Wednesday, May 26, 2010

A lower rate for Corporation tax in Northern Ireland?

The new Northern Ireland secretary, Owen Paterson, says he would back an inquiry into whether the province should have lower rate of corporation tax than applies in the rest of the UK. How odd.

Ever since corporation tax was introduced to the UK in 1965, the rate has been consistent across all the regions. I don't recall every hearing previously of any suggestion that this should change.

I am aware that Politicians and business leaders in Northern Ireland have been lobbying for a dramatic cut in corporation tax. They point across the border to the Irish Republic, whose corporation tax is only 12% — among the lowest in the western industrial world.

Companies and political parties in the north claim that Northern Ireland operates at a severe disadvantage when trying to attract multinational capital in competition with the republic. Of course this is no different to the rest of the UK. Is the enquiry intended to be a genuine intent to consider all of the issues? Or is the outcome already clear - as may seem obvious to anyone who understands our corporation tax system? Or am I being too limited in my thinking?

Let's assume it were possible to determine a simple way to determine the extent to which corporate tax profits earned in NI were subject to a lower rate than in the rest of the UK. Three simple challenges occur to me immediately:
  • What would stop existing companies from seeking to relocating there or simply establishing subsidiary companies or branches there to benefit from the lower rate?
  • How about the additional administrative burden of requiring 'transfer pricing' adjustments as between the different parts of a group based on the mainland and in NI?
  • And, despite the best efforts of HMRC, companies will shift profit out of the rest of the UK and into Northern Ireland and pay less tax overall as a result.Who will pick up the increased burden?

And then, what next? A lower rate for companies based in Scotland? And then for those in Wales? The Cornish Nationalists would have something to say about such a policy too.

Maybe the North of England would be next, then the Midlands? Indeed, everywhere other than London and the South-East?

I tend to think that the outcome of the inquiry, were it to be undertaken, is already quite obvious and inevitable. There can be no differential corporation tax rate as between different parts of the UK. I would imagine the Treasury knows this too.

What about you?

1 comment:

  1. You might also use the same argument about different rates of income tax in different parts of the UK.
    However, the Scottish Parliament does have powers to change the rate of tax north of that border, it has just never used those powers. And why not? Because the mechanism does not exist that would allow a different rate of tax to be deducted under PAYE from people dependent on their home address (or works address?).