern Ireland Affairs, the hon. Member for Tewkesbury (Mr Robertson), discussed the importance of differentiation in Europe as a way of attracting new business to Northern Ireland. People come to Northern Ireland because they see it as a good stop-off point between, for example, the US, the south American countries and the European Union. They see us as a gateway to European markets. When we debate the European Union in Parliament let us not forget that many of those who locate their businesses in Belfast, Derry and other places do so because they see Northern Ireland as part of the EU and a good way to make those connections. We need to be careful when we talk about withdrawing from the EU—I have no problem with differentiation within the EU—as we need to be conscious of the impact that that would have, despite what we may do on tax regimes.

All those things are important. Some of them are in the gift of Westminster; some are in the gift of the Assembly. However, we have taken an important first step with this Second Reading. As we proceed with a detailed consideration of the Bill I trust that we can look at how we ensure that we experience the maximum benefit in Northern Ireland. I stress again that unless we have a stable, integrated future in Northern Ireland it will not be an attractive place for large businesses. When the due diligence is done, one of the most important considerations is stability. We need to create that stability as a starting point, and from there this measure will give us an opportunity to make prosperity part of the package that the peace process can deliver.