Corporation Tax (Northern Ireland) Bill
Public Bill Committee, 3 February 2015.
Sandra Osborne (Labour, Ayr, Carrick and Cumnock)
Good morning, everyone. Before we begin, I have a few preliminary announcements. Could electronic devices be switched to silent or switched off? Tea and coffee are not allowed during sittings of the Committee. The notice period for amendments is three working days. Starred amendments—those tabled with inadequate notice—will not normally be called.
The Committee will now consider the programme motion on the amendment paper. We will then consider a motion to report written evidence, followed by a motion to permit the Committee to deliberate in private. Assuming that the last of those motions is agreed to, the Committee will move into private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room and our oral evidence session will begin.
Examination of Witnesses
Sandra Osborne (Labour, Ayr, Carrick and Cumnock)
The first witnesses this morning are Her Majesty’s Revenue and Customs, HM Treasury and the Northern Ireland Office. Good morning to our witnesses. We have until 11 am for this evidence session. Will the Ministers and their officials introduce themselves for the record?
Shabana Mahmood (Labour, Birmingham, Ladywood)
I welcome all the witnesses and thank them for coming to give evidence to the Committee. May I start by asking about the conditionality element of corporation tax devolution in the agreement that has been reached? We had a lot of discussion on Second Reading, particularly on the condition that the power will be devolved in 2017 if the finances of Northern Ireland are placed on a sustainable footing. Will the Secretary of State give us a bit more insight into that aspect of the devolution conditions in terms of the expectations of the Treasury, the Northern Ireland Office and the Northern Ireland Executive?
Shabana Mahmood (Labour, Birmingham, Ladywood)
Do you have a timetable in mind for the agreement on the criteria that are going to be applied?
Shabana Mahmood (Labour, Birmingham, Ladywood)
I am a little surprised that the criteria are not in place for measuring a key condition for devolving an important power. The Northern Ireland Executive do not yet know what threshold they will have to meet in order to get this power in 2017. It seems strange that not even the basic criteria have been agreed ahead of the legislation. Is there a particular reason for that? Is it just timing?
Shabana Mahmood (Labour, Birmingham, Ladywood)
To move on to the expected cost of the reduction—how much money will have to be paid back to the UK—a figure of £300 million was discussed on Second Reading. Is that based on a UK main rate of 20% corporation tax or 21%?
Shabana Mahmood (Labour, Birmingham, Ladywood)
As a rough and ready estimate—one of your officials could help—if the main rate was 21%, what would be the expected cost? Do we know?
Shabana Mahmood (Labour, Birmingham, Ladywood)
Fair enough.
Shabana Mahmood (Labour, Birmingham, Ladywood)
Someone else can try the mental maths, perhaps. Is there a standard formula for calculating how much money will have to be paid back by the Northern Ireland Executive to meet EU judgments and so on? Is it what happens in other EU countries when a calculation is made of what needs to be paid back?
Shabana Mahmood (Labour, Birmingham, Ladywood)
So it is still a matter for live discussion whether the £300 million or £325 million cost gets taken off the block grant to begin with, or that is in effect done when CT revenues are in Northern Ireland. Are the practical ways in which the money finds its way back into the Treasury still being discussed?
Shabana Mahmood (Labour, Birmingham, Ladywood)
There is an invitation to the officials there.
Shabana Mahmood (Labour, Birmingham, Ladywood)
That is helpful. Finally, before other Committee members come in, the block grant will be adjusted to reflect corporation tax forgone by the UK Government due to direct and behavioural effects, but it does not take account of second-round effects on other taxes. The direct effect is more obvious, but could you say more about the methodology for working out behavioural impacts—even though it will not take account of second-round effects on other taxation in the UK—and give some idea of the quantum of such second-round effects?
Andy McDonald (Labour, Middlesbrough)
If this is introduced and it is a success for Northern Ireland, has there been an assessment of the potential impact on other areas of Great Britain, such as Scotland, or the north-east of England, which shares much of the economic profile of constituencies such as those of my hon. Friend the Member for Foyle?
Andy McDonald (Labour, Middlesbrough)
We talked about differentials. This is all about having a different rate in Northern Ireland from that of the rest of the United Kingdom. How will that help? You say that if it is uniform across the globe, this is supportive of a lower rate. Does a uniform lowering of the rate not disappear the differential? How is there an advantage to Northern Ireland if the rate across the whole United Kingdom is standardised, or are you heading towards a Republic of Ireland rate of corporation tax?
Nicholas Dakin (Labour, Scunthorpe)
How widely did the Government consult on the change before reaching their decision? For example, did they consult bodies such as the Institute for Fiscal Studies?
Nicholas Dakin (Labour, Scunthorpe)
What about the IFS’s criticism when it says,
“Corporation tax is not a good candidate for devolution”,
and expresses concerns about profit shifting—we have covered some of that—and tax competition in the UK, suggesting that this adds complexity to the picture, which might not be beneficial overall?
Nigel Mills (Conservative, Amber Valley)
May I go back to the second-round effect? There was a paper by HMRC or the Treasury in late 2013, which looked at the dynamic effects of corporation tax, and suggested that, over the long term, about 45% to 60% of the tax revenues were got back from income taxes and VAT. I suppose that by not giving those back to Northern Ireland, there could be a net cost, and actually it is really quite harsh on them. They have to pay all the downsides, but they get back none of the tax upsides. Is that really what is planned in the long term?
Nigel Mills (Conservative, Amber Valley)
I am trying to understand how HMRC will handle the risks of profit shifting, and people moving to Northern Ireland from GB just to get the lower tax rate. In practical terms, how will you spot what is happening and look for any structures being created or any new risky behaviours? Are you resourced to do that? Have you thought yet about how you might spot that happening?
Nigel Mills (Conservative, Amber Valley)
If you started to see lots of online sales being routed through Belfast, or mail-order sales being based in Belfast, or intra-UK principal structures turning up to try to get trading profits into Belfast, do you think you could spot any trends like that?
Nigel Mills (Conservative, Amber Valley)
Were you tempted just to have an allocation system to split profits between the mainland and Northern Ireland: just to go for sales and employees, rather than the separate-entity approach? Or is this the only way that this could realistically have been done?
Nigel Mills (Conservative, Amber Valley)
I have one last question. On the UK’s moving to having an onshore tax haven—if I can be inflammatory in my choice of language—has that wound up any of our international partners, who are perhaps thinking, “This is not where we thought international agreements were taking us. Why are you potentially risking a much lower rate in a part of the UK?” Are we not encouraging mobile profits to turn up here in an artificial way that perhaps other countries will not like?
Mark Durkan (Social Democratic and Labour Party, Foyle)
If we can go back to the implications for the block grant, some years ago, the Varney review seemed to try to fill everybody with fear that corporation tax could be devolved only on the basis of a fixed and continuing-for-all-time cut in the block grant: when it is gone, it is gone; this is a dangerous punt and we do not know what will happen afterwards, depending on volatility. The Government seem to have found a modified approach, which will seemingly project what the differential would be and take account of that in the block grant, rather than simply looking at what the reduction in the block grant would be. Would that mean that we are looking at an aspect of tax assignment in Northern Ireland’s background, and that a portion of what Northern Ireland will get under the Barnett formula will be directly attributable to what it is presumed it will raise in corporation tax?
Mark Durkan (Social Democratic and Labour Party, Foyle)
That must mean you can attribute what the remainder tax is within the block. If you are able to say that the tax reduction means that that amount has to come off the block grant, the corollary is that you can identify how much is in the block grant that is attributable to corporation tax.
Mark Durkan (Social Democratic and Labour Party, Foyle)
Earlier, the Secretary of State said that some of this might be comparable to tax and devolution in other parts of the UK. Clearly, tax assignment is increasingly talked about as a feature of the Scottish model of devolution. I wonder why we talk only about the drop—what will be taken out of the block grant—and not how we measure what is still in the block grant from corporation tax, and how that might vary over time.
Mark Durkan (Social Democratic and Labour Party, Foyle)
I did not write the package; the Government and others did. Clearly, there is a strong notion of tax assignment in a number of areas, not just in relation to income tax. It is also there in relation to a portion of VAT being identified within the Scottish block grant.
Mark Durkan (Social Democratic and Labour Party, Foyle)
Given that the IFS has said that corporation tax can be volatile, it is about knowing at any time, year on year, the assumption of what will be in the block grant, and at the end of the year, when we find out what has happened, what adjustments are made. Will there be any consequential adjustments for future block grant allocations?
Mark Durkan (Social Democratic and Labour Party, Foyle)
It could arise in future years. It is one thing to calculate based on the first declared lower rate of corporation tax in Northern Ireland. That calculation can state that that is the reduction in the block grant. However, what about the revenue raised and collected by Revenue and Customs after that? What does that count towards in future? As Northern Ireland attracts a lot of businesses and grows a lot of its own, the corporation tax take will go up. Where does the benefit of that corporation tax take go?
Mark Durkan (Social Democratic and Labour Party, Foyle)
Counted how? Would that be counted as an extra on what was the projected Barnett formula block grant, or counted as more of the block grant that it is getting already attributed to corporation tax take under the Barnett formula?
Sammy Wilson (DUP, East Antrim)
May I follow up on that? This is important. Whether or not it is cut and paste, the figure of £300 million or £325 million is the headline figure at present. For the future, it is important that the Northern Ireland Assembly and people in Northern Ireland know what the cost of this will be.
To follow on from Mark’s question, will the amount of tax attributable to Northern Ireland simply be measured by experience or does the Azores judgment require the Treasury to say, “We expect a certain take every year, so we have a formula for that take”? The base figure cannot stay like that for the next 50 years; there has to be some growth. If Northern Ireland does better than that formula, there is a gain. If it does worse than the formula, there will be a net loss to the block grant. I suppose what we really want to find out is how that will be calculated? Will it be calculated according to corporation tax rise in the rest of the United Kingdom? Will it be calculated according to GDP growth? How will it be measured?
Sammy Wilson (DUP, East Antrim)
You must have some idea of the kind of formula that is used in other circumstances. If corporation tax does not grow as quickly as it does in the rest of the United Kingdom, either because it is not successful or because other factors influence Northern Ireland’s economy, is there potential for the bill as a percentage of the block grant to increase over time? The growth in the formula would not equate to growth on the ground in Northern Ireland.
Sammy Wilson (DUP, East Antrim)
I suppose that that is the point. What are the requirements under the Azores judgment for predicting or measuring what the contribution should be in future years once the tax has been devolved? Is there a range of options? If so, has any work been done on what the figure could be in five years or 10 years if it is starting from a £325 million base at present, using those particular options?
Sammy Wilson (DUP, East Antrim)
I understand that there has to be a two-way risk. All I am trying to ascertain is whether we have any idea as to how the figure is likely to grow, because that is important when it comes to deciding just how much you reduce the rate by and how much risk you take on.
Sammy Wilson (DUP, East Antrim)
That brings me to another point that the Executive need to know: the conditionality that has been attached to this. Back home, it is almost seen that, because of the Stormont House agreement, this is now a done deal. I think it is right that conditionality be attached to it, but can you spell out for us, Secretary of State, what that means? Does it simply mean that if the Executive agree the budget for next year, which is currently on the Floor of the Assembly, that is it? If there is a hiccup in getting the welfare reform changes through, does that breach the conditionality?
Part of the Stormont House agreement was that to get the finances on a sustainable footing, there would be a voluntary redundancy scheme, which would involve some 20,000 civil servants taking voluntary redundancy to bring the budget to a level that was sustainable in the long run. Do you expect to see that monitored for a certain period before those conditions have been met? What yardstick will you use to measure whether the conditions have been met for the devolution of corporation tax?
David Rutley (Conservative, Macclesfield)
I want to follow up a couple of points that have been raised, particularly concerning potential safeguards against abuse. Mr Sherman talked about profit shifting and the risk-based approach that was being adopted. I am keen to understand what safeguards will be put in place if there was evidence of abuse, and to have a better understanding of what the sanctions might be.
David Rutley (Conservative, Macclesfield)
Such as?
David Rutley (Conservative, Macclesfield)
So that would be safeguards in terms of trying to anticipate this and prevent people or businesses from doing it in the first place. If there was evidence of abuse, what sanctions are available to Ministers to discourage, dissuade and prevent people from doing this?
David Rutley (Conservative, Macclesfield)
I have one other quick, slightly different, question. Regarding the impact on GB regions—for example, I am the Member of Parliament for Macclesfield, in the north-west—if significant investment was deemed to be being drawn away from other regions, what remedies would be envisaged to address this potential excessive movement of investment from the mainland to Northern Ireland?
Chris Evans (Labour, Islwyn)
The entire corporation tax base, including reliefs and allowances, will remain with the UK Parliament. We know how complicated corporation tax is in terms of reliefs and allowances. Is this really a halfway house? Why have you not gone the whole hog and allowed the Northern Ireland Executive to set the reliefs and allowances?
Chris Evans (Labour, Islwyn)
I come from Wales, where we have a lot of discussions about devolving tax. The crux of the issue is that if there is, as we hope, a reduction in corporation tax that competes with the Republic of Ireland, there will be an immediate reduction in the block grant. I assume that the effect of a reduction in corporation tax will take quite a bit of time to be felt in Northern Ireland. What adjustments are going to be made for that reduction in block grant while we are waiting for the benefits of reducing corporation tax?
Chris Evans (Labour, Islwyn)
This last question is more a question for the Northern Ireland Executive, but do you believe, Secretary of State, that they will able to fix a budget that can take account of the impact of corporation tax devolution in the next three to four years?
Steve Pound (Labour, Ealing North)
I apologise, Mrs Osborne, for being about 10 minutes late. Unfortunately, the grim grip of winter holds Hanwell in its hand and a light dusting of snow inevitably led to delays throughout the Central line. I can only apologise for that.
The Secretary of State referred to a possible relocation north from Dublin, and to 700 consultees. What is the extent of the north-south aspect of that consultation? The Finance Minister in Dublin obviously will not make a formal statement or express an opinion, but does the Secretary of State or any of her officials anticipate any change in fiscal policy in Dublin if corporation tax is lowered in Northern Ireland?
Steve Pound (Labour, Ealing North)
With the greatest respect—as politicians often say—you are talking about the devolution rather than the reduction. I do not think that anyone would object to the devolution, but were the consequences of a reduction in corporation tax to be significant, the 30-years-plus low corporation tax regime in Dublin would inevitably have to be reconsidered. Does the Secretary of State think that that is a valid statement?
Steve Pound (Labour, Ealing North)
I am talking about the implications for their own—
Steve Pound (Labour, Ealing North)
Secretary of State, you referred to the possibility of relocation from the Republic of Ireland to Northern Ireland. Was that a throw-away comment or has it been factored into the discussions?
Steve Pound (Labour, Ealing North)
I am grateful. I cannot believe that anyone in the Committee would disagree with that percipient analysis of the benefits of Northern Ireland and its skilled work force.
Shabana Mahmood (Labour, Birmingham, Ladywood)
May I go back to the question about allowances and credits and the fact that they are not part of the devolution measures? I agree with the Financial Secretary’s points about complexity and the increased risk of profit shifting. How does the UK’s allowances regime compare with that of the Republic of Ireland—is there perhaps a future scenario where the Northern Ireland Executive might be pushing for devolution of allowances so that they can better compete with the Republic of Ireland, which may have a more favourable regime? Is that something that you have considered, and does our regime currently compete quite well with the Republic, notwithstanding the difference in the headline rate of corporation tax?
Shabana Mahmood (Labour, Birmingham, Ladywood)
Do you agree that the current regime, in particular for allowances, is competitive when compared with the Republic of Ireland’s regime, notwithstanding anything that might be in the offing in relation to BEPS and so on?
Shabana Mahmood (Labour, Birmingham, Ladywood)
You have pre-empted my question on the “Double Irish”.
You have probably seen the written evidence that KPMG Belfast submitted. I wanted to pick up a point about the definition of back-office functions. The Bill excludes,
“trades consisting of lending activity, relevant regulated activity and insurance activity”,
but back-office activity is carved out of that. KPMG Belfast raises the prospect of definitional difficulties for back-office functions. What are your comments on that? What is the experience of the definition of back- office activity in other taxation legislation and do you expect the same problems potentially to carry over into the Bill?
Shabana Mahmood (Labour, Birmingham, Ladywood)
That is helpful. The Financial Secretary recently met the Chartered Institute of Taxation to discuss the Bill. I understand there was discussion about the legislation being complex, the lack of time for consultation on its measures and the prospect of its being kept under review, given the time before it comes into force. It would be helpful to hear the Minister’s views on that.
Shabana Mahmood (Labour, Birmingham, Ladywood)
I have one final point. Some stakeholders and businesses have raised the scenario of an SME that is close to the boundary of large-company rules and may move in and out of that area. Have you considered allowing such firms to opt in to the large-company rules?
Mark Durkan (Social Democratic and Labour Party, Foyle)
To go back to the points that were raised about companies—for instance, the Secretary of State referred to small and medium-sized enterprises. Obviously, Revenue and Customs will want to ensure that everyone is conforming and that those who are benefiting from the reduced corporation tax rate are those for whom it is appropriate. How far do you see there being any difficulties on things such as 75% or more of working time and 75% or more of working expenses, et cetera? Is there any concern that there will be artifice on the part of firms just to maintain that position?
Mark Durkan (Social Democratic and Labour Party, Foyle)
How is the expense measured? Is it employees who are employed in Northern Ireland—that is where their address and their wage is—but who might be spending a lot of time over here? How far does it go?
Mark Durkan (Social Democratic and Labour Party, Foyle)
What about a business that starts in Northern Ireland, but expands and develops into a wider UK market? Will there come a point where that business has to say that its growth means that it has grown out of this eligibility?
Mark Durkan (Social Democratic and Labour Party, Foyle)
On back-office activities, and the interpretation or the adjustments that may be made to the understanding and interpretation of that—and it is not the only area in relation to some of the consequences on behavioural effects—we have heard today that Revenue and Customs has powers to fall back on. There seems to be a sense that you think that, come what may, you will always have something in the bat belt to deal with any abuse or risk that may arise. However, you said that you might have to look to Ministers for further legislation. Will you colour in for the Committee exactly what powers you have to fall back on, and what you envisage with those powers? They are not particularly well defined in the legislation—there are simply lots of indications that measures may have to be taken or things may have to be looked at. What powers are you relying on?
Mark Durkan (Social Democratic and Labour Party, Foyle)
You said you have powers to fall back on. It is not simply what is within the legislation, so will you colour in some of what you are referring to, which might be in the legislation?
Mark Durkan (Social Democratic and Labour Party, Foyle)
Would it be the case that any interpretive measures that you took in response to what you had observed would apply only on the basis of guidance that would then be published, rather than being imposed retrospectively?
Mark Durkan (Social Democratic and Labour Party, Foyle)
In some other legislation we see a lot of references to guidance that will be issued or made available. There is less specifically about guidance in the Bill, perhaps on the basis that you are saying that the references to guidance are elsewhere in the tax code. There seem to be a number of provisions in the Bill that allow either the Treasury or HMRC to take steps in response to what they see. When those steps are taken, if they reinterpret or redefine what is to be interpreted, will that apply retrospectively, without having been the subject of guidance in advance?
Sandra Osborne (Labour, Ayr, Carrick and Cumnock)
Two Members have indicated that they wish to speak. I urge them to be mindful of the time: I have no wish to interrupt anyone mid-sentence if it can be avoided.
Sammy Wilson (DUP, East Antrim)
On the Northern Ireland employer regime, there could be some difficulty with construction industries in Northern Ireland, some of which undertake quite a lot of work outside Northern Ireland. It is probably a temporary thing caused by the stalled construction industry in Northern Ireland, but much of their profit in one particular year during a contract may be made outside Northern Ireland, or they may have more than 75% of their work force outside Northern Ireland, just for a short period. Given the criteria, could we find a situation where small and medium-sized enterprises drop in and out of qualification for the lower corporation tax in Northern Ireland, or will it be taken over a longer period?
Sammy Wilson (DUP, East Antrim)
Just taking the construction industry, some firms may find, because a contract may well last longer than a year, that they are in the regime one year and out of it the next year, even though they would normally qualify as small and medium-sized enterprises with 75% of their work force in Northern Ireland.
Sammy Wilson (DUP, East Antrim)
Once they have fallen out, is it just as easy for them to fall back in again? This is a big question, especially in the construction industry. Lots of firms may well have to seek work in Scotland or in London, but that could disqualify them for the period in which that contract, which may be a major part of their income, is being fulfilled.
Nigel Mills (Conservative, Amber Valley)
Mr Sherman, you seem to be suggesting that if new abuses come to light you might want to change the Bill. You have not put a targeted anti-avoidance rule in the Bill—quite uniquely. Are you tempted to suggest that there ought to be one, to have that protection from the start, rather than trying to add it later?
Nigel Mills (Conservative, Amber Valley)
All new regimes have an anti-abuse format to try to catch those unknown future planning ideas from the start, in order to avoid having to add them later.
Sandra Osborne (Labour, Ayr, Carrick and Cumnock)
Order. I apologise for interrupting the hon. Gentleman. That brings us to the end of the time allotted for the Committee to ask questions. I thank the witnesses, on behalf of the Committee, for their evidence. We shall meet again on Thursday 5 February to begin line-by-line consideration.