Will local budgetary deadlock derail campaign for 12.5% tax rate in North?

Business and politicains all want it but welfare reform demand from London has thrown up an unexpected hurdle

If corporation tax were cool, Eamonn Donaghy of KPMG in Belfast would be the Bono of his world – half quiet tax accountant, half buccaneering campaigner with a nifty sideline in high-level lobbying.

In his case, the lobbying relates to devolution of the power to set the North’s corporation tax rate and, crucially, reducing it from 20 per cent to 12.5 per cent.

Donaghy has been riding the corporation tax horse for nearly two decades at this stage, seeing out numerous UK secretaries of state for Northern Ireland and prime ministers in the process. But still, the top of the mountain and the clear air of corporation tax devolution are stuck just beyond his reach and still, his enthusiasm for the fight is unwavering.
Things looked good earlier this year when, in March, the then London government signed into law the act that would allow the Northern Ireland Assembly to choose its own rate of corporation tax from 2017.

The next step was for the Assembly to do exactly that, by matching the Republic’s 12.5 per cent, and then for everybody to await the tide of foreign and domestic investment that would start to flow as it did south of the Border.

Unfortunately for those behind the move – practically all of the North’s politicians and business people – passing the Act was not enough because the UK administration had thrown in a little sting in its tail. For powers to set corporation tax to devolve, the Assembly would first need to deliver for the treasury close to £600 million in welfare cuts as part of chancellor George Osborne’s grander economic plan.

Cold feet Initially, the Northern parties all signed up for what became known as “austerity”, but after a while, Sinn Féin and the SDLP got cold feet.

This left things where they stand at the moment: no corporation tax devolution, no welfare reform and, to top it all, reductions in the old-fashioned block grants from London to reflect the amounts that should have been cut out of the welfare budget by now. Even by the kindest assessment, it’s a bit of a mess.

Donaghy acknowledges that he never expected the hurdle at which the corporation tax campaign would fall would lie within the North itself. He had presumed that getting the UK treasury to sign off would have been the key battle. Nonetheless, he remains optimistic, reluctantly putting a 75 per cent chance on the likelihood of the rate being changed as planned.

The arguments for devolving the power to set the corporation tax and reducing it to a level similar to that of the neighbouring jurisdiction will be fairly obvious to anybody familiar with the Irish economy as a whole.

While the low rate that applies in the Republic is not the only draw for foreign investors, it is the hinge upon which investments fall and it is a star attraction that the North lacks.

A Department of Finance paper last year found that a small number of sectors dominated by foreign-owned multinationals accounted for one quarter of economy-wide gross value added, or almost 60 per cent of the same measure within the business economy. They also accounted for almost half of all manufacturing jobs.

In the North, widely accepted estimates suggest that two-thirds of economic activity can be traced back either directly or indirectly to the public sector.

The situation, which has its roots in the North’s troubled history, is clearly neither desirable nor sustainable, a fact Donaghy and his business pals in the Grow NI corporation tax lobby group realised a long time ago, at a stage where, he recalls, every single big business was grant-aided.

Others would argue, however, that corporation tax is either not the right place to start, or is not the basis of the right overall strategy. More investment in skills is needed first, say some, while others, including Bro McFerran, the former managing director of Allstate NI, a major US insurance company already operating in the North, suggest the Assembly is not yet ready to handle such a complicated matter.

State aid Technically, allowing the North to apply a lower corporation tax rate than Britain could be interpreted as state aid under EU rules, meaning it would be disallowed. To get around this, a principle developed in a case involving Portugal’s Azores islands must be applied, in that the cost of reducing the rate must be borne by the North itself, rather than in London.

In effect, this means a reduction in the block grant, probably in order of £200-£250 million or so in the first year of a reduction, with this first being felt two years after the rate decline. By Donaghy’s reckoning, this effect would be eliminated somewhere between year five and year 10, after which point the extra benefits will hit home.

He points out that the £200 million “doesn’t disappear” but is transferred to the pockets of the private sector, who then need to be persuaded to invest it. He cites earlier calculations (based on a UK rate higher than it is now) that a rate cut could lead to the creation of 90,000 jobs over 25 years.

Richard Murphy, a policy expert who has advised unions on the issue, would argue that, in fact, there is a risk the money would just vanish, with cuts in public services more likely to be the primary legacy of the move. He says the economy would need to grow by one-third even to break even on its budget.

“Viewed in this light, cutting corporation tax looks like a considerable gamble with the existing budget and public services. A more candid reading might invoke the spectre of self-harming,” he wrote on his website last year.

Fear of the unknown In a more general sense, fear of the unknown is also motivating opposition, particularly in light of wider the cuts and public sector redundancies that are already heading the North’s way. From the UK’s perspective, there are some worries that a lower tax rate in the North will introduce harmful tax competition with England, Scotland and Wales.

Donaghy realises that a lower corporation tax rate is no silver bullet, but he reckons the other conditions that the North can offer (high-quality education, an advanced legal system, EU membership, an English-speaking population) mean it could just be the bow needed to tie together an already-strong investment case.

As things stand though, Invest NI (the North’s inward investment agency) cannot sell even the promise of lower corporation tax, even though it lies tantalisingly within reach.

Still, the agency has managed to build up very respectable investment clusters in some areas, with recent wins in, for example, fintech and back-office legal services proving its expertise.

Donaghy estimates that there are between 50 and 100 sitting-duck US companies already operating on the ground, at least some of whom could be persuaded to relocate further, profitable parts of their group to the North if and when the tax button could be pressed.

These would, he hastens to add, be proper business assets such as intellectual property rather than brass plates, with the exclusion of financial services from the plans for a 12.5 per cent rate aimed at avoiding precisely that.

Invest NI, says Donaghy, has “some very good people” who themselves will acknowledge that they are “fishing in a much smaller part of the pond” when it comes to competing for investment with lower-tax jurisdictions.

He jokes that this is the “restricted area” of the overall pool and not the part that features on shortlists when consultants are drawing up lists of possible investment locations for large multinationals. “Corporation tax gets [the Republic] on to the last three,” he says, only slightly ruefully.

He reckons that potential investors (and presumably, KPMG’s potential customers) are “deferring, sometimes permanently” plans for investment in the North because of the corporation tax uncertainty, a claim borne out by a recent decision to shelve a US State Department-led investment conference there.

“The medium- to long-term strategy is about trying to grow the private sector and to make people think along business and economic lines in a much more positive way,” says Donaghy.

One thing upon which all the Northern parties agree is that reducing the corporation tax rate is a good thing, but there is still some political capital to be won within the detail.

“Austerity crisis” A recent article in An Phoblacht argued that “the current austerity crisis” would mean that the North’s economy “will not be able to afford the introduction of corporation tax even if a date and rate were to be agreed”.

Grow NI responded, saying 100,000 jobs had been created in the Republic in the last four years, with a low corporation tax rate behind many of them.

“We have a legislative assembly that is less than 20 years old. The make-up of our political class is not the same as in other places,” is Donaghy’s subtle judgment on the Assembly and its workings.

Some colour on this came this week, when the North’s DUP finance minister Arlene Foster presented what has been dubbed a “fantasy budget”, a rather uncertain manoeuvre designed to lift proceedings out of the current impasse.

The fantasy (Foster prefers “provisional”) comes because the budget has been drawn up as if welfare reform had been agreed, thus buying some time as efforts to reach actual agreement continue. In a worst-case scenario, the budgetary powers would rotate back to London, but this is seen as a highly unlikely option in practice. Either way, the situation is far from desirable.

Donaghy has encountered delays and hurdles before, from the devolution idea first being shot down by former Inland Revenue chief Sir David Varney in a landmark report in 2007 to the situation today, where he can hold the act in his hands.

“It’s the long way round,” he says. “Bendy roads.”

The business perspective . . . What do business owners in Northern Ireland think about the plan to cut the corporation tax rate MARK NODDER Group managing director at Wright Group, the Ballymena, Co Antrim-based bus manufacturer and second-largest such business in the UK. He says corporation tax reform is “the one single thing the entire business community and the entire political community can agree on”.

For his company, which employs almost 2,000 people, paying less corporation tax would mean being able to spend more money on research and development.

Wright’s supplies buses all over the world, either by “flatpack” or in finished form, and spends roughly £5 million a year on R&D at the moment. All of this research into the company’s cutting-edge vehicles is carried out in the North by well-paid graduates, often drawn from Queen’s University in Belfast. Reducing the corporation tax rate would, he says, help to enrich the environment for both school- and university-leavers. “It would set us on a different growth track.”

As for the current uncertainty, he says: “I won’t entertain it not happening.” NISHI WARD Founder of Waste Systems, an engineering company based in Plumbridge, Co Tyrone, that designs and makes products for the waste recycling industry. The firm employs 25 people, mostly graduates, and plans to hire another 36 as it expands to a new industrial premises in Omagh.

Ward points out that his headquarters lies just 10 miles from the Border with Donegal, where he would pay thousands less in corporation tax. The planned reduction would, he says, allow him to invest more in his already-profitable business and target growth in new international markets. He considers it to be “disgraceful that business is being held to ransom over the political process”, but is still hopeful that the change will come to pass.

He notes that Tyrone has become home to a cluster of engineering firms, a number of which have already been bought out by US companies, and suggests that a lower tax rate will see more of that happen, thus embedding the sector and creating a deeper pool of skilled workers. LIAM BRADLEY As owner of a chain of nine Bradley’s Pharmacy outlets across Derry and Tyrone (as well as six in England), Bradley says rising rent and rates loom larger within his business plans than the promise of reduced corporation tax payments.

“It seems like it is always tomorrow; I don’t know whether it is going to happen or not,” he says of the planned change. “It’s hard to take it as being real at the moment because it’s still so vague.”

Bradley also points out that all businesses subject to UK taxes in recent years have already benefited from some tax reductions, as the wider corporation tax rate has declined from 28 per cent in 2010 to 20 per cent today. This makes the proposed reduction a touch less impactful than it might once have been, Bradley suggests.

He would nonetheless welcome a 12.5 per cent rate, saying the savings would allow him to invest in upgraded IT systems and could even leave space for wage increases for his 60 staff in the North, who have been subject to a pay freeze as margins have shrunk.