What does the future hold for the rate of Corporation Tax in Northern Ireland?
The Scottish Parliament already has a package of powers to set a number of taxes in Scotland, and with the first devolved taxes for Wales to go live on Easter Sunday 1 April 2018 for Land Transaction Tax and Landfill Disposals Tax, followed by Income Tax planned for next year, the question arises about what is to happen in Northern Ireland?
In March 2015 Parliament passed the Corporation Tax (Northern Ireland) Act 2015 which, subject to commencement regulations, devolved corporation tax rate setting powers to the Northern Ireland Assembly. The UK Government committed to commencing the regime if the NI Executive were able to demonstrate its finances were on a sustainable footing.
The debate about devolving tax raising powers to NI, and a proposed cut in the rate of corporation tax for the Province has been running for many years, and just when it was looking like a distinct possibility with the much publicised “rate and date” campaign, a number of obstacles have been put in the way.
It had been planned to introduce the new rate from 1 April 2018 – which would have been a very welcome Easter gift to the business community!
To date, much time and effort has been spent in making the various economic arguments for NI to have a lower rate of corporation tax to that prevailing in the rest of the UK, with a number of estimates put forward on the costs of implementing such a cut. Has all this work been a wasted effort? We would all certainly hope that is definitely not the case.
The arguments for a cut have been well made, and the potential economic benefits articulated very successfully, however the costs involved have caused much concern as to the financial viability of such a change. A cut in the rate of tax will mean less revenue is collected for the Treasury. Under European rules, the NI Executive will have to make up the shortfall through a cut in its block grant from Westminster.
With the cut in the headline rate of corporation to the current rate of 19% and falling again to 17% in 2020, this prohibitive estimated cost has been reducing as the potential differential between a UK main rate and a NI rate is narrowed. Equally though at the same time as the differential has narrowed, the benefits of a lower NI rate have been diluted! It was envisaged that a rate of 12.5% matching that of the Republic of Ireland would be introduced – meaning that the same rate of corporation tax would apply across the island of Ireland, North and South.
While this gained political agreement across the parties, was this really the correct rate to make a real difference? Personally I strongly believe there is an argument to cut the NI rate to lower than the Irish rate. A rate of 10% would have been a much more compelling alternative!
One of the appealing arguments for many Brexiteers was that the UK in leaving Europe would have more control over its own rules and legislation, however this will depend of course on the exact nature of the outcome of the ongoing negotiations. At this point in time, it is almost impossible to make a call on the outcomes.
Going forward the UK may decide to continue with a degree of convergence with EU, in consideration of the benefits of economic co-operation choosing to harmonise UK policies with that of the EU. Or alternatively, it may take the bold step of choosing to diverge, and in relation to taxes, especially corporation tax may use its ability to compete through better company tax policies.
This therefore raises the question of the prospect of the UK introducing corporation tax rates that undercut the existing rates in the main EU countries, however it is unlikely that this area will be looked at in isolation from decisions on other policy areas. Potential Foreign Direct Investment companies will wish to see a degree of convergence with the rest of the EU, particularly US FDI companies that are looking at the UK as a platform to doing business in Europe.
Setting Brexit to one side, which we all of course would gladly do, we have more immediate problems in NI with the lack of a functioning Assembly, now coming into its fifteenth month, and with no immediate sign of anything changing. Now more than ever in such uncertain times we need a fully functioning Executive up and running, taking control of the NI Budget and representing the people of NI. An Assembly that understands the local issues, and can make informed decisions for the good of NI, and as part of that an implementation of a cut in the corporation tax rate finally!
Caroline Keenan
Tax Director
ASM Chartered Accountants