Posted on Wednesday 22 June 2011 by Ulster Business

Would big retailers be eligible for the lower CT rate?

Would big retailers be eligible for the lower CT rate?

By John Simpson

If Northern Ireland gains approval for the transfer of authority to set corporation tax for local businesses, what rules or guidelines can be expected or what variations should be adopted?

The Treasury can be expected to want to protect the fiscal authority of HMRC (or what was formerly known as Inland Revenue). For the Treasury that would suggest that devolution should be planned to minimise the number of variations that might be accepted. The simplest option might be that the Treasury would agree that all commercial trading companies registered in Northern Ireland would continue to file a UK-wide company tax return but that the calculation of tax due would be at a lower rate, say, 12.5%.


Even that simple concept raises difficulties. Would a company registered in Northern Ireland (NI) qualify for the lower rate of tax, even if some of its turnover or profit was earned in Great Britain (GB)? There are a large number of local businesses which have turnover in GB. Presumably, HMRC would insist that profits earned by subsidiaries in GB would not qualify. Then, does the restriction need to be narrowed further to exclude all non-NI turnover and profits? The Treasury will be quick to argue that the objective of a lower corporation tax rate is to encourage additional NI. It could make little sense to encourage local firms to do more business outside NI. Then this question must be reversed. What would be the sensible decision on qualification for lower corporation tax for businesses which have GB Headquarters and have branches in NI. An example would be the multiple retailers. Should their turnover and profits in NI be allowed to claim the lower tax rates? The expected answer is that, if the business can prepare separate accounts for operations in NI, then the business in NI would be eligible. Some businesses would decide that the extra administration and tax inspector scrutiny made this too cumbersome. Others, particularly the big retailers, could be expected to file claims. Under this category, firms such as Tesco, Sainsbury, Dunnes and ASDA could benefit significantly, unless their structure already minimises UK taxation.


Having decided which firms could qualify, there are then decisions to be made on determining the appropriate tax rate in NI, the phasing in of any change of tax rate after the handover, the degree to which NI might vary the scheme of tax allowances, as well as whether (or how) existing businesses might contribute to help offset the loss of revenue to NI through the change in the tax revenue from the Barnett formula. The option of phasing in a lower corporation tax rate has been suggested as a method of reducing the impact on the NI budget. Arguably, the incentive value of the prospect of lower tax rates would be created by a commitment to a timetable and new investors could plan on that assumption. As a tactical decision, the important qualification is that the phasing should not be too prolonged. A five year timetable seems acceptable whereas a ten year prospect would be less convincing. Perhaps the most critical decision on the application of a Northern Ireland corporation tax would lie in the scope to vary the scope and scale of tax deductible allowances. There is still some uncertainty on whether the Treasury and Treasury Ministers can be persuaded to widen the devolved remit to allow different allowances in setting the taxable profits. If the Irish example is followed, a key distinction will be made between trading and non-trading income. In principle, the devolved tax base would only apply to trading income. More interesting possibilities emerge if the devolved Northern Ireland arrangements include authority for an enhanced scale of allowances for capital expenditure or new or increased allowances for R&D, training and marketing. To avoid doubt or ambiguity, the NI Executive should negotiate these options at an early stage as the legislation is prepared. The Treasury may argue that adding options about varying the tax base is extending the proposal for a variation in the tax rate in ways which would make the UK system more complicated to administer. From a NI perspective, a legislative framework which allowed variations in the tax base would be an attractive feature for the Executive which, although potentially adding extra revenue losses to the Executive, might be used judiciously. Whilst the Treasury will have an understandable preference for a devolution of corporation tax systems which minimises extra complications, there is a possible caveat from the European Commission. If the UK corporation tax system remains a single national structure with only provision for a lower rate in NI, the Commission may ask whether this fails to satisfy the requirement of the Azores ruling of the European Court. The challenge would be that institutionally there was a national UK system which was being used to ‘cover' the introduction of a new State Aid. Presumably the Executive and the Treasury will get informal guidance from the European Commission before the legislation for devolution of assigned taxation powers is drafted. There is no mention in the Treasury consultative paper of any possible complication for Northern Ireland of the implications of UK international double tax agreements with other countries. Are any agreements affected by a change in taxation rules in NI?


There are very big differences in the estimates of the cost to NI as corporation tax revenue decreases, at least for some years. The optimists believe that the net reduction in the Executive budget may be only a few years; others see at least a ten year problem. The Executive, naturally, will wish to avoid any accusation that in order to benefit international businesses, other social causes should be penalised. Logically, since the corporation tax changes are a benefit to all profitable businesses then the beneficiaries should contribute. The first trade-off could legitimately be the withdrawal of the cap on business rates bills for manufacturing businesses. This will be unpopular with some large manufacturing firms but this subsidy has for a long time been monitored by the EU as an undesirable State Aid. Lifting the cap on rates for manufacturers would not be a large enough source of revenue. The basic proposition is that all profitable businesses benefit handsomely from a reduced tax rate and that some of that benefit should be recouped by a targeted levy. The difficulty is that there is a trade-off between raising a levy and leaving improved post-tax profits so that extra investment is incentivised. This becomes a tense political judgement for Ministers. The easiest (but not ideal) form of levy would be a flat rate increase in business rates. What firms gain in lower corporation tax they lose, in part, in higher rates. To maintain the attraction to new investors, a feature of a changed rating regime might be a five year rates holiday for major investments. The corporation tax debate must now move from slogans into operational details. The devil is in that detail.


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