Cut in North’s corporation tax looking increasingly unlikely

Accountancy firm KPMG received no thanks two weeks ago when it urged cutting corporation tax in Northern Ireland. Politics appears to have too much on its plate, yet this issue is timely and pressing.

Business groups have been making the same call since last November’s UK budget, which confirmed a corporation tax rise from 19 per cent to 25 per cent – an increase that comes into effect this Saturday.

The Windsor Framework was signed last week, Stormont could return shortly and Sinn Féin wants to lead an executive under a new economic policy. Low corporation tax will remain central to the Republic’s economic policy. On Tuesday it was reported that the Government will use flexibilities in the new international minimum rate of 15 per cent to keep Ireland’s headline rate at 12.5 per cent.

Northern Ireland is being promoted to international investors as enjoying unique dual-market access. This sales pitch has an all-island dimension: the Republic is primarily where the North will access the EU.

Northern Ireland’s poultry industry must be forced to clean up its act

---

Some claims about the cost of a united Ireland don’t stack up

---

Why Caoimhe Archibald is the rising star of Northern politics

---

Northern Ireland is already a ‘sanctuary city’ in the UK – it could yet become one in Europe

---

One of the first things prospective investors will notice is that corporation tax in the North is double the rate in the South. Although the importance of corporation tax in business decisions is often overstated, the advantage of dual-market access is also overstated. Northern Ireland will only retain EU single market access for goods. It has a new administrative barrier with Britain, lower than the barrier between the Republic and Britain but not by enough for many firms to find it worth doubling their tax bill.

In what feels like a typical Brexit punchline, years of complexity has suddenly come to a head. Business leaders in Northern Ireland began proposing lower corporation tax almost two decades ago. Step by step their lobbying overcame political and legal obstacles that had been considered insurmountable.

From 2010 Conservative Northern Secretaries found the concept ideologically irresistible and pushed it in London, where the Treasury among others had been dismissive.

The DUP embraced the policy as part of its pro-business posture. Less expectedly Sinn Féin supported it by portraying equalisation of tax rates North and South as economic unification and by describing devolution of any tax as “repatriating powers from Britain”.

Regional corporation tax was presumed to breach EU state aid laws, which still apply under the Windsor Framework. This turned out to have a precedent and a solution: the Azores had been allowed to cut its rate by bearing the cost in its devolved budget.

The Treasury agreed it would cost Stormont £300 million annually to match the Republic. In 2015, Westminster passed a law devolving the necessary powers. The government has committed to commencing this legislation if Stormont requests it and demonstrates its finances are “on a sustainable footing”.

A target date of November 2018 was set but the request never came, mainly because Stormont was in a state of collapse or preoccupied by the pandemic. However, the issue was not forgotten. The 2020 New Decade, New Approach deal created an independent Fiscal Council to put Stormont’s finances on a sustainable footing.

Sinn Féin finance minister Conor Murphy created a separate Fiscal Commission to examine tax devolution. Its report, published last May, advised equalising corporation tax with the Republic. Murphy had previously said he was not “actively pursuing” a cut to corporation tax because the North-South difference was narrowing, making it less important, and he had better priorities for the cost to Stormont’s budget.

The rate difference will jump next week to its highest since 2011, putting the cost of equalisation closer to £500 million. Stormont could not find that sum under normal circumstances, let alone under the spending squeeze it faces if and when devolution returns. Nor has London ever offered such a sum on an annually recurring basis even under the most generous deals to restore devolution.

The irony is that a corporation tax cut is meant to pay for itself by growing the economy, just as it boosted tax revenue in the Republic. However, this dynamic effect is extraordinarily difficult to model – although the Treasury tried in 2015 it was defeated by the novel interplay of regional and national taxes and company profits.

So the £300 million was an opening estimate, which Stormont is apparently expected to renegotiate as growth occurs.

The Fiscal Commission has proposed getting over this upfront cost by letting Stormont borrow it, and by negotiating a new agreement specifying exactly how the benefits of growth would be shared between Belfast and London. This is a more realistic request. It would have significant political power if made jointly by Sinn Féin and the DUP as part of an overall plan to restart Stormont and capitalise on the Windsor Framework.

But considering how it might look to the rest of the UK, the British government might feel Northern Ireland has had enough favours already.