Budget 2015: Tax cut’s impact on rate debate

City of London
City of London

Future cuts in corporation tax announced in the budget are set to have a two-fold impact on the debate around cutting the rate even lower in Northern Ireland.

Legislation has been passed at Westminster to devolve the responsibility for setting the rate to Stormont, but handover of the power has been held up by a destabilising political dispute in Belfast.

But, if and when the power-sharing Executive does take control, the administration will now be grappling with a slightly different equation.

Advocates of a lower rate of tax on business profits in Northern Ireland point to a potentially transformative impact on a local economy that shares a land border with a jurisdiction - the Republic of Ireland - where the tax is only 12.5%.

But critics of the move claim reducing the local rate so significantly from the UK’s 20% would damage public spending, as it would see the Treasury cut an estimated £300 million off the Executive’s annual funding to offset the loss in revenue.

Chancellor George Osborne’s announcement that the UK-wide rate will now come down to 18% by 2020 is set to impact on both schools of thought.

While narrowing the gap would mean less of an annual cut to Treasury funding, it would also mean less differentiation between Northern Ireland and the rest of the UK when it came to attracting big businesses to invest.

Dr Esmond Birnie, chief economist with PwC in Northern Ireland, said: “Taking corporation tax down to 19% by 2017 and 18% in 2020 will significantly reduce the potential impact of a 12.5% rate in Northern Ireland.

“However, it will also reduce the cost to the block grant, which the Government has estimated as £300 million annually.”

The Chancellor will only hand over corporation tax powers to Northern Ireland when the Executive’s finances are on a firm footing.

That is a long way off at present due to a row over the implementation of welfare reform.

The impasse over welfare has endangered December’s wide-ranging Stormont House political deal between the Executive and the British and Irish governments and, as a consequence, has left the administration in Belfast facing a £600 million black hole in its budget.

Dr Birnie said the “immediate issue” was resolving the Stormont impasse and setting the “rate and the date” for corporation tax implementation.

He added: “The Chancellor made that clear when he said that delivering the Stormont House Agreement and sustainable public finances was a priority for both Westminster and the Northern Ireland political parties.”