Corporation Tax (Northern Ireland) Bill

Nigel Mills Excerpts

Tuesday 27th January 2015 Commons Chamber

[Mrs Villiers]

The principle of the Bill is that that becomes a matter for the Northern Ireland Assembly and the Executive. It is for them to make the choice and decide whether to go ahead with implementation of a reduced rate. Obviously, there is a great deal of support for bringing down the rate of corporation tax in Northern Ireland to the same level as in the Republic of Ireland. I know that the hon. Gentleman’s party colleague, Minister Foster, would like to see it reduced still further. Those matters are not provided for in the Bill because the Bill vests that choice with the Northern Ireland Executive once commencement has taken place.

As I was saying in response to the intervention, Northern Ireland has a unique position within our United Kingdom. The land border that it shares with a very low corporation tax environment in the Republic of Ireland puts it at a significant competitive disadvantage when competing for inward investment into the island of Ireland. Northern Ireland is also more dependent on the public sector than most other parts of the UK. Estimates vary as to the extent of this dependence, but it is generally accepted that around 30% work in the public sector, compared with about 20% in the rest of the UK. Some surveys put the dependence on the public sector at even higher levels.

Economic prosperity as measured by gross value added per capita is still some 20% below the UK average and has been so for a number of decades. Of course, Northern Ireland faces a range of difficult issues flowing from the legacy of the troubles. All these challenges need to be overcome if Northern Ireland is to compete successfully on the national and global stage for jobs and for investment. None of this is to say that Northern Ireland does not have some amazing entrepreneurs and some hugely successful businesses that are truly world-beating. Under this Government unemployment in Northern Ireland has fallen in every month for the past two years and the record of foreign direct investment is strong, not least because of the efforts of the Northern Ireland Executive.

But for all the great businesses we have in Northern Ireland, the blunt truth is that there are just not enough of them, so the Government are convinced that to boost the private sector and enable Northern Ireland to perform even more strongly in attracting inward investment, we need to go further. We need to provide stronger incentives for Northern Ireland firms to invest in growth. The Bill before the House today will give the Assembly a powerful tool to help them do this, enabling Northern Ireland to take a decisive step forward towards rebalancing its economy.

The Bill provides a further demonstration of this Government’s general commitment to devolution, which we have shown in many ways, including with the Scotland Act 2012. We are making progress on implementing the Smith commission proposals for further powers for Scotland over tax and welfare to be transferred to the Scottish Parliament. Draft legislative clauses were published on 22 January.

[Nigel Mills (Amber Valley) (Con)]

Is my right hon. Friend aware of the data which suggest that almost twice as much will be raised from companies moving from Great Britain to Northern Ireland than from those moving into Northern Ireland from overseas? If that is the case, does she think it fair that Members from Northern Ireland may vote on the UK-wide corporation tax rate as well as their own, when they are effectively competing with our constituents?

[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.

--- Later in debate ---

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to follow the hon. Member for Belfast East (Naomi Long). I should like to begin by saying that this measure is entirely the right thing for Northern Ireland. Those of us who serve on the Select Committee have all seen how hard it is to compete when a neighbour a short distance away can offer a much lower rate of corporation tax. I wholeheartedly support the notion that we should allow Northern Ireland to choose its own corporation tax rate, especially on trading profits. In fact, I would even support the principle that lower business taxes drive growth. Over the past five years in the UK, we have reduced our corporation tax rate from 28% to—in a couple of months’ time—20%, which is important in helping to drive growth in the whole country.

That leads me to my first concern. Part of the argument for making that reduction is that we recover money that we lose in corporation tax by attracting more investment: more companies make more money and pay more corporation tax as there are more profits. Even though corporation tax is set at a lower rate we begin to recoup some of the costs. With more employment, we would expect increases in income tax and PAYE. Greater economic activity will result in more VAT, and more property transactions will give rise to more stamp duty. Those are the key ways of recovering what is lost through lower corporation tax.

It is not entirely clear how much of those increased tax takes will go to Northern Ireland and how much will be kept by the UK as a whole. When the final deal is done and a calculation is made of by how much budgets are reduced, that net cost needs to be worked out to ensure that it is fair to Northern Ireland and fair to the rest of the UK. There will need to be a breakdown of the overall impact of behavioural change as a result of a lower tax rate in Northern Ireland, if that is what results. I assume we expect to see a rate of 12.5%, or perhaps a little lower to make it competitive.

We seem to be devolving taxes haphazardly, creating a mishmash. We ought to look forward a few years and ask, for all our taxes, “What should our tax system look like? What taxes will we devolve and to where? How can we best achieve a sustainable, sensible tax system as a result of that?” One way of doing that would be to set a federal income tax rate and a federal corporation tax rate that apply throughout the UK. Once those were set, each area could choose its own rate as well, so there could be a federal corporation tax rate of, say, 10% and Northern Ireland could choose 0% as its local rate, and England could choose a rate as well.

What we have in this Bill is a complex way of doing that for one area of the country. I accept the reason for doing that just for Northern Ireland initially, but if there is pressure from Scotland and Wales, this mishmash of a system will be hard to act on and it will be very unfair on England. How will we work out the rate that we want? With the devolution of corporation tax, I suspect that the easiest competition will be between Northern Ireland and the rest of the UK, because we have the same currency, much the same legal system, the same VAT system and the same income tax system. In fact, for almost any sensible business, the east midlands is a far more attractive place to do business than Northern Ireland. I would say that, because my constituency is there, but we have the right skills, the right location and all manner of advantages.

[Ian Swales]

Does the hon. Gentleman agree that the sort of business decisions we are talking about are long-term decisions, and if the tax system appears to be moving around wildly among countries year by year, companies will not use it because they will not be able to rely on a long-term future?

[Nigel Mills]

The hon. Gentleman is right. That is why we should look ahead and see what our tax system should look like. Nobody in the UK wants a business man with a business based in Amber Valley or Redcar to think, “I could save half my corporation tax by moving to Northern Ireland.” That may help Northern Ireland, but it will not help the mainland. It will not help UK plc to attract more inward investment. We want fair competition. I accept that competition is good and that if we get investment somewhere in the UK, that is better overall, but we want investment coming in from outside, not moving around within the UK.

As a matter of fairness, if parts of the UK are to compete on corporation tax, those parts should not vote on the rate elsewhere in the UK. If Northern Ireland wants to set its own corporation tax, let us let England, Wales and Scotland set ours. If we devolve it further, the same fairness should apply. People in my constituency should be able to say, “Yes, we are competing, but we can choose whether to compete or not.” I hope that before April 2017 some sort of mechanism is in place to ensure fairness. Devolving taxes without first settling that is dangerous in constitutional terms. I am not sure it would be tolerable for Scottish MPs, for example, to set their own income tax and then to set ours as well. I accept that that is probably more of a problem than corporation tax, but it is an example of the unfair tax system that we could end up with.

An excellent Library paper that runs through the research shows on page 13 that, looking at the behavioural response to a lower rate of corporation tax in Northern Ireland, even by year 4 we would see that profit shifting from the rest of the world into Northern Ireland would have an impact of £30 million a year, but that profit shifting from Great Britain to Northern Ireland would have an impact of £60 million a year. That is twice the impact of new foreign direct investment. Tax-motivated incorporation would have a potential impact of £45 million —even more than foreign direct investment into Northern Ireland. I hope that the measures in the Bill will reduce the likelihood of the latter possibility. The easiest way of competing will be to move around within a regime rather than try to attract investment into the UK that would not have come here in the first place.

That leads me to look at how cluttered some of these proposals will make the corporation tax system. This is not a simple set of things to understand. A company that has its tax base in Great Britain and Northern Ireland will have to work its way through some fairly complex situations. There were simpler options. We could have just had an allocation key that worked out one profit and then how much of it would be taxed in Northern Ireland and how much in the rest of the UK, based on employees and sales. It could have ended up a bit like the awful EU tax base that was thought up. However, within the UK, that might have worked, being easier to understand and removing some of the distortions of attempts at tax avoidance. Taxation based on sales is much harder to fix.

There are still some gaps in these proposals. It is absolutely right that we have stopped allowing finance companies to get the lower tax rate. Otherwise every large corporate would have had a finance company based in Belfast doing its finance for the rest of the UK and moving profit over there artificially. That would have been unacceptable.

How do we stop other things happening that we might not like? What about intellectual property planning? If I move all my brand names over to Northern Ireland, can I charge large royalties in the rest of the UK and artificially move profit in that way? That is not caught by the restrictions in the Bill. It is not moving jobs or creating real value; it is just moving assets around a regime and trying to get a tax advantage.

On the flipside, there are some wrinkles in how we have tackled the finance company exemption. Under the definitions in clause 17, I am not sure what happens in the case of a company trading in Northern Ireland that makes a lot of profit, ends up with some cash at the end of the year, and thinks, “Okay, I’ve got another important investment project in 18 months’ time, so perhaps I’ll lend this cash around to somewhere else in my group of companies and make a bit of interest income.” It is then engaging in a lending activity. Has that blown it out of the whole lower rate because it now has an excluded activity, or is only the interest taxed at the higher rate, and because it is a very small part of its activity, that is okay? I am not quite clear about how we tackle real, practical situations such as that.

I am not convinced that the situation for small and medium-sized companies is entirely fair. The hon. Member for East Antrim (Sammy Wilson), who is no longer here, said that some construction companies in Northern Ireland end up with lots of building work on the mainland because that is where the work has been. If, during the year, such a company gets a big contract on the mainland, it then has to track whether the profit from that becomes more than a quarter of its total activity. If it is 26% by the year end, it pays 20% corporation tax on the whole of its profits, whereas if it is 24% at the year end, it pays 10% on the whole of its profits.

I accept that for the vast majority of SMEs that do not trade on the mainland and operate just in Northern Ireland, that will be a very simple situation, and one small contract will not hurt. However, I suspect that SMEs trading in both areas will be in a worse position than a large company, because a large company that had 26% of its activity on the mainland would still get the lower rate for most of its profits, but a small company will lose it for most of its profits. Perhaps there could be a way of allowing an SME to elect to be in the large company regime if that better reflects its needs. Another option would be to have two separate companies and split their activities, but that does not strike me as a very easy situation. There are some issues that may lead to unintended complexities.

We need to think through exactly which activities we do not want to qualify for the lower rate. We have a new diverted profits tax coming, whereby if someone moves an activity that ought to be somewhere else, we will try to tax it at a higher rate than our UK standard rate. Under one of the provisions, someone who is being taxed at a rate of less than 80% of the UK rate will be caught. Clearly, Northern Ireland is likely to have a tax rate of less than 80% of the main UK rate. If a Northern Ireland company has an internet trading business or a mail order business in Belfast and takes careful steps to avoid having an establishment on the UK mainland, could that company be caught by the diverted profits tax, triggering a higher rate than if it was in the UK? How can we stop people artificially putting trading activity using very few employees into Belfast, rather than doing it on the mainland, to get the lower rate? I accept that no one wants the rate to apply to activity involving no employees, but I sense that certain activities that do not require much labour might be moved, which is not what we intend.

I welcome the principle of the Bill. I have some concerns about rushing it through now without thinking about how it affects the UK as a whole—we need to do that if we are to get a tax system that is sustainable in the long term—about how cluttered we are making our corporation tax system and about whether things in the Bill’s details might make the system work in a way that we do not want, but I suggest that we think through such issues in Committee.