Corporation Tax (Northern Ireland) Bill

Shabana Mahmood Excerpts

Tuesday 27th January 2015 Commons Chamber

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

It is a pleasure to wind up this debate on behalf of the Opposition. We have had an interesting and, I think, high-quality debate. It is an important issue which has been the subject of many discussions over a number of years. I am particularly pleased that so many Members from across Northern Ireland contributed, and I am pleased, too, that, unlike in more recent outings when the Minister and I have been opposite each other on Treasury matters, this has been a slightly longer and meatier debate, not over so quickly. It is a reminder of the good old days when this Parliament was a little busier. That was welcome.

We heard from the former Secretary of State, the right hon. Member for North Shropshire (Mr Paterson), who I thought was right to point out the potentially significant benefits of the Bill, which we also acknowledge. As my hon. Friend the Member for Bury South (Mr Lewis), the shadow Secretary of State, said in his speech, perhaps the former Secretary of State did not quite hear that part of my hon. Friend’s remarks. We say simply that the devolution of corporation tax will require some difficult choices to be made to fulfil the conditionality envisaged in the Stormont House agreement and the Azores judgment. There is a trade-off. We acknowledge that the economic benefits of the change cannot be fully realised without additional changes, particularly investment in skills and infrastructure, to which I shall return a little later. We certainly acknowledge the potentially significant benefits for the people of Northern Ireland through corporation tax devolution.

The hon. Member for East Antrim (Sammy Wilson) was absolutely right to highlight the risk of brass-plating. We need to ensure that these measures have a substantive effect—and I am sure we will return to those issues in the Public Bill Committee.

The hon. Member for Tewkesbury (Mr Robertson), the Chair of the Select Committee on Northern Ireland Affairs, spoke, and his Select Committee has done a huge amount of work on this agenda. I pay tribute to it for that.

The hon. Member for Foyle (Mark Durkan) was right to say that the devolution of corporation tax was not a magic bullet, and to point out that the successes achieved by the Republic of Ireland—particularly from the mid-1990s onwards—had as much to do with higher education funding and investment as with a lower corporation tax rate.

I was pleased that the hon. Member for Redcar (Ian Swales) asked about transfer pricing and profit shifting, and I echo his questions to the Minister. I am sure that we will return to them in detail in Committee, but it would be helpful if the Minister set out some of the Government’s early thoughts about ways of ensuring that the Bill does not provide more opportunities for the exploitation of transfer-pricing and profit-shifting rules.

There was much talk of the dependence of the Northern Ireland economy on the public sector, but, as the hon. Member for Belfast East (Naomi Long) rightly observed, the private sector in Northern Ireland is also heavily dependent on public sector contracts. That is one of the systemic issues with which we shall need to get to grips if we are to achieve a true rebalancing of Northern Ireland’s economy.

The hon. Member for Amber Valley (Nigel Mills) highlighted some technical details to which I hope the Minister will return, probably in Committee rather than today. He spoke of the interplay between the behavioural change among businesses responding to what will potentially be a much lower corporation tax rate and other changes that the Government envisage, particularly in relation to the diverted profits tax.

The hon. Members for Upper Bann (David Simpson) and for South Down (Ms Ritchie) made powerful points about the importance of encouraging more young people in Northern Ireland to stay there, because they are the future of Northern Ireland. The hon. Member for Strangford (Jim Shannon) rounded off the debate very well by pointing out that, while businesses are very much in favour of the measure, we must ensure that the reform delivers for the whole of Northern Ireland and that the benefits are shared throughout the population.

As the shadow Secretary of State said, peace and stability in Northern Ireland are inextricably linked with the increased economic and social progress that Northern Ireland needs. There is an interdependence between the economy and the peace process. I think that there is consensus in the House that if the peace process is to thrive, Northern Ireland will need more private sector growth and investment as part of a long-term rebalancing of its economy. It has long been argued by some that devolution of corporation tax to Northern Ireland so that it can ultimately set a lower rate in order to compete with the Republic—given the sharing of a land border—would enable Northern Ireland’s economy to be rebalanced more quickly, and would lead to sustained economic growth.

Labour Members are committed to supporting measures that increase inward investment in Northern Ireland and support the rebalancing of its economy, and we acknowledge that the devolution of corporation tax could play an important role in the achievement of those objectives. However, as I said earlier, it will require a trade-off between corporation tax reductions and spending cuts. It is important for us to give proper consideration to the long-term as well as the short-term implications for Northern Ireland and for the United Kingdom as a whole. We agree that the 2017 timetable set out in the Stormont House agreement allows time for that consideration, and we will not oppose the Bill. We will co-operate with the Government to ensure that it can be scrutinised appropriately and dealt with speedily during the current Parliament.

The Bill will devolve the rate-setting power for corporation tax in Northern Ireland to the Northern Ireland Assembly for trading profits only, and subject to a commencement order. It will devolve the power to set a corporation tax rate, but will not devolve control of the base. The Northern Ireland rate would apply to all the trading profits of a company if that company was a micro, small or medium-sized enterprise, and if the company’s employee time and costs fell largely in Northern Ireland. In that context, “largely” is defined as at least 75%. In the case of large companies, the rate would apply only to profits that are attributable to a Northern Ireland trading presence. The Northern Ireland Assembly will not be able to set the rate for non-trading profits, such as income from property.

[Ian Paisley]

Earlier in the debate, I asked the Secretary of State if she had taken any advice or guidance about what level of corporation tax Northern Ireland should consider. Does the Opposition spokesman have any view on that? Indeed, is the current inquiry set up by the Labour party in Northern Ireland even considering that?

[Shabana Mahmood]

I am afraid that on this occasion I must give the hon. Gentleman a similar answer to that from the Secretary of State. This Bill is looking at the devolution of this power. It is not for me to say to the Northern Ireland Executive, or Northern Ireland politicians of any description, what that rate should be. Once this Bill passes and we hit the 2017 timetable, that will be a matter for the representatives in Northern Ireland and nobody else.

There are a number of issues, and they have been touched on by Members. We all need to consider them deeply as this progresses both through the House and in the further discussions that will take place as a result of the Stormont House agreement.

First, as has been said, the impact of the Azores decision is important. The devolution of corporation tax needs to be done in a way that ensures it is not caught by EU rules on state aid. In order to meet the third of the three conditions set out in that judgment regarding fiscal autonomy, the Northern Ireland Executive would need to bear the full fiscal consequences of changes in tax revenues resulting from a new corporation tax rate so the block grant would be adjusted to reflect the fiscal costs of a reduction in the corporation tax rate. That is an important issue, and we heard from the hon. Member for South Down about amendments she and her colleagues might want to introduce to address the impact and the modelling behind how some aspects of that would work in practice. There will be a trade-off with public spending cuts and some difficult choices will therefore have to be made, and it is important that those impacts are fully considered and thought through, particularly because, as I said earlier, even the private sector in Northern Ireland is highly dependent at this stage on Government contracts.

The £300 million adjustment that might be required is a burden that may well increase if Northern Ireland were to have a much lower corporation tax rate that then increased the cost and the offsetting from the block grant. The hon. Member for East Antrim asked some questions about the formula that will be imposed in order to calculate the forgone tax by the rest of the UK. It would be helpful to have some clarification from the Financial Secretary on how that formula will operate in practice. I am sure we will address the detail in Committee, but we would like an outline of his thinking now.

Conditionality is attached to the Stormont House agreement. The financial annex adds conditionality to the progress of this Bill, in order to ensure that any changes are fiscally sustainable, stating that there must be

“a clear commitment to put the Executive’s finances on a permanently sustainable footing for the future.”

The Secretary of State did not in her opening speech labour too much the issue of putting the Executive’s finances on a stable footing for the future. There is some detail in the financial annex to the agreement, but that is an important condition that has not necessarily been well ventilated in the debate we have had thus far. Again, however, I am sure we will return to that issue in Committee.

Many Members highlighted the fact that the headline rate of corporation tax is not a panacea. It does not in and of itself result automatically in economic growth, and it was only one of a number of reasons, as many commentators and academics have said, why the Republic of Ireland experienced its economic miracle from the mid-’90s onwards. None of us in this House should see it as a panacea. Investment in skills in particular is just as important, as is investment in infrastructure and, as Members have said, looking at planning rules. All these issues will be crucial. It would be a mistake to think that Northern Ireland’s economy will automatically rebalance just because it has a lower rate of corporation tax—a rate more on a par with that in the Republic of Ireland. That alone will not achieve what we all want, which is a thriving and growing Northern Ireland economy. Other changes will be needed, and it would be helpful to hear from the Financial Secretary the Government’s thinking on some of them.

We have talked a lot about corporation tax not being the only way to achieve economic rebalancing, but as the hon. Member for South Down pointed out, the Institute for Fiscal Studies said in its 2013 green budget that it is a tax which, over time, can vary substantially in revenue terms, and much more so than total receipts from national income. We will need to hear more about how the volatility of corporation tax might impact on the Northern Ireland economy, and particularly about any modelling the Treasury has done on its impact on Northern Ireland’s finances.

As I have said, we recognise that there are potential gains for the people of Northern Ireland from this measure. However, we want responsibly to consider and ventilate the risks it also poses, which we will carefully scrutinise as we progress. We will also carefully consider anti-avoidance measures, to ensure that the Bill does not simply become an opportunity for businesses to brass-plate and base themselves in Northern Ireland, with no other economic benefits for the people of Northern Ireland. I look forward to the debate in Committee.

[The Financial Secretary to the Treasury (Mr David Gauke)]

We have had a helpful and wide-ranging debate on a Bill that will allow the Northern Ireland Assembly to set a different rate of corporation tax from the rest of the United Kingdom, and enable Northern Ireland to encourage genuine investment that will create jobs and growth. It will help rebalance the Northern Ireland economy away from dependence on the public sector, and I welcome the support it has received from all parts of the House. Representatives of six different political parties have spoken in support of it. That mirrors the support received beyond this Chamber—from businesses in Northern Ireland that have long argued for this reform, and we are delighted to have introduced it.

The debate has been relatively lengthy and many contributions were made. I am conscious that there is a further debate to follow, so I am a little constrained by time, but let me see if I can address most of the points that were raised.

I thank the shadow Secretary of State, the hon. Member for Bury South (Mr Lewis), and the hon. Member for Birmingham, Ladywood (Shabana Mahmood) for their support. I think it fair to say that Labour has been somewhat sceptical about devolution of corporation tax. The shadow Secretary of State challenged my right hon. Friend the Secretary of State on the question of when they expressed opposition to it. I am tempted to quote the right hon. Member for St Helens South and Whiston (Mr Woodward), who said at the 2011 Labour party conference that the proposal to cut corporation tax was “a huge gamble” that

“risks making a bad situation worse.”

He urged the then Secretary of State to

“think twice before he leaps.”

To be fair, such scepticism is consistent with Labour’s general position on corporation tax. Whereas the two parties in this Government have cut corporation tax in this country, and five parties in Northern Ireland want to cut corporation tax there, Labour wants to increase the rate across the UK. Whether it is comfortable positioning itself to the left of Sinn Fein on this matter I am really not sure, but that is where it is.

[Shabana Mahmood]

I hesitate, Madam Deputy Speaker, to stray too far from the terms of the Bill, but the Financial Secretary is well aware that our manifesto commitment is to raise the headline rate of corporation tax from 20% to 21% and to put every single penny of that money towards a cut and then a freeze in business rates, which will primarily benefit small and medium-sized businesses. Will he at least acknowledge that that is a business-friendly measure?

[Mr Gauke]

The sense of direction in increasing corporation tax would be a mistake. I will not detain the House for long on this matter, but I also note that Labour’s pledge is to have the lowest corporation tax rate in the G7, which would allow it to increase corporation tax to 26%. That would be a major reversal of the progress made by this Government. However, I am sure you would like me to return to the issue of Northern Ireland, Madam Deputy Speaker.

Let me add my tribute to those that have made to my right hon. Friend the Member for North Shropshire (Mr Paterson). Having worked with him in opposition and in government on this policy, I can testify to the vision, tenacity and infectious enthusiasm he has shown. He demonstrates, as does this Bill, what can be achieved by a Minister with his determination and vision, and he deserves much of the credit for the progress that has been made. He also rightly paid tribute to the current Secretary of State, who has demonstrated great skill in making progress on this matter. He put a lot of the momentum into the process, but it has also required her talents to bring us to this point.

The hon. Member for East Antrim (Sammy Wilson) made an excellent speech about the history of this progress. He and I have had many conversations and meetings on this matter. He described the progress by saying that we would go forward a bit and then back a bit, and that at times it was frustrating. I can tell him that I shared that experience, but he made a good case for the progress we have made. He also made an important point about the Republic of Ireland’s resistance to raising corporation tax at times when it faced great financial difficulties. That point was also made by my hon. Friend the Member for Tewkesbury (Mr Robertson), the Chair of the Northern Ireland Affairs Committee, who described how important it was to the Republic of Ireland to maintain low rates of corporation tax and to grow the private sector.

My hon. Friend made a couple of other points that I wish to address. He mentioned timing and said it would take a couple of years before this measure comes into effect. As has been said by a number of hon. Members, it is important that we set a sense of direction so that businesses can see where things are going in future years, but it takes some time to implement a change of this sort. Therefore, the 2017 timetable is as fast as is realistic. He also asked whether we should have the Committee stage on the Floor of the House or upstairs. That is largely a matter for the usual channels, but given that we want to make progress as quickly as possible and that a limited amount of time is left in this Parliament, it is right that we take every opportunity to make progress on this as quickly as we can. The fastest and easiest way of doing that is by holding the Committee stage, which will involve detailed scrutiny of some 87 pages of legislation, upstairs.

The hon. Member for Foyle (Mark Durkan) rightly made the point, as did a number of other hon. Members, that other issues will drive growth and this measure should not been seen as a silver bullet. He also said we should not create a new twilight zone where businesses and individuals can play the tax system to their benefit, and I will deal with that briefly in a moment. My hon. Friend the Member for Redcar (Ian Swales) made similar points about tax avoidance and also mentioned the impact of this measure on the UK more widely, and I will deal with that in a moment also.

The hon. Member for Belfast East (Naomi Long) made an excellent speech. A couple of points worth highlighting are the need for Northern Ireland to get its financial house in order and to have sustainable public finances, something that is well recognised, and the fact that political stability is important for providing the environment for economic growth in Northern Ireland. I agree with her on that.

My hon. Friend the Member for Amber Valley (Nigel Mills) brought his technical expertise to this debate. He raised a number of points that are probably best addressed in Committee. I do not know whether he was making an application to serve on that Committee, but he certainly raised a number of important points.

The hon. Member for Upper Bann (David Simpson) talked about grasping the opportunity to help economic growth in Northern Ireland. The hon. Member for South Down (Ms Ritchie) made a similar point. She also highlighted other matters, and talked about how to help the Northern Ireland economy. She asked about our engagement with the Northern Ireland Executive. I can assure her that, over the course of many years, there has been significant engagement, that the Northern Ireland Executive have been involved in discussions on the joint ministerial working group and the subsequent design process, and that we have kept the Northern Ireland Executive informed of progress in the design of legislation and taken their views into account when agreeing the final design. There have also been regular discussions at official level between the Executive, Her Majesty’s Revenue and Customs and the Treasury. I am grateful to the Executive for their co-operative approach at ministerial and official level, and that engagement is continuing.

To conclude the debate, the hon. Member for Strangford (Jim Shannon) also highlighted additional challenges that Northern Ireland faces, including improving the planning system and ensuring that the skills base and education system is working for Northern Ireland, and all of those were good points.

Let me pick up on a few of the issues to emerge from the debate. The most significant point, which was raised on a number of occasions, was ensuring that this is about real economic activity. This is not about profit shifting or a brass plate. I can assure the House that we very much share that view. This is not about finding a way in which companies can reduce their tax base through contrived or artificial arrangements, but about encouraging jobs and growth in Northern Ireland. We will ensure that HMRC has the capacity to deal with these matters. For example, when dealing with transfer pricing matters, HMRC will have a risk-based approach to ensure that the system works, so that we do not see the type of activity that so concerns Members.