Reducing North's corporation tax 'could reduce grant by £270m'
Reducing the North's corporation tax rate could mean a £270m (€309.3m) reduction in the block grant after five years, a British Treasury paper said today.
That could be offset by a 6% rise in investment by domestic and foreign companies, the consultation document added.
Alternatives to a straight reduction include deferring it for several years and phasing the change in to allow companies to plan their strategies.
The British Treasury is considering allowing the Northern Ireland Executive to reduce the tax level to 12.5% in line with the Republic.
The Secretary to the Treasury and Northern Ireland ministers attended today's consultation launch in Lisburn.
The document warned: "Northern Ireland would bear the fiscal consequences of devolution including upside and downside risks if tax receipts were more or less than forecast.
"Given the volatility of corporation tax in a relatively small private sector base like Northern Ireland this may be a significant risk."
By 2014 the main rate of corporation tax for the whole of the UK will drop to 23%.
Options outlined in the British Treasury paper include allowing a tax-varying power up or down by 11% from the 23% rate, similar to Scottish powers over income tax; setting the UK rate in the North at 12.5% and allowing the Executive to vary it; and setting the rate at 0% and allowing the Executive to vary it.
According to the paper, alternatives to a straight reduction to 12.5% include deferring it for two to three years.
If businesses acted upon the announced rate cut before its implementation, then the economy could start to benefit from additional investment made in anticipation of the reduction before it had to meet the cost of a reduced block grant.
It would also allow more time to adjust to the public spending reductions.
A phased approach could align the cost of the reduction more closely with the level of new investment activity, allowing the private sector to grow more before the full impact of spending cuts was felt, which could reduce the early impact on employment.
Non-trade profits, such as income from property rental, could be excluded from the reduction to reduce the cost of the measure, but it would increase costs for businesses and tax-collecting authorities.
Other tax policies may help rebalance the economy, including tax credits for research and development and other reliefs.
Northern Ireland First Minister Peter Robinson and Deputy First Minister Martin McGuinness welcomed the consultation.
The intention of a fall in corporation tax is to bring about increased investment.
It is estimated domestic investment would increase by between £50m (€57.25m) and £65m (74.4m) in the first year and by year 10 there could be higher annual investment of around £110m (€125.95m).
Foreign direct investment, taking account of displacement from the rest of the UK to the North by companies seeking to lower their costs, would increase by between £105m (€120.2m) and £175m (€200.4m) in the first year.
Not taking account of displacement by year 10, the estimate is of higher investment of around £310m (€355m).
That represents a 6% annual increase in investment.
That has to be set against the costs. Devolving tax-varying power would have to satisfy a European Court of Justice ruling that other regions or central government could not subsidise the reduction, meaning the Northern Ireland Assembly would have to bear the fiscal consequences and suffer an adjusted block grant for public spending.
Around 1.5% of the UK’s corporation tax receipts comes from the North. By calculating the cost of a reduction of corporation tax to 12.5% this would necessitate a fall by year five of £270m (€309.3m), or 2.6%, in the block grant.
The reduction could raise an extra £10-20m (€11.45-22.9m) a year in additional corporation tax revenue because more companies would invest.
The paper added: “If corporate income increased, this should in turn lead to higher consumption, which might be expected to increase revenue from VAT and excise duties.
“National Insurance contributions and income tax revenue may also increase as greater corporate earnings were distributed to labour via higher wages and employment.”
It said additional revenue from other taxes could recover up to 21% of the corporation tax receipts foregone each year.
