CORPORATION TAX (NORTHERN IRELAND) BILL

Public Bill Committee, 5 February 2015.

Sandra Osborne (Labour, Ayr, Carrick and Cumnock)

We now begin line-by-line consideration of the Bill. If Members wish, they may remove their jackets in Committee, but if anyone does I will be very surprised at this temperature. Please ensure that all your electronic devices are switched off or in silent mode.

The selection list for today’s sittings is available in the room. It shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. A Member who has put his or her name to the leading amendment in a group is called first. Other Members are then free to catch my eye to speak on all or any of the amendments in the group. A Member may speak more than once in a single debate.

I will work on the assumption that the Minister wishes the Committee to reach a decision on all Government amendments. Please note that decisions on amendments take place not in the order in which they are debated, but in the order in which they appear in the amendment paper. In other words, debate occurs according to the grouping in the selection list and decisions are taken when we come to the clause that the amendment affects. I hope that explanation is helpful.

I will use my discretion to decide whether to allow a separate stand-part debate on individual clauses and schedules following the debates on the relevant amendments.

Clause 1 - Trading profits taxable at the Northern Ireland rate

Nigel Mills (Conservative, Amber Valley)

I beg to move amendment 1, in clause 1, page 9, line 26, at end insert—

‘(3A) If an election by an SME under this subsection has effect the large company condition shall be treated as satisfied in relation to an accounting period and the SME condition shall be treated as not satisfied in relation to the same accounting period.

(3B) An election under subsection (3A) can only be made by a company that in an accounting period—

(a) is an SME for the purposes of section 357KC;

(b) is not a Northern Ireland employer for the purposes of section 357KD; and

(c) has a NIRE.

(3C) An election for the purposes of subsection (3A)—

(a) must be made by notice to an officer of Revenue and Customs;

(b) must specify the accounting period in relation to which it is to have effect; and

(c) must be made before the end of the period of 12 months beginning with the end of the specified accounting period.”

It is a pleasure to serve under your chairmanship this morning, Mrs Osborne, at the start of the Bill Committee debates. It is a slightly unusual Bill, since we have six clauses and the first covers most of the Bill.

I am working on the assumption that we will have a separate clause stand-part debate, so my remarks do not need to cover the whole Bill. The amendment is an attempt to sort out an omission in the Bill that involves treatment of small or medium-sized companies and large companies, and what happens if the former do not quite meet all the conditions for such a company under the Bill. A small or medium-sized company could end up being in a worse position than if it was a large company.

The Government have tried to be sensible. We obviously need to be careful that only companies operating in Northern Ireland get a benefit from the lower corporation tax rate, which is why the large company rules set out that a large company has to divide its activity between what is taking place on the mainland and what is taking place in Northern Ireland, so the lower tax rate is only for the Northern Ireland share of its profits. That has to be the right approach.

It is entirely fair to give a more simple regime to small and medium-sized companies in the UK, so that they do not have go through the whole compliance horror of trying to split their activities if they know that they are really trading only in Northern Ireland or trading only a small amount. For a small or medium-sized company, the rules should give a lighter compliance burden, which is to be welcomed greatly.

In some situations, however, a company might drop out of the rules without realising and end up in a worse position. The rules for small and medium-sized companies set out that they must meet the European Union size criteria—some of which, helpfully, are in euros, which can cause a bit of volatility in whether they are met. For clarity, the rules state that a small or medium-sized company must have fewer than 250 employees and either turnover of less than €50 million or balance sheet assets of less than €43 million.

At the start of the Parliament, the €50 million turnover level would have been equivalent to about £45 million; at today’s exchange rate, that is about £38 million. A company could have been small or medium sized at the start of the Parliament, but now that the euro has weakened in recent weeks, it might have fallen out of the criteria without expecting it. A company might think it is covered by the simplified rules but suddenly might not be because of exchange rate movements, so it might not realise that that is how the rules are applied.

Another situation might arise whereby a small or medium-sized company won a contract on the mainland late in the year. The hon. Member for East Antrim used the example of a construction company in the evidence session the other day. The company might undertake the project as a useful way of splitting its income—it might provide employment for people in Northern Ireland who are sent over to the mainland to do the work, which is all sensible. However, if the value of those mainland contracts was more than 25% of its activity, the company would miss the 75% test in the Northern Ireland work force conditions, and its whole profit for that year would attract the higher mainland rate, not the lower Northern Ireland rate. The company might not know that until right at the end of year, when it was trying to work out which of its contracts had been completed and which had been paid for.

That could lead to a real compliance burden. It could lead to a company not wanting to take on work that might take it over the threshold, because the amount it earned could be less than the extra corporation tax it ended up having to pay. This looks like an unfortunate situation, and it would leave a small or medium-sized business with, say, 70% of its activity in Northern Ireland having to pay the mainland UK rate of 20%, whereas a large company in the same situation would get the lower Northern Ireland rate for the 70% of its profit it made in Northern Ireland. That does not strike me as entirely fair or as what we probably intend.

The question is how we strike a balance between an easier regime for small and medium-sized companies and one that does not unduly penalise them if they happen to have split activity. We could argue that a company that knows it has a reasonably sized mainland operation and a Northern Ireland one could choose to have two separate companies and do all its mainland work in a separate company. It would not then risk tainting its Northern Ireland operations and losing the lower tax rate—if the rate is indeed lower after the powers before us are granted. Normally in the tax system, however, we do not want to distinguish between the ways in which groups operate—whether they operate through separate companies or just one legal entity. Doing so creates a whole new burden for those companies, which then have to decide whether to have two separate legal entities, manage them separately and allocate contracts and employees between them. That in itself risks creating a compliance burden in trying to get around these rules.

Amendment 1 would therefore provide that a small or medium-sized company that meets all the rules for being small or medium-sized, but that does not meet the Northern Ireland work force condition for a year—I accept there is a look-back year, so companies would actually have to miss the condition for two years before they lost the lower rate—can choose for that accounting period to elect into the large company rules. They can then separate their activity out and still get the lower Northern Ireland rate on the share of their profits that they have earned in Northern Ireland.

That would not impose a burden on any company that did not make that election. Any company that thought that that was too hard, that the savings were not worth the effort or that it just did not have the relevant information could choose not to make that election, and they would, effectively, fall out of the rules for that year. I cannot see that that would impose a burden on anyone—unless they chose to impose one on themselves—but it would maintain fairness. A company that just misses out on the small and medium-sized company rule and on the lower rate could get into the large company rate and then have the lower rate on the proportion of the profits it has earned in Northern Ireland. That strikes me as fairer. It takes away the risk—I accept it is probably quite small—that a small or medium-sized business could end up in a worse tax position than a large business, which is not what we normally intend in the tax rules.

There are other scenarios we need to be a little careful about. What happens if I am a small or medium-sized enterprise operating on the mainland with a small operation in Northern Ireland? Under the rules as drafted, unless I have 75%, I cannot take advantage of the lower Northern Ireland rate. That means I am probably at a big commercial disadvantage if I try to operate in Northern Ireland. However, if, by allowing the Northern Ireland Assembly to set the rate, we are trying to attract investment into Northern Ireland, we probably want small and medium-sized businesses on the mainland to say, “Actually, I do want to open another site. I want to open some more shops in my chain. I want to extend my business somewhere else. Northern Ireland is quite an attractive place. I would like to work there. I would like to employ people there. I will put my next outlet in Northern Ireland.” However, such businesses cannot qualify under the rules as drafted.

There are certain attractions, such as fairness for small and medium-sized businesses and encouraging medium-sized businesses on the mainland to invest in Northern Ireland, in allowing such businesses to opt into the large company rules and get the share of their profits they fairly earn in Northern Ireland at the Northern Ireland rate, rather than the mainland rate. I am not the only person to think so.

We had written evidence from Eamonn Donaghy at KPMG in Belfast, where he is the head of tax and also head of Grow NI, which has been campaigning for the introduction of the Northern Ireland corporation tax rate. He comments that it would be helpful for small and medium-sized companies to be able to elect to get into the large company regime.

I hope the Minister will look favourably at the matter. I have been tabling amendments to finance Bills and tax issues a lot in this Parliament. I have never quite managed to convince the Minister to come over the line and accept one of my amendments, although I remember one day when we thought we might have done that, but we will gloss over that unfortunate incident.

I am not attempting to derail or criticise the Bill. I am merely attempting to sort out a small gap that will probably hit some companies only in a rare set of circumstances. The data show that there are not many companies in danger of dropping out of the SME exemption. If we want this new regime to work for the long term, we need to try to close some of the gaps. The amendment would be a fair addition and add no extra burden. It would simply create the right conditions for a small or medium-sized company.

Mark Durkan (Social Democratic and Labour Party, Foyle)

It is great to serve under your chairmanship again, Mrs Osborne. I rise to indicate sympathy with the points made by the hon. Member for Amber Valley. It is important to ensure that the measures in the Bill are conducive to helping businesses—not only businesses that site themselves in Northern Ireland—without jeopardy to other regional economies in the UK, and it is important to help grow our own indigenous businesses. Obviously, businesses in Northern Ireland will not succeed to their fullest purely within the context of the Northern Ireland market. They will want to trade elsewhere on the island of Ireland, elsewhere in the UK, and indeed beyond.

The provisions, as they apply to the portion of a company’s trade in the UK, could cause particular wrinkles. We want to ensure that companies that export goods or services—they will have people working in sales or in labour-led services such as construction—are not in the position of having to decide at a given point in the year whether they can take a certain contract that might come their way, because it might just put them over the line. We do not want them to say, “Sorry, can we shovel that off to another accounting period?” We do not want people to have that difficulty with the work that they might bid for or potentially be awarded in a UK market, as opposed to the work that they can get in the market in the south of Ireland or elsewhere outside the UK.

The Financial Secretary indicated in the evidence session the other day that the Government feel they have built enough elasticity into the Bill and that the measures will have all the room for movement that firms need, so that nobody will find themselves on an absolute knife edge. We know that that is the intent and that that is what is surmised for now, but it may not be people’s experience later. There are flexibilities. Things can be carried forward for a year and then rounded off later, but that still gives rise to choices being made by companies and professional advice having to be sought as to whether they can afford to take certain business opportunities, and whether they will have fundamentally to change issues around the standing of their company in terms of corporation tax. We must ensure that we are not leaving any invidious wrinkle whereby small and medium-sized enterprises would find themselves at a disadvantage compared with bigger companies in the sector that are competing in the same market.

The hon. Member for Amber Valley has made the point well. I am conscious of companies in my own constituency—some in construction, including some fairly specialised ones in construction and engineering—competing for contracts, some of which are a result of capital spending by the Government here and through various parts of local government. Some of those companies have found themselves in a difficult situation when dealing with the tax authorities, perhaps because the company was taken over and there were other problems or tax debts. I want to ensure that I will not be talking to those same companies again about a different version of the same problem with their corporation tax standing.

This is also about ensuring that people do not inadvertently put themselves in any difficulty that would place them in a questionable standing with Revenue and Customs. We need to ensure that this is all seemly, if not quite seamless, from everyone’s point of view. Revenue and Customs will then not find itself questioning firms, and firms will not find that, after successful work and having won and discharged contracts, their tax status is undermined and contrasts with their business plans and assumptions.

Shabana Mahmood (Labour, Birmingham, Ladywood)

It is a pleasure to serve under your chairmanship, Mrs Osborne. I welcome Members to the Committee. We have already had a high-quality Second Reading debate and oral evidence session. I look forward to that continuing today.

The hon. Member for Amber Valley always brings a huge amount of technical expertise to these debates, which is welcome and appreciated. He gave a good summary of what he is trying to achieve. The Financial Secretary will remember that I asked him a similar question when we took oral evidence, and I was persuaded by his answer. He explained that he and his officials had considered this point but that they felt, in the end, that it was perhaps more theoretical. They felt that it would not lead to practical difficulty of the kind envisaged in the amendment and the written evidence submitted by KPMG.

The Financial Secretary said in his answer to my question that he did not feel that many businesses close to the boundary would benefit from opting in to the large business rules. Given that he and his officials have looked at this, it would be helpful to understand how many businesses we might be talking about and the nature of those businesses. I was persuaded that this point is perhaps more theoretical than practical, but will he give a bit more information about the number of businesses? That would be helpful.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mrs Osborne. It is always a happy moment when I begin a speech having just heard that my arguments persuaded the hon. Member for Birmingham, Ladywood. That is not always my experience. I hope that my hon. Friend the Member for Amber Valley will also find my arguments persuasive today. Time will tell on that front.

Amendment 1, which was tabled by my hon. Friend the Member for Amber Valley, seeks to allow SMEs that do not qualify for the Northern Ireland corporation tax rate because they do not meet the 75% employment threshold the option to elect into the rules for large companies. I am sympathetic towards the intent behind my hon. Friend’s amendment, but I do not believe that allowing SMEs to elect into the large company regime is the best approach. The rules are designed to deliver two key things for SMEs: simplification and reduced administrative burdens. I hope that hon. Members agree that those are two important objectives that we should bear in mind when designing reforms such as this. The rules mean that the majority of SMEs are subject to a simple in/out test. A company is classified as an SME on the basis of a slightly amended version of the EU SME definition boundary, because it aligns with the UK corporation tax exemption for SMEs from transfer pricing. That alignment is a simplification in itself, as the definition will be familiar to many companies.

Nigel Mills (Conservative, Amber Valley)

I am sorry to interrupt the Minister so early in his speech, but he mentioned the exemption from transfer pricing. Medium-sized companies have the option to elect into the transfer pricing rules if they think that to do so would suit their interests.

David Gauke (Conservative, South West Hertfordshire)

That is true, but the fact that there is such a definition and alignment here is helpful, particularly given the relevance of transfer pricing rules in the context of Northern Ireland corporation tax. It is helpful to make use of that definition.

SMEs are subject to an employment test. If an SME has 75% or more of its UK employment in Northern Ireland, it qualifies for the Northern Ireland rate. If it has less than that, it remains within the main UK rate on all its UK trading profits. That employment test takes into account both employee time in the UK and UK work force costs. It means that companies are taxed based on objective criteria, and only SMEs that have a substantial part of their employment in Northern Ireland will have their profits taxed there. The test also means that for the majority of SMEs, all their profits will be subject to only one rate of tax. In many cases, SMEs will not have experience of the international profit allocation principles of the large regime or the capacity to handle them, so our approach keeps administrative burdens proportionate for all SMEs. Furthermore, SMEs that have failed the employment test will not have the administrative burden of estimating their tax take under both regimes before deciding whether to elect into the large regime.

Given the complexity and additional burdens that the amendment would create for SMEs, it is worth considering the numbers involved—a point that the hon. Member for Birmingham, Ladywood touched on. HMRC analysis indicates that there are approximately 26,500 SMEs active in Northern Ireland, and under our current rules, 97% of those are eligible for the Northern Ireland corporation tax rate. That leaves only 3% of SMEs unable to access the Northern Ireland rate. However, the majority of those have less than 10% of their employment in Northern Ireland. As the vast majority of SMEs active in Northern Ireland have either nearly all, or very little, employment in Northern Ireland, they will not need to consider in great detail what rate of tax they should pay. The data support our conclusion that the simplification and reduced burden of not having election in the regime outweigh the potential reduction in tax liability for a very small number of companies.

We have included a grace period for SMEs so that they will continue to qualify for the Northern Ireland rate during the first year in which they dip below the 75% threshold or no longer meet the SME size definition. They would have to fail one of the tests for two periods in succession to move out of the SME regime. If a Northern Ireland SME construction company wins a contract in Liverpool, for example, which results in a shift in location of its employees, even if it no longer passes the 75% work force test, it will continue to benefit from the Northern Ireland rate for at least a year. Temporary shifts in employee demographics will not penalise such companies.

I hope that hon. Members agree that the evidence does not support the need for the amendment, which would add a disproportionate level of complexity into the regime for SMEs, as I said during the evidence session earlier this week. However, I agree that that area should be monitored, in case the demographic changes that I have mentioned cause problems.

I recognise that some concerns might be of particular issue to the construction industry. To aid in that, HMRC officials have asked interested parties for evidence of instances in which there might be a problem.

Sammy Wilson (DUP, East Antrim)

The Financial Secretary has outlined the safeguards for such temporary movements of work by firms that might operate outside Northern Ireland. Will he explain the process, if a firm drops out of the Northern Ireland regime for a period, for getting back into the regime? Will firms simply have to show in the next year that they are now back within the 75% threshold, because the contract has ended or whatever? Will they automatically drop in, or will there be a transition period or a complicated process to elect back into the regime?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman makes a helpful point. As I mentioned, there is a grace period for those companies that qualified for the Northern Ireland rate in one year, but did not in the next. Things are not symmetrical. If a company qualifies as a Northern Irish company, it qualifies as a Northern Irish company and for the relevant rate of corporation tax. I hope that I am reassuring him on that front. In short, companies are back in for every year that they pass the test. There is a year of grace if they fall outside the test.

As I said earlier, it is worth keeping the matter under review and I appreciate that there are particular issues for the construction industry. There are discussions on that.

Mark Durkan (Social Democratic and Labour Party, Foyle)

It is clear from what the Financial Secretary has said that there is flexibility on work carried out in the UK. Will he also assure us that for companies whose work in Northern Ireland is in the southern Irish market there will be no new jaundiced look at the degree to which their work serving markets in the south is counted as Northern Ireland work? Many firms are working in the south of Ireland, as well as elsewhere in the UK. When those companies show their 75% in Northern Ireland, will there not be some check on how far the people in Northern Ireland are working purely within Northern Ireland, or are carrying out contracts just over the border? I am in a border constituency and such activity is natural for many firms.

David Gauke (Conservative, South West Hertfordshire)

The first point to make returns to what I was saying earlier. That is likely to be an issue for relatively few companies. The vast majority of SMEs have, in essence, all or nearly all their activity in Northern Ireland, or little of their activity in Northern Ireland.

On the tests that we have in place, the test in this case is to do with the activity that occurs within the United Kingdom. Time that is counted as occurring in Northern Ireland must be in Northern Ireland—the work must physically be in Northern Ireland. Activities that are not in Northern Ireland—ones that occur in the Republic of Ireland, to take the particular example of the hon. Member for Foyle—cannot count as time contributing towards the 75% test.

I am not sure whether that is the reassurance that the hon. Gentleman sought, but the measure applies to activities in Northern Ireland—the test is whether 75% of the employees are in Northern Ireland. I suspect that in many cases the types of firms that he is talking about, ones that guest-conduct activities in the Republic of Ireland, might well not be doing much on the mainland. In those circumstances, there will not be too much of an issue. Some of those firms may be doing something on the mainland, but I suspect many will not. As I say, however, we will continue to speak to interested parties.

Mark Durkan (Social Democratic and Labour Party, Foyle)

To clarify, firms in Northern Ireland cannot count work going into the southern Irish market—work that they have competed for as Northern Ireland firms and so on—as part of their 75% in relation to the assessment of the bulk of their UK activity.

David Gauke (Conservative, South West Hertfordshire)

Yes, that is correct. That would not count towards the 75%.

As I said, the earliest the regime could take effect is April 2017, so there is time properly to assess any representations, rather than unnecessarily complicating the regime now.

I accept some of the points about the challenge for the construction industry, although, taken as a whole, the data suggest relatively few businesses are likely to be affected by the inability to make an election.

It remains the case that, where we give companies a choice, they will feel obliged to seek advice to calculate how much tax they would pay under either regime, and that will result in additional complexity. There must be a concern that, in some circumstances, the cost of making that assessment could be greater than any financial benefit they would gain from acting on it.

It is also worth drawing the Committee’s attention, as I have done, to the grace period for those who temporarily fall outside the Northern Ireland regime. However, with all that, as I say, there is the ability properly to assess representations with a view to coming back to the issue if a persuasive case is made.

To provide further clarity to the hon. Member for Foyle, time spent in the Republic of Ireland will not be relevant to either side of the equation, because the 75% test relates to time spent in the UK, whether in Northern Ireland or the rest of the UK.

With those points of clarification—and, I hope, assurance—I hope my hon. Friend the Member for Amber Valley can be persuaded to withdraw his amendment.

Nigel Mills (Conservative, Amber Valley)

I am grateful for the assurance that this issue will be kept under review. I am not totally convinced that having an election that can be completely ignored adds a great deal of complexity. I am not sure how many small companies out there spend their days pondering whether they should elect themselves into the transfer pricing rules, which is an option they have had since those rules came into force for UK entities. I am not totally sold on that argument, but I accept the clause will probably cause a problem for only relatively few companies. If evidence does come forward that some entities will be affected, I hope the Government will keep that under review. There is an annual opportunity in the Finance Bill to sort out any issues that do arise, so I beg to ask leave to withdraw the amendment.

Nigel Mills (Conservative, Amber Valley)

I beg to move amendment 3, in clause 1, page 9, line 38, at end insert “, and

(c) the sole or main purpose of carrying on the trade in Northern Ireland rather than in England, Scotland or Wales is not to achieve a reduction in Corporation Tax.”

On a slightly different tack, the purpose of this amendment is to test whether the provisions to prevent companies from moving to Northern Ireland for tax reasons—effectively fleeing the mainland to reduce their tax bill by quite a large amount, rather than for good commercial purposes—are sufficient to do that. The Committee is at a slight disadvantage, because I need to convince it that those provisions are not sufficient, even though we have not been through all the clauses that contain them—perhaps I could go through the next 66 pages of the Bill and try to explain those clauses myself.

However, the point I am trying to make is that there are, quite sensibly, a lot of safeguards in the Bill. No one wanted allowing Northern Ireland to have a lower corporation tax rate to mean that every large multinational company could effectively halve its tax bill on its financing activities around the UK or Europe by having one man doing half a day’s work a week on a spreadsheet in Belfast. It is pretty clear from the excluded activity on lending and investment that that cannot happen.

Sammy Wilson (DUP, East Antrim)

Does the hon. Gentleman accept that that is also the aim of the Northern Ireland Executive? The last thing that they wanted was an arrangement that did not create employment, give the opportunity to generate more wealth or grow the private sector. A lot of work has been done on compliance and the resources for it to ensure that the scenario he has painted will not come about.

Nigel Mills (Conservative, Amber Valley)

I entirely accept that the desire of the Assembly and the Executive is not to enable companies’ portable income to be plonked in Belfast solely to achieve a tax advantage without generating employment. The amendment is to make sure that the rules stop such activity and that no clever large corporates can find a way past them.

I am already happy that financing cannot be used in such a way. The next portable income source most commonly used for tax planning would be royalties and intellectual property. If someone could move their IP into a Northern Ireland company, would their royalties be taxed at a rate much lower than the mainland one? The Bill has complicated provisions on intangible assets; I shall leave the Minister to try to explain those to us later. However, it is pretty clear that if someone just moved already existing IP from a mainland company into a Northern Ireland one, or tried to allocate it to their Northern Ireland operation, they would not get the lower tax rate. It looks as if the easiest ways of doing such things will be covered.

However, what is the next line of things that people could do? Real trading income, rather than investment income for tax purposes, would have to be involved. A principal company could be sat in Belfast with very few staff, dealing, perhaps, with the final signing of contracts agreed on the mainland; we have been trying to tackle such structures through the diverted profits tax. Alternatively, companies might try to place their internet sales for the whole UK or wider in Belfast. Again, that would require only some servers and a couple of IT people to manage.

In theory, under the Bill, if only a very small proportion of an organisation’s internet customers were from Northern Ireland, and most were from the mainland, yet all the sales were booked through a company based in Northern Ireland that had no staff or assets on the mainland, there would be no apportionment between the mainland and Northern Ireland: all the income would be taxed at the lower Northern Ireland rate.

Ian Swales (Liberal Democrat, Redcar)

Does the hon. Gentleman share my concern that the Bill does not specifically address the internet—a big issue that we are trying to deal with on a wider front? The Bill leaves such situations open. Companies such as Marks & Spencer are already exploiting Dublin as an offshore, online sales centre.

Nigel Mills (Conservative, Amber Valley)

Yes. One of the reasons for tabling the amendment was to see whether there were any further gaps in the Bill that we could try to close. A large corporate for which there is a much lower rate within the same territory and tax code will understandably try to get its portable activities into that lower rate. That will be attractive. It is not easy to move between countries: there are various exit provisions, different legal rules, and, possibly, different currencies. Furthermore, employees would have to change the regime they were taxed in. If a company can move within one territory, many of those downsides do not apply.

Andy McDonald (Labour, Middlesbrough)

I am listening carefully to the hon. Gentleman. Has he applied his mind to whether his amendment could, perversely, have a paradoxical effect? Might it not conflict with other provisions in the Bill? Which provision would predominate? People might point to the clause resulting from the hon. Gentleman’s amendment and say that that is the one that must not be fallen foul of.

Nigel Mills (Conservative, Amber Valley)

That is an interesting question and I am grateful to the hon. Gentleman for asking it. My intent was to add an extra test that would not say that if someone met this condition but not the one on excluded trade, they would somehow be back into the Northern Ireland rate. It was meant to be an additional hurdle.

We currently have many tax divisions that have a targeted anti-avoidance rule; I think that almost every new provision that is introduced now contains some kind of anti-avoidance rule to try to stop the planning before it starts. By no means was I trying to lower the hurdles that must be cleared. I accept that there is always a risk with Back-Bench amendment drafting that one can trigger unfortunate unintended consequences, but I was trying to explore the issues relating to companies doing what looks like, and is taxed like, perfectly good commercial trading activity, but in reality has much higher profit levels than employment levels and so would not fall within the various exclusions for lending, oil activity, investment management, insurance, re-insurance or the exploitation of pre-existing intellectual property. I was trying to ensure that, for anything that was trading and solely tax-motivated that we are already trying to prevent multinational corporations from moving into low tax regimes, we can try from the start to prevent from taking place in Northern Ireland.

By lowering the corporation tax rate in Northern Ireland—assuming that the Assembly chooses to do that—we are trying to get companies to go to Northern Ireland that otherwise would not have gone. I presume that the lower corporation tax rate is intended to influence their decision-making process. There is a risk that if we said, “You can’t just go to Northern Ireland to get a tax advantage”—would that run counter to the whole principle of their going to Northern Ireland if the thing that is stopping them from going to Dublin now is the corporation tax? If that is the thing that changes their mind and makes them go to Belfast, would the amendment I am proposing effectively render the tax rate pretty useless in attracting investment? I suspect that the answer is no.

The formulation I have chosen to use—the sole or main purpose test—is pretty widely recognised in tax rules. If a company could show that it was going to Northern Ireland because of the quality of the employees, the strength of the market, the great infrastructure or the thriving sector there—if all those considerations were taken into account—the fact that the corporation tax reduction tipped it over the line would not mean that the test had been failed. It would be failed only if the sole reason why a company was going to Belfast with two men to do principal structure or monitoring servers was to get a tax advantage. That is the sort of thing that I was seeking to prevent, not any genuine commercial choice about Northern Ireland as a place to go.

All this is important because the assessment of the behavioural responses to Northern Ireland having a lower tax rate showed that by far the biggest effect was profit shifting from Great Britain to Northern Ireland. The Library paper that picks up all the relevant studies showed that, even by year 5, the profit shifting from the rest of the world to Northern Ireland would be only £30 million, while the profit shifting from GB to Northern Ireland would be £55 million—almost twice as much. In fact, tax-motivated incorporation would be another £50 million. The people who have looked at the matter think that one issue with a lower corporation tax rate will be that companies will surely try to shift profits purely for tax reasons.

I accept that those assessments may well have been undertaken before all the various drafting to prevent the most obvious ways of moving portable income solely for tax purposes. Nevertheless, as an MP for an English constituency, although I have no problem with tax competition or with Northern Ireland competing for investment with my area or with the whole of England, I want that to be real commercial investment by companies that are going to put real jobs, manufacturing and whatever else into Belfast. We do not want things to be shifted over there that do not really attract any investment, purely to take advantage of the lower tax rate.

The amendment proposes a fall-back position for HMRC if it started to see a lot of companies that had no commercial reason to go to Belfast moving their servers from the mainland to Northern Ireland, with no commercial advantage, no movement of employees, and no particular gain other than the tax rate going down from 20% to the new Northern Ireland rate. As far as I can tell, it would be quite hard to prevent that with the various measures that are already in the Bill. My amendment would give HMRC the tools to tackle that and would be a deterrent to people trying clever tax planning tricks.

We know that a lot of corporates have been quite keen to plan carefully where they account for their profits to try to get lower tax rates, so some people out there will be looking to see what they can do that will not cost them very much, but will get them a nice tax saving. The amendment would be a deterrent. In Northern Ireland, we want things that create jobs and investment, and help to sort out the economy. We do not want artificial transfers from the mainland.

Ian Swales (Liberal Democrat, Redcar)

The hon. Gentleman is making an interesting speech. On the wording of his amendment, does he see a possible difficulty with what “carrying on the trade” means, particularly with respect to the internet? The issues he is highlighting could be defined as carrying on a trade, and that is part of the problem that we all have in this area.

Nigel Mills (Conservative, Amber Valley)

Yes. The proposed new section I was seeking to amend—357KB—starts with a qualifying trade. To get a lower tax rate, there needs to be a qualifying trade, and the section uses the phrase,

“means a trade carried on by a company”,

so I was using the wording already in the Bill, rather than trying to insert a clever new provision.

There is probably an issue for Northern Ireland budget managers. The costs that the Northern Ireland Executive would have to take into account to lower the corporation tax rate are not simply, as mentioned in the evidence session on Tuesday, the impact of Northern Ireland businesses being charged at a lower rate. They would also take into account the costs of businesses transferring from the mainland to Northern Ireland to try to get the lower tax rate within the UK. Perhaps the Financial Secretary will correct me if I have misunderstood that.

If a large number of businesses move from the mainland to Northern Ireland to get the lower tax rate, the Executive will end up picking up the costs for the reduction in their corporation tax bill, even though that has added very little to the Northern Ireland economy, so I can fully see that there would be little desire in Northern Ireland to have such a situation. My amendment would help ensure that there would not be a big cost to Northern Ireland if such a situation started to occur.

I accept that there are alternatives. The Government could choose to introduce new clauses to tackle particular forms of avoidance. The HMRC officials who gave evidence on Tuesday talked about having provisions in the Bill to sort that out, but I think that those changes would normally be prospective, not retrospective, and they would take time to bring into force, whereas my amendment would apply right from the start of the tax being reduced. It would deter people from avoiding tax in the first place. It attempts to replicate what is done in nearly every new tax provision now, and I think it has a certain logic.

However, the purpose of tabling the amendment was to probe whether the Financial Secretary thinks the Bill is sufficiently robust to tackle all the predictable forms of avoidance. I am not seeking to formally add it to the Bill at this point. It is probably a little risky for a Back Bencher to try to add to measures such as this. I would probably open up as many loopholes as we close, but I hope the Financial Secretary will reassure us that the Government have thought through all the obvious tax planning opportunities and that such a provision is not needed at this time.

Mark Durkan (Social Democratic and Labour Party, Foyle)

On the subject of opening loopholes, the wording of the hon. Gentleman’s amendment could leave an indigenous company that has successfully grown a business in Northern Ireland open to the question of whether it continued to stay in Northern Ireland, or whether it should move elsewhere. It might stay because it wants to stick with the lower corporation tax. The hon. Gentleman’s amendment would not apply only to companies coming into Northern Ireland; it could be used adversely to question why a company was remaining there as it grew.

Nigel Mills (Conservative, Amber Valley)

I accept that that is a theoretical risk. I hope that companies would have sufficiently good reasons for being in Northern Ireland in the first place and that they could say that they have been long established there. I hope that a decent HMRC inspector would realise that a company that had been trading in Northern Ireland for a long time was not there to get the benefit of a tax that did not exist when it established itself. I can see that there is a risk that we could deter the activity that we are trying to encourage by reducing the tax. I accept that we have to be careful to get the balance right. That is why I said I was not proposing to push the amendment to a Division. I suspect that if we were to do a general anti-avoidance rule, it would need to be drafted and thought through quite carefully with the appropriate safeguards. I hope that the Minister can assure the Committee that we are not opening any doors to tax avoidance that we are trying to close on a multinational basis by having a back door within our domestic regime.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I thank the hon. Member for Amber Valley for his comments on his amendment. He is right to highlight the risk. The points that he made about not wanting to open up further avenues for potential tax avoidance were correct. The Committee and those who have followed the issues closely do not want to see anything other than genuine economic activity resulting from the proposed changes in Northern Ireland, so that its economy can rebalance, strengthen and result in more people being able to access higher-paid, decent jobs. That will be for the betterment of everybody.

They key question is: what behavioural changes will occur among companies if Northern Ireland chooses to have a rate of corporation tax as low as that of the Republic of Ireland? That issue is perhaps the most important, particularly the question of how we quantify those behavioural changes. That is why I wanted to probe the Minister on how the formula will be calculated and the methodology that will be applied to try to work out how much money the Northern Ireland Executive will have to pay back to the Treasury to account for its forgone corporation tax revenues, and to account for behavioural impact.

Second-round effects are explicitly ruled out by the Stormont House agreement. That is well understood, but behavioural impact motivated only by the potential low corporation tax rate, which is what the hon. Member for Amber Valley was seeking to stop with his amendment, will be quite important. That could potentially be quite a big bill for the Northern Ireland Executive. I would like to hear more from the Minister on that. I appreciate that discussions about the formula may be at an early stage or are not advanced enough for him to give us an idea of what it will look like, but that will be an important additional cost that is not yet well understood if there is a lot of profit shifting from the rest of the UK to Northern Ireland.

I want to probe the Minister on whether he is keeping an open mind about the potential for having targeted anti-avoidance rules, which the hon. Member for Amber Valley mentioned. TAARs have been attached to pretty much every bit of legislation that I have debated since I have been the shadow Minister responsible for this brief so it seems strange that something has not been added into this legislation straight away. That does not seem to fit the pattern so far.

TAARs are a useful catch-all provision, which have the benefit of preventing companies, particularly well-off businesses that have money to spend on high-quality legal and professional accounting advice, from having some of those early conversations. Did the Minister consider that for the Bill, and is he keeping an open mind that he or a future Government of a different political persuasion may wish to return to that in future finance Bills before we reach the 2017 deadline? We will return to some of those issues later. I appreciate what the hon. Member for Amber Valley is trying to achieve with his amendment, and I am sure that clarification and reassurance from the Minister would be welcomed by the whole Committee.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to respond to a probing amendment tabled by my hon. Friend the Member for Amber Valley—not for the first time today or, indeed, on other occasions. I hope that he will have many opportunities to table such amendments to future finance Bills and other tax measures in the years ahead.

Amendment 3 seeks to prevent companies from qualifying for the Northern Ireland rate if their “sole or main” aim for trading in Northern Ireland rather than the rest of the United Kingdom is to achieve a lower corporation tax bill. My hon. Friend’s concern is profit shifting from the rest of the United Kingdom to Northern Ireland, with companies moving just to take advantage of a lower tax rate. I would like to explain why I believe that the amendment would have unintended consequences.

First, as I am sure Members know, tax is just one issue that businesses consider when making investment decisions. A lower corporation tax rate in Northern Ireland does not necessarily mean that companies will move out of the rest of the United Kingdom. Companies will weigh up all costs and benefits associated with running their business, including tax, before deciding where to base their activities. While I have sympathy for my hon. Friend’s intention, it would be difficult to determine the main purpose of a company moving to Northern Ireland. It could lead to burdens associated with HMRC compliance work, as well as creating uncertainty for businesses.

The amendment could be triggered if companies from overseas chose to invest in Northern Ireland having considered investing in the rest of the United Kingdom. It is also possible, as the hon. Member for Foyle pointed out, that the amendment could catch existing Northern Ireland companies that choose to expand in Northern Ireland instead of in the rest of the United Kingdom. I appreciate that that would be an unintended impact, but it would certainly not be in keeping with the objectives of the regime, which are to help to rebalance the economy and encourage foreign direct investment into Northern Ireland.

My hon. Friend’s concern is profit shifting and misuse of the regime through avoidance. Let me try to reassure him that the rules have been designed to protect against that. In addition to the general anti-abuse rule, the Northern Ireland rules are limited to trading profits and exclude higher-risk, more mobile activities such as lending and investment. Existing anti-avoidance provisions, including the new diverted profits tax rules, will protect against artificial arrangements and avoidance.

The rules also require larger businesses to use international principles for profit allocation, which will provide similar levels of protections to those we currently have for international avoidance. In the evidence session on Tuesday, Mike Williams from the Treasury made the interesting point that in those circumstances, HMRC is able to see both sides of the transaction because it deals with both elements.

The Northern Ireland regime also contains special features to address tax incentives that arise due to having two corporation tax rates within the United Kingdom. For example, the rules on losses have been modified to remove the incentive to gain a tax advantage from disproportionate use of Northern Ireland trading losses against UK main rate profits.

Ian Swales (Liberal Democrat, Redcar)

The Financial Secretary has said more than once that HMRC will see both sides of the transaction. That is clearly the case, but has he taken account of the fact that some Northern Ireland activity will need to have a new corporate entity to benefit from these arrangements? At the moment, they do not need to because they can have one UK corporate entity. The entity that HMRC is looking at may not exist at the moment.

David Gauke (Conservative, South West Hertfordshire)

That may be the case. None the less, it would still be HMRC dealing with it. If there are two entities within the same group, it will be perfectly easy for HMRC to look at those in the context of one group, which occurs as a matter of course at present. As I mentioned, the diverted profits tax that will be put in place can deal with both international and UK arrangements and can be very relevant to the digital economy. The point my hon. Friend the Member for Redcar made could be significant here. We also have to bear in mind the work that is ongoing with the base erosion and profit shifting process with the OECD. Those recommendations should also help us ensure that economic activity is taxed where that activity takes place.

Ian Swales (Liberal Democrat, Redcar)

On a matter of detail, is the Minister satisfied that the wording of the new diverted profits tax legislation, which I support, will cover diverted profits inside the UK?

David Gauke (Conservative, South West Hertfordshire)

The diverted profits tax deals with both international and UK arrangements. That includes those in relation to the digital economy—the point my hon. Friend made earlier. There is no reason why that should not be relevant in this area.

I touched on the example that losses rules have been modified to remove the incentives to gain a tax advantage from disproportionately using Northern Ireland trading losses against UK main rate profits. Of course, it is difficult to pre-empt every single way in which businesses may seek to exploit the rules, but as we made clear at the oral evidence session, we would move to counter any attempts to manipulate the rules.

HMRC is continuing to proof the Bill, as it does for all legislation, and if it is deemed necessary, there is time and we can introduce further anti-avoidance rules to target any potential weaknesses before or after the regime comes into effect.

On the impact on the block grant, a good point was made that clearly the intention of the Northern Ireland Executive is to encourage genuine economic activity in Northern Ireland. It would bear a cost if there were profit shifting in an artificial movement from the rest of the UK to Northern Ireland, and experience little benefit in extra reward. Interests are aligned on that front.

My hon. Friend the Member for Amber Valley mentioned the House of Commons Library briefing paper, which had an estimate of the profit shifting from the rest of the UK to Northern Ireland. Those early costings were based on a provisional view of the regime design, under a different UK main rate and using initial methodologies that have been refined. For example, the exclusion of financial activities was not included in the earlier costings. To some extent those numbers are no longer up to date.

The hon. Member for Birmingham, Ladywood raised a point about the block grant: that the Stormont House agreement confirmed the terms for which an adjustment to the block grant would be made. It will reflect the tax revenues forgone by the UK Government due to both direct and behavioural effects, but it will not take into account second-round effects. I previously made the point that all the finer details still need to be confirmed, but I hope that that provides useful clarification.

I recognise the concerns raised about avoidance. However, I believe the amendment would have unintended consequences in creating uncertainty for businesses conducting themselves in a legitimate way. The existing anti-avoidance measures are sufficient. Therefore, not for the first time, I urge my hon. Friend to withdraw his amendment.

Nigel Mills (Conservative, Amber Valley)

It was always meant to be a probing amendment, so I beg to ask leave to withdraw it.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I beg to move amendment 4, in clause 1, page 64, line 27, after “activity,”, insert “(other than a lending activity by a Northern Ireland credit union),”

Sandra Osborne (Labour, Ayr, Carrick and Cumnock)

With this it will be convenient to discuss amendment 5, in clause 1, page 65, line 2, at end insert—

‘(3A) In this section, “Northern Ireland credit union” has the same meaning as that given in section 2(2) of the Credit Unions (Northern Ireland) Order 1985.”

Mark Durkan (Social Democratic and Labour Party, Foyle)

The two amendments concern the position of credit unions in Northern Ireland. I simply seek assurance and clarification that financial services in broad terms will be excluded from being able to benefit from a lower devolved corporation tax rate. My aim is to ensure that credit unions should not inadvertently be part of that exclusion. I have chosen this particular form of amendment, rather than trying to put credit unions into the SME category. The intention is to ensure that for corporation tax purposes credit unions are treated on a par with small and medium-sized enterprises.

Credit unions pay corporation tax. I have credit unions in my constituency with very large memberships and a strong savings base built up over many years. They pay a significant amount of corporation tax and they notice the difference between themselves and their counterparts in the south of Ireland in what they pay.

In circumstances where a new devolved tax rate could be set, obviously credit unions in Northern Ireland look forward to being able to benefit from that. As hon. Members will know, credit unions are not-for-profit organisations, and they are community based. Credit unions were specifically exempted from being categorised as financial services in the Northern Ireland Act 1998, which put the Good Friday agreement into legislation. Financial services and regulation of financial services were not then being devolved. To ensure that there was a devolved window into the affairs of credit unions, the provision was made that the Credit Unions (Northern Ireland) Order 1985 would be devolved. That was how those drafting the legislation ensured that credit unions were not treated the same as other financial services.

Of course, there have been complications since then because we have moved both in this House and in the Northern Ireland Assembly. I chaired an inquiry as Chair of an Assembly Committee into the matter. That was to bring about a situation where credit unions in Northern Ireland would be regulated by the Financial Services Authority, now the Prudential Regulation Authority and the Financial Conduct Authority. That was not due to any malpractice, malfeasance or instability of the Northern Ireland credit unions, but simply because being regulated as financial services was the only way in which the very strong credit unions could offer the range of services to members that much smaller credit unions can offer on this island. Essentially, credit unions in Northern Ireland were disadvantaged in the range of services they could offer compared with their counterparts in the south of Ireland or Great Britain.

The way to ensure that they could offer more services was to have them regulated by the FSA and now its successors, the FCA and PRA. There are problems with that, though I will not bore the Committee with some of the difficulties that arise around that regulation and interpretations. However, there is concern that credit unions could be inadvertently caught in the interpretations under the Bill.

Clearly, credit unions are not going to place themselves in Northern Ireland for any undue purpose. All the legal requirements of the common bond and others have to be met. Nothing egregious would be done by any of the credit unions. However, more credit unions in Northern Ireland could find themselves caught by corporation tax liabilities, because more of them are merging to take account of regulation under version 2 requirements, if they opt for that. In that instance, some credit unions that have previously not had an issue could find themselves in that position as a result of mergers. The amendment is about ensuring that we take care of this now.

Further credit union legislation is currently going through the Assembly. The hon. Member for East Antrim is probably aware of that from his role in the Assembly. We have an arrangement whereby the registration of credit unions in Northern Ireland essentially takes place under devolved legislation. Of course, the regulation of credit unions takes place under financial services legislation here. Credit unions are a bit different, and this is about ensuring that that difference is protected when it comes to corporation tax.

Nigel Mills (Conservative, Amber Valley)

While we are debating excluded lending activities, I want to ask the Financial Secretary another question. I hear the points made by the hon. Member for Foyle. If an ordinary trading company makes a profit and ends up with some cash in hand, it would not be uncommon in a group situation to lend that money into the group if the company had no immediate use for it. Under normal principles, we would obviously expect interest to be received on that money being lent around a group, but we would not count that as a financing activity. We treat it as a normal part of the trade for a company to keep some cash in the bank to earn interest on it or to lend it somewhere until it has a need for it.

There is a bit of a risk in the definition. The consequence seems to be that a trade is an “excluded trade” if it consists of or includes “a lending activity”. It is hard to say that a company has not carried out a lending activity if it has lent money somewhere, I suspect. Does that mean that any company with cash earning interest in the bank or that has lent money to somewhere else in its group for a short-term purpose has somehow blown its whole trade out of these rules? I suspect that that is not what is intended. If the cash being provided is purely incidental to the trading activity, if there is no attempt to set the company up as some kind of financing business and if it is a short-term arrangement, that should be okay.

Ian Swales (Liberal Democrat, Redcar)

I raised the point in my speech in the House that unless we tighten up the Bill, it will be perfectly possible for the arrangements that the hon. Gentleman describes to be encouraged and possibly become larger. Interest rates could be extremely high and yet be out of sight because they are in the name of a legitimate manufacturing entity, for example.

Nigel Mills (Conservative, Amber Valley)

I accept that this is quite hard. These principles have been looked at when dealing with our controlled foreign companies rules, in terms of whether a proper trading company overseas happens to be using whatever cash it has incidentally or whether it has somehow become part trader, part financer.

I accept that it is quite hard to draw the line. However, we need some assurance that HMRC will not seek to disregard a whole trade because of a small amount of money that is interest free for a short period. There may be an argument that, when allocating a large company’s presence between the mainland and Northern Ireland, all the cash and so on will normally be allocated to the head office bit in the mainland rather than the trading activity in Northern Ireland. That might be a way out of this, but I am not sure how that kind of allocation would be achieved in a situation where there is no presence on the mainland and only a presence in Northern Ireland.

It would be helpful if the Financial Secretary gave us some assurance that a trading business trying to do something sensible and not trying to get a tax advantage will either only get charged a 20% mainland rate on any interest income or will be okay for small, incidental activity in that situation.

Ian Swales (Liberal Democrat, Redcar)

In seeking clarity on this, the hon. Gentleman gives an example of cash generated within the business. Does he recognise the risk in terms of how a subsidiary in Northern Ireland would be financed and how much money was put into that subsidiary? Even though it might be a legitimate manufacturing subsidiary, for example, it could be over-financed to encourage profit shifting through the activity that he described.

Nigel Mills (Conservative, Amber Valley)

Yes. As I say, finding the balance here is not easy. We could just say that any interest income is taxed at the mainland rate and is not regarded as part of the trading activity. That, I suspect, would be an acceptable fix in that situation to take away that risk. I was just trying to work out from the drafting what the situation would be for an innocent trading business that has cycles of trade: for part of the year, it builds up cash, which it needs to spend later in the year to build up its stock again. We would not want it to be purely commercially holding that cash for a few months, earning some interest, and then cease to be a Northern Ireland trade in that situation. Whatever we do, we do not want to create financing companies by the back door.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I have just a short additional question following the speech from hon. Member for Foyle. I bow to his much greater knowledge of the detail and historical development of regulation of credit unions in Northern Ireland. It would be helpful if the Minister explained the treatment of credit unions in relation to financial services and with respect to other regulation in the rest of the UK, particularly in England. Is it normal practice to carve out exclusions for credit unions from other regulation that impacts on finance and banking, given that this is an attempt to do so from the general exclusion already in the legislation?

David Gauke (Conservative, South West Hertfordshire)

As we have heard, amendments 4 and 5, tabled by the hon. Member for Foyle, relate to credit unions, so I will respond to them together.

I recognise and share the hon. Gentleman’s support for credit unions, which offer an important service to their members. That is why the Government have taken a number of actions lately to support them. As legislation for credit unions is already devolved to the Northern Ireland Assembly, many of those actions have a rest-of-the-UK focus. However, one action is particularly relevant for this forum: the decision in 2012 to bring credit unions in Northern Ireland under the remit of the Prudential Regulation Authority and the Financial Conduct Authority. That means that credit unions in Northern Ireland are now regulated alongside credit unions in the rest of the UK and depositors are protected under the Financial Services Compensation Scheme.

While I fully share the hon. Gentleman’s support for credit unions, I do not support his amendments. The Bill excludes certain activities, which are predominantly carried out by the finance sector, from the Northern Ireland corporation tax rate because profits of such activities are highly mobile and could present opportunities for profit shifting from the rest of the UK without generating genuine employment activity.

The hon. Gentleman may have taken that to mean that credit unions are also excluded from the new rate. Importantly, credit unions do not pay tax on their income from loans that they make to their members because they have a specific exemption. To charge them at the Northern Ireland rate would therefore put them in a less favourable tax position than they currently enjoy, which is not his intention.

Credit unions pay corporation tax on investment income and on capital gains, but those are not covered by the Northern Ireland regime. As credit unions do not have a trade of lending money for corporation tax purposes, they are therefore neither explicitly included nor excluded from the Northern Ireland rate and as such are in no worse a position because of it.

Let me turn to the points raised by my hon. Friends the Members for Amber Valley and for Redcar. On the issue of corporate financing operations and whether that would qualify for the lower rate, we have a restriction on intra-company interest payments—section 357 of the Corporation Tax Act 2009—so that neither receipts nor inductions are taken into account in computing Northern Ireland profits. That mirrors the approach taken for intra-company royalties. We do not have a connected party or intra-group interest restriction. The general restriction to trading profits should cut out most interest transactions as an excluded trade can consist of, or include, a lending activity. That should pick up intra-group lending that is claiming to be part of a trade, rather than investment activity.

Corporate financing operations and related profit-shifting activity will not qualify for the Northern Irish rate. The regime applies only to trading profits, and future group finance payments will normally generate investment profits rather than trading profits. To the extent that interest payments fall within trading income, the profits of such trades will not qualify for the Northern Irish rate.

Another point made was about what happens if a company is engaged in lending as an incidental part of what it does. Lending and investing and other excluded activities will not constitute an excluded trade or activity if the excluded activity is purely incidental to the main trade. This will be made clear in the guidance.

As I said earlier, trading profits for credit unions do not involve corporation tax. Investment profits and capital gains do, but those areas, in terms of investment profits, are excluded from the Bill altogether, so credit unions will be no worse off. I hope that clarifies the matter for the hon. Member for Foyle. The amendment is not necessary and may even work against what it is intended to do, so I urge him to withdraw it.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I have heard what the Financial Secretary said about hazards, and I am certainly cognisant of those. However, I have some difficulty in understanding exactly what he means when he says words to the effect that the Northern Ireland credit unions would neither be in the devolved rate nor out of it. It is not specified in the Bill, and my amendment was trying to get some clarity. Notwithstanding the points made about credit unions being regulated alongside other financial services, including their counterparts here in Great Britain, it needs to be understood that there is a different legal basis for the credit unions in Northern Ireland, because they are a part of devolved legislation. As well as regulation under financial services legislation from Westminster, there is also devolved legislation that pertains to credit unions in Northern Ireland.

Credit unions in Northern Ireland do not have access to things such as the growth fund and the modernisation fund, which have been used to support the development of credit unions here in Great Britain over the past couple of years. The credit unions have to meet the costs of the new compliance regimes for the PRA and the FCA, including costs in relation to IT and training. All these are costs for which there is no financial support available to credit unions. They have to meet the costs out of their own resources. That is why investment income is important to them. There are other difficulties, to do with the restrictions on the investment income and the fact that they are no longer allowed to invest for five years at attractive rates, because of the new regulatory status that hampers them. There are larger credit unions, including sizeable credit unions in my constituency, that count corporation tax as having a significant marginal impact on their affairs.

One of our local papers, the Derry Journal, runs a weekly feature called “Friday’s Child” in which people are asked questions. One of the questions relates to favourite books, and the most popular answer is the credit union book, because that is how well grounded credit unions are in a place like Derry. The feature was founded originally by my predecessor, John Hume, many years ago.

Because credit unions have moved to the new regulatory regime as a way of being able to offer more services to members—though they are struggling with some of the interpretations—they are concerned that there would be a lack of sympathy for them being able to benefit from a devolved rate of corporation tax. It seems sensible to me that if the Assembly is to legislate for credit unions—creating rules and requirements on them over and above those arising from financial regulation here—and be responsible for legally registering them, a devolved corporation tax rate set by the Assembly should be available to them, rather than an otherwise higher rate.

It seems strange that credit unions in Northern Ireland, given their size and scale, would not be treated like for like with the small and medium-sized enterprises that are neighbouring them. That was the main point of the amendments. I take the Financial Secretary’s warning that the amendments might not be complete and might raise other questions. I was trying to ensure that the previously used formula of differentiating Northern Ireland credit unions from other financial services that was in the 1998 Act was carried through in this legislation. The Assembly is allowed to legislate for credit unions through the reference to the 1985 order. If that is where the Assembly gets power over credit unions, it should extend to this legislation; then it would be compatible. There is nothing inconsistent or artificial about that.

I hope the Financial Secretary will continue to look at the matter. I know that credit unions in Northern Ireland will be on the case as well, because they do not see why they should be excluded from a devolved rate. Although it does not set the issue aside, I beg to ask leave to withdraw the amendment.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I beg to move amendment 6, in clause 1, page 66, line 18, at end add—

“(c) must be made publicly available; and

(d) must be provided to the Northern Ireland Assembly.”

Sandra Osborne (Labour, Ayr, Carrick and Cumnock)

With this it will be convenient to discuss amendment 7, in clause 1, page 66, line 29, at end add—

“(c) must be made publicly available; and

(d) must be provided to the Northern Ireland Assembly.”

Mark Durkan (Social Democratic and Labour Party, Foyle)

It is a pleasure to serve under your chairmanship, Mrs Osborne. Amendments 6 and 7 point to the need to ensure that changes of interpretation and definition made by either the Treasury or Her Majesty’s Revenue and Customs under the Bill are made publicly available, as well as any new regulations or standards. No one will then be surprised by any such changes or think that anything capricious has happened. As I understand it from previous Bills, “made publicly available” usually means that that information will be made available on a website and through other means, as is seen fit. That is the best way to ensure that people who need to know these things do indeed know them. The amendments also make specific provision in relation to the Northern Ireland Assembly’s being notified.

The amendments relate to excluded activity and back-office activities in particular. However, starred amendments 8, 9 and 10 make the same point for other parts of the Bill that provide for regulations to be made by HMRC and the Treasury. Those amendments would ensure that where regulations are made—possibly in the light of adjustments to reflect some of the behavioural issues that we discussed this morning—people are properly notified of them.

I would like people to be discretely notified about the Northern Ireland guidance, which I have touched upon in new clause 1. There should be clear, bespoke guidance on the provisions applying to Northern Ireland, so that people do not have to devil away to find them in all sorts of places. I believe that that is the right approach, for a number of reasons. It will ensure that the Assembly, in discharging its new devolved role in relation to corporation tax, can never claim that it was blind to interpretative changes affecting which businesses come under the corporation tax set by the devolved Assembly, or that the conditions were changed unknown to the Assembly.

If the Assembly is setting the rate, it is right that all other rules applying to the rate should by fully known to the Assembly. It must be properly notified. If we are going to have dual powers or functions, one needs to operate in the full light of the other so that the Assembly cannot complain that it was not properly notified or say, “We only found out about this because some accountants raised the issue and came to one of the Assembly’s committees and because some firms now say they’re running foul of this.”

Due notice must be given, and there needs to be propriety in the different roles that will continue to be discharged by the Treasury on the one hand, which will very much control the rules, and the Assembly on the other hand, which will determine the rate for firms that qualify for the devolved rate. The amendments would simply ensure that that happened.

I will not stray into the wider issue of guidance because that is the subject of new clause 1. I know you will say that I am straying from the strict spirit of the amendment, Mrs Osborne, although we were given wide freedom earlier when discussing credit unions to discuss much else. Touching on credit unions, I note that the amendments relate to the power to amend the definition of “excluded trade” or “excluded activity”. That can, of course, encompass credit unions and the issues we talked about this morning. If the Financial Secretary does not allow changes at further stages of the Bill, I hope he will at least allow the power on page 66 of the Bill, addressed in amendment 6, to be used, among other things, to deal with credit unions and to ensure there are no anomalies.

My reason for tabling the amendments was not an assumption on my part that any or all changes made by the Treasury or HMRC would always be adverse. That is why I make the point about credit unions. It could be that the timing, terms and sequence of changes give rise to concerns, suspicions or grumbles. We do not want anything like that; we want this to work smoothly. We do not want people to look for one thing for the Assembly and find it undermined by changes made at the Treasury. We do not want the Assembly then to say that it did not know and was not told anything about it. That would affect the credibility of the arrangements.

It is also important to ensure that these arrangements are fully public and transparent, because we want to avoid any suggestion that devolving corporation tax is about creating new twilight zones. We want to ensure that the reputation of the region is not affected by claims of anything untoward, unclear or obscure in how the provisions operate. Ministers told us in the evidence session that the Bill is in this form to offer the clearest and cleanest way to provide for the devolution of an important power, while at the same time mitigating abuse, complication and year on year variations, with people not knowing where they stand, falling in and out of different rules and regimes. That is, of course, important.

Ian Swales (Liberal Democrat, Redcar)

I am following the hon. Gentleman with interest. I am surprised that he feels the amendments are necessary. Does he have any examples of where the UK Government have done things that have not been communicated to the north-east assembly—I am sorry, the Northern Ireland Assembly?

Mark Durkan (Social Democratic and Labour Party, Foyle)

I do not wish to come here with a litany of complaints. I am trying to look at this with a legislator’s eye. If there are going to be these changes, let us ensure there is due notice. It is quite common in other legislation. I have sat on other Bill Committees on financial services, banking reform, small charitable donations and so on, and in all of those cases, where provision for regulation powers was given to the Minister, the Treasury or another Department such as Revenue and Customs, the issue of guidance and publicly available information has always been identified. That is so far missing in this Bill.

I know the Financial Secretary will tell us that because the Bill is mainly amending other legislation, all the normal requirements and obligations around notification are there. Given that we are creating discrete arrangements in relation to Northern Ireland, we should include that point in the changes to any rules, whether they come from the Treasury, as provided for in some parts of the Bill, or from Revenue and Customs, which is provided for in others. We must ensure good practice and good legislation. Unlike the other bits of legislation, there is a specific interest in terms of the Northern Ireland Assembly, and its particular locus needs to be respected.

We do not want the Assembly to find its own reputation impugned because it was setting rates without knowing what else was going on with changes in the rules. Nor do we want the Assembly in turn complaining about, or being asked to complain about, the way in which the Treasury or Revenue and Customs have gone about their lawful business of responding to issues and practices that arise, which they may feel they need to deal with under the terms of the Bill.

There have been issues before where matters of interpretation from the Treasury and Revenue and Customs have caught businesses out—not always in relation to the Treasury’s own determinations, but sometimes because of how the Treasury interprets rulings from Europe and how that has affected businesses as well. In some of those cases, there has even been the risk at times of some of those changes having retrospective effect. I know that that was the case for a firm in my constituency that produces wonderful cream liqueurs. If Members buy branded cream liqueurs in any of the main chains, the chances are they are made in my constituency.

A firm looked likely to be caught badly because of changes in European understandings, which, surprisingly to me, were being readily taken on board by the Treasury. The changes related to the duty band for the products in terms of their median alcohol rate. They were going to be put into a higher duty band, and the implication was that it was going to be retrospective as well. We were able to resolve that, but I want to make sure that we do not get anything like that arising under the Bill. I am sure that no one intends it, but we need to take care in the legislation to ensure that changes will be duly notified to all who need to know them, and we need to ensure that the locus of the Assembly is recognised.

David Gauke (Conservative, South West Hertfordshire)

I welcome you back to the Chair this afternoon, Mrs Osborne.

Amendments 6 and 7 seek to ensure that any regulations made by the Treasury exercising its powers to amend the definitions of excluded trades or activities, or back-office functions, are made publicly available and provided to the Northern Ireland Assembly. The hon. Member for Foyle mentioned that he tabled additional amendments that were not included in today’s debate. Those are similar to amendments 6 and 7 in that they also seek to ensure that information relating to further powers used by the Government is made public.

Given that the amendments seek to address many of the same issues as the ones included in today’s debate, I hope that my response will suffice for all of them. Although I appreciate that the intent behind the amendments is to ensure that any changes to definitions are communicated publicly and in particular to the Assembly, I do not believe them to be necessary.

The powers within clause 1 give the Treasury scope to provide more clarity over excluded trades, activities and back-office functions. HMRC will publish detailed guidance to help businesses understand the definitions of these. In addition, companies with customer relationship managers will be able to discuss any issues or concerns directly with HMRC. If we feel that more clarity is needed, or if we need to deal with changing circumstances, then this power allows us to clarify or change the definitions in legislation. If it is deemed necessary to use the powers to update or change definitions within the regime, then the regulations will be made by statutory instrument.

As hon. Members will be aware, the Statutory Instruments Act 1946 sets out the requirements for publication of statutory instruments. Therefore, if these powers were to be used, the relevant statutory instrument would be published both online and in hard copy by the Stationery Office, as per all legislation. It is also likely that the legislation would be published in draft first for consultation, so stakeholders would get a chance to comment on any changes being made. On that basis, a requirement in law for regulations to be made publicly available becomes rather redundant, as they already will be.

Turning to the second aspect of the amendments, the communication with the Northern Ireland Assembly, here I have sympathy with the intent behind the amendments, but again I do not believe that they are ultimately necessary. I agree that the Assembly should and indeed must be kept fully abreast of any changes to definitions within the regime, not least given the Assembly’s legislative duty conferred by this Bill for setting the Northern Ireland rate. Members of the Assembly and the Executive will need the most up-to-date information on the regime as they consider whatever rate will be appropriate for Northern Ireland. However, the Assembly will already have that information.

First, as I have set out, any legislative proposals are likely to be published in draft and will be published again once finalised. The Assembly—and indeed anyone else—will have access to them. Secondly, and possibly more helpfully, there will exist a number of channels for these issues to be discussed. The exact nature of governance arrangements between the Government and the Executive is yet to be agreed, but I can reassure the Committee, and the hon. Member for Foyle in particular, that they will be of a form that ensures full Executive visibility when using such a power; and that should also be communicated to the Assembly.

To use the example of Scotland, arrangements are set up via a memorandum of understanding to manage governance of the Scotland Act, and in particular the Scottish rate of income tax, between the Government and the Scottish Government. That is at both ministerial and official level. For example, the uses of powers—similar to those subject to the amendment—under the Scotland Act have been shared in draft with the Scottish Government and have been the subject of public consultation prior to laying before Parliament.

In addition, the memorandum of understanding sets out further reporting arrangements, including for the laying of accounts with the Scottish Parliament by HMRC, and reporting and evidence from the HMRC additional accounting officer, who at present is Edward Troup, HMRC second permanent secretary and tax commissioner, to the Scottish Parliament.

Although there are, of course, differences in terms of the constitutional arrangements and the taxes involved, which will need to be considered carefully, I see no reason why the Scottish model should not provide at least the starting point for governance arrangements on Northern Ireland corporation tax, including the communications with the Assembly. For the Committee’s information, I expect that discussions on the governance arrangements will commence soon, to be agreed in plenty of time before 2017.

Even though ultimately my argument would be that these amendments are unnecessary, the thrust of them raises an important issue of ensuring that governance arrangements for Northern Ireland corporation tax are robust and sensible, for both sides. If the hon. Member for Foyle agrees to withdraw the amendment, which I urge him to do, I can assure him that my officials will take full account of the need to keep the Assembly informed of any changes as they develop the governance arrangements in discussions with the Executive.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I thank the Minister. He has addressed the issues and I appreciate the commitments that he has given to ensuring that all the future machinery of intra-governmental communication between the Treasury and the devolved Administration will ensure that there is, in the terms that he used, “full Executive visibility.” Of course, my amendment does not just address the issue of Executive visibility but is intended to ensure that the Assembly can never feel that it was left behind the pillar when important changes that affected the scope, or the relevance, of its powers were made. It is clear from what the Minister has said that he hopes that that Executive visibility does extend to the Assembly being duly sighted of things. I am certainly content with that. I prefer legislation to include a bit more in terms of laying down good practice and building good “Highway Code” standards. There will be difficult traffic and arguments about how clear the lines were at junctions when it comes to some decisions, so I prefer things to be clearer, but that would not lead me to press the amendments to a vote. I look forward to the Minister being able to work with the devolved Ministers and others to ensure that, as more of the scheme is developed, people are content with not just how it starts, but how it will continue to operate—I hope, successfully—over many years. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

Clause 1 makes the main changes needed to allow Northern Ireland to set its own rate of corporation tax for specified activities and adapts the rules in a number of areas of the corporation tax regime to allow for the existence of a different rate of corporation tax in Northern Ireland from that of the rest of the UK. Since 2010, the Government have cut the UK main rate of corporation tax from 28% to 21%, and it will fall further later this year to 20%, giving the UK the joint lowest corporation tax rate in the G20. The small profits rate has been cut to 20%. The cuts are an essential part of the Government’s successful long-term economic plan to make the UK more competitive, supporting business investment and job creation.

However, Northern Ireland has a unique economic position in the UK. I will start by reminding the Committee, briefly, about the arguments in favour of Northern Ireland having its own rate of corporation tax. They were first set out in the consultation “Rebalancing the Northern Ireland economy” in 2011, which highlighted the unique economic challenges that Northern Ireland faces: namely, its demographic and location—uniquely in the UK, it has a land border with another country; its reliance on the public sector; and its legacy of 30 years of the troubles.

Those challenges are no less acute now, as the statistics bear out. Not only is public sector employment around 10% higher than the UK average, but economic prosperity —gross value added per capita—in Northern Ireland is persistently some 20% below the UK average, as it has been for a number of decades. However, Northern Ireland has strong growth potential, which both sides of the House want to unlock. The Northern Ireland business community is convinced that the measure will boost the indigenous private sector, both large and small. A devolved and lower rate of corporation tax in Northern Ireland would be a key tool to attract foreign direct investment. Alongside the efforts being made to put the Northern Irish public finances on a sustainable footing, the measure will provide a means to rebalance the economy for the long term.

On Second Reading, we discussed the objective of working towards a more balanced and prosperous economy in Northern Ireland, which I know is an objective that we all share. That was confirmed by our helpful discussions at Tuesday’s evidence session. The Bill is one of the key ways that we can start to achieve that objective.

I will set out the changes made in clause 1 in a little bit of detail. Clause 1 inserts part 8B into the Corporation Tax Act 2010, which makes a number of changes. First, it allows the Northern Ireland Assembly to set the rate of Northern Ireland corporation tax by way of a resolution. The regime is designed to give the Assembly similar rate-setting flexibility to that of the UK Parliament. Being able to set the Northern Ireland rate by resolution means that it will be able to act speedily if it wishes to change its rate. In operation, the rate or rates will be proposed by the Executive, with the Minister of Finance and Personnel making the recommendation to the Assembly. The clause also allows the Assembly to set any rate that it sees fit.

I know that hon. Members have a strong interest in issues relating to the interaction between the rate, the impact on the block grant and the EU state aid rules in this area, particularly the Azores judgment and the so-called Azores criteria. As we covered those points in some detail in our evidence session, I shall not labour them now. However, with your permission, Mrs Osborne, I shall briefly reiterate a few core points that hon. Members might find useful.

The Azores criteria require that an area receiving devolved fiscal powers is shown to be institutionally, politically and economically autonomous from central Government. In effect, that translates to autonomy to set the tax and collect it without interference or influence, with the region paying the costs of devolution rather than continuing to receive the same or similar levels of funding as before, which would implicitly impose costs on other parts of the country.

That last point is where the block grant comes in. As set out in the Stormont House agreement, the block grant will be reduced to reflect tax revenues forgone by the UK Government as a result of devolution, plus the additional tax revenue forgone due to the behavioural effects resulting from a lower corporation tax rate in Northern Ireland. The Executive will then retain all Northern Ireland corporation tax revenues.

I stress again that the arrangements for calculating the block grant need to be agreed between the Treasury and the Executive, so I cannot provide more details here. Nor does the Azores judgment prescribe how the adjustment should be made, recognising the very different fiscal models in EU member states. However, our current estimate, assuming rates of 12.5% in Northern Ireland and 20% in the UK, is an adjustment of £325 million in 2019-20, assuming that that is the first steady-state year when compared to existing arrangements. As discussed on Tuesday, there will also be a process of reconciliation to compare forecasts with actual results once Northern Ireland corporation tax receipts are known.

My final point on that is to repeat that there is upside as well as downside risk. If a lower rate of corporation tax in Northern Ireland is, as we hope and expect, successful in growing the economy and thus corporation tax receipts, the Northern Ireland budget will see the benefits.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Will the Minister clarify whether the block grant, when it is set in future years, might include an assumed amount that will come from corporation tax, or whether it will be minus all corporation tax, meaning that just as with the regional rate, the Assembly will have to raise that amount in addition to the block grant?

David Gauke (Conservative, South West Hertfordshire)

The final details will need to be worked out in terms of adjustments and the block grant, but my understanding of the position is that first, as I mentioned earlier, there is more than one element to the adjustment that needs to be made. It is not simply a case of a reduction in the block grant reflecting the reduction in the rate made by the Northern Ireland Executive and Assembly; we must also take into account the behavioural effects. That is the first point.

Of the two circumstances described, the latter circumstance will be the case. In other words, the reduction of the block grant will reflect the entirety of the corporation tax base, and then the revenues raised can, to a greater or lesser extent, replace the amounts that would otherwise have been raised from corporation tax. Perhaps I have not made myself entirely clear to the hon. Gentleman: there will be a full reduction in the block grant, so the whole 20% will be reduced from the block grant and additional sums will be raised by the Northern Ireland Executive through corporation tax at the rate that they determine.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I thank the Minister for that. I am not sure that that is what was understood by all the parties at Stormont House, because when I asked this question, I was told that all that would come off the block grant was the differential created by the lower rate. What does he envisage happening year on year if corporation tax yields become very high? Will that be a windfall benefit to the Assembly and the Executive? If yields are lower, will the block grant be adjusted in future years to take account of that? Or is it entirely a case of, “You have it devolved and you take your chance.”?

David Gauke (Conservative, South West Hertfordshire)

I return to the point I made a moment ago. If the policy is successful in growing corporation tax receipts, the Northern Ireland budget will see the benefits, but the finer details of the block grant adjustments are still to be agreed, obviously within the parameters set out in the Stormont House agreement.

Let me return to the clause. The clause also determines which trades and which profits and losses qualify for the Northern Ireland rate. The new rules aim to target genuine economic activity in Northern Ireland, while limiting the risk of profit shifting. Those two issues came up on Second Reading and in the Committee’s evidence session, and I know many Members of the House, understandably, feel strongly about them. They formed a core part of our guiding principles for the design of the new regime. The new rules will apply to trading profits only, which will more effectively target activity that encourages genuine economic growth and employment; profits from, for example, property income will not be included. That principle was agreed in the joint ministerial talks on the design of the regime between the Government and the Northern Ireland Executive following the 2011 consultation.

Although the rate will apply to most Northern Irish trading activities, certain trades and activities are excluded. First, certain activities of the financial services industry are excluded, to reduce the risk of profit shifting into the new regime. The excluded trades and activities are highly mobile and therefore pose a greater risk of profit shifting from the rest of the UK. Including them in the regime might result in a limited increase in employment in Northern Ireland and could have a significant impact on the cut to the block grant. In line with encouraging employment, however, back-office functions relating to those activities will be allowed within the new rules. Back-office functions have been raised a number of times in our debates, so let me spend a minute or so clarifying the legislation on them.

On Second Reading, it was suggested that back-office functions would be excluded from the Northern Ireland corporation tax rate, and interested parties have made similar comments. I am pleased to confirm that that is not the case and that back-office functions for excluded activities will be allowed within the new rules. Such activities do not pose the same risk of profit shifting as the activities specified in clause 1, and provide a fertile area of employment in Northern Ireland—something we are keen to encourage, as are hon. Members.

Several hon. Members asked about the definition of back-office functions, and the question was also raised in stakeholder meetings my officials held in London and Belfast. The term will take its normal commercial meaning, and HMRC will provide detailed guidance for those less familiar with the term. Chapter 17 of new part 8B of the Corporation Tax Act 2010, inserted by the clause, gives the Treasury a power to specify by regulation what constitutes a back-office function. That will allow the Treasury to provide clarity to companies if necessary, but I hope HMRC’s guidance will answer any questions that may arise. In operation, the clause will allow excluded companies a one-off election to bring back-office functions into the Northern Ireland regime. That removes the need for the fragmentation of the company—something the Executive expressed concerns about.

The clause also excludes the profits of oil and gas extraction, as those are ring-fenced for corporation tax purposes and have their own discrete rules and corporation tax rate. I noted the lively discussion on Second Reading, led by the hon. Member for East Antrim, about the potential for development of oil and gas extraction in Northern Ireland, and I await further developments with interest.

The clause sets out the rules for small and medium-sized enterprises, partnerships and large companies. For large companies, the Northern Ireland rate will apply to profits attributable to activity carried out in Northern Ireland through a permanent fixed place of business or by an agent acting on the company’s authority. That presence in Northern Ireland is termed a Northern Ireland regional establishment, and where appropriate follows OECD principles. Those are widely recognised and should make it easier for companies to comply with the new rules. For SMEs, the rate will apply to all their UK trading profits if they have at least 75% of their UK employment time and costs in Northern Ireland. We discussed that in great detail in the debate on the amendment tabled by my hon. Friend the Member for Amber Valley, so I will not go into great detail now. However, as was mentioned, the test reduces the burden for SMEs and enables them to follow a simplified set of rules.

The clause amends the rules for various tax reliefs to cater for the introduction of the Northern Ireland rate to ensure that companies feel a similar benefit from the reliefs, regardless of which corporation tax rate applies to them. For example, reliefs associated with research and development, creatives, patents and remediation of contaminated or derelict land are modified so that the benefit is broadly the same regardless of the corporation tax rate applying to the companies. In addition, the rules set out that a Northern Ireland loss is to be first relieved against Northern Ireland profits. If the relief is given against mainstream profits it is to be revalued based on a formula so that Northern Ireland losses, in tax terms, are worth the same wherever they are used.

Finally, the clause sets out how intangible fixed assets will be treated where a company has Northern Ireland profits or losses. The aim is to encourage the development of new intangibles—for example, intellectual property—in Northern Ireland, while not opening up the regime to profit shifting.

Taken together, the changes will provide Northern Ireland with the flexibility it needs to set its own rate of corporation tax, while ensuring that profit shifting and manipulation of the new rules is strongly discouraged. The clause allows Northern Ireland to set its own rate of corporation tax, providing a much needed way to help it rebalance the economy and encourage growth in the private sector.

Ian Swales (Liberal Democrat, Redcar)

The rules about intangible fixed assets are quite complicated and it would be helpful if the Minister confirmed that it will not be possible, for example, simply to move a business’s intellectual property to a Northern Ireland regime, as happens with other companies, to Bermuda for example. How will the regulations prevent that?

David Gauke (Conservative, South West Hertfordshire)

First, the regime will be available only for intellectual property created after commencement, so it will not be possible to move existing intellectual property to Northern Ireland; it is forward-looking only. It will then be a case of examining these matters and ensuring that any relevant intellectual property is created in Northern Ireland. The forward-looking nature of the provision makes it much easier to address that concern.

I have taken a little time to talk about clause 1, which is at the heart of the Bill.

Mark Durkan (Social Democratic and Labour Party, Foyle)

It is the whole of the Bill.

David Gauke (Conservative, South West Hertfordshire)

Well, it is the Bill. I hope that the Committee will forgive me for taking a little time to run through it. I dare say that there will be questions about some of the detail, and I will be happy to take the Committee through the clause in much greater detail, if that is desired, although the published explanatory notes cover it.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I was rather surprised that the Minister did not go on a bit longer. I hope he will forgive me some detailed questions about clause 1 and in particular the 17 chapters of new part 8B of the Corporation Tax Act 2010 that it introduces. The Committee will be pleased to know that I do not intend to go individually through each of the chapters.

As the Financial Secretary explained, clause 1 and enables the Northern Ireland Assembly to set the main rate of corporation tax in respect of certain trading profits, to be called the Northern Ireland rate. The rate in general will apply to all of the trading profits of a company if that company is a micro, small or medium-sized enterprise, and the company’s employees’ time and costs fall largely in Northern Ireland. The rate will also apply to trading profits attributable to certain operations of large companies using the usual internationally recognised principles of attribution, and to an appropriate share of a corporate partner’s share of the profits of a partnership.

We are committed, as I believe are hon. Members across the House, to supporting measures that would increase inward investment in Northern Ireland and support the much-needed rebalancing of Northern Ireland’s economy. For decades, Northern Ireland has lagged behind the rest of the UK in terms of productivity and prosperity. Various measures have been tried to boost the Northern Ireland economy, including increased levels of investment and job-creation programmes but few have had long-term success. In contrast, for many years the Republic of Ireland has had a low corporation tax rate of 12.5%, specifically designed to attract direct foreign investment, stimulate internal investment and therefore stimulate the whole economy. As we have discussed, it has long been argued that a similar or lower rate would have similar benefits for the Northern Ireland economy. The need for such a change is more pressing, given the land border between the two countries.

The starting point is to acknowledge that the case for devolution of corporation tax to Northern Ireland is unique. Compared with the rest of the UK, Northern Ireland has underperformed economically. The Financial Secretary mentioned the impact of 30 years of the troubles, which deterred inward investment and prompted many highly skilled workers to leave Northern Ireland and seek employment elsewhere. As I said, the sharing of the land border with the Republic of Ireland is what makes the case for Northern Ireland and for this change different from arguments that may be made by other parties elsewhere.

David Gauke (Conservative, South West Hertfordshire)

I agree with the hon. Lady’s points about the specific circumstances in Northern Ireland and the general case for devolution. Will she give us her views on the case that lower corporation tax rates can result in higher levels of investment and productivity? As a general matter, does she accept that argument?

Shabana Mahmood (Labour, Birmingham, Ladywood)

I can see where the Financial Secretary is trying to take the debate, so let me tackle the underlying political point head on. Of course it is the case that the headline rate of corporation tax has an impact on the matters he raises, but he will know—I am sure that the businesses that tell me this tell him, too—that the headline rate of corporation tax is not the only factor that companies consider when deciding in which country to locate; it is one of a range of factors. I will make that point in relation to the changes envisaged for Northern Ireland. That is an important aspect of the policy-making framework, it does have an impact on the decisions companies make about the relocation of their businesses, but it is not the only factor and it would be a mistake to think that that alone it is a magic bullet, either for the UK as a whole or Northern Ireland in particular.

If the Financial Secretary is referring to our manifesto commitment for an increase in the headline rate of corporation tax from 20% to 21%, he will know, because I have told him on many occasions, that we are making that change in order to support small and medium-sized enterprises in relation to business rates. All the money raised from the change will be spent on cutting and freezing business rates. Business rates policy is also an important aspect of the cost of doing business. I am sure that he would agree, though we may differ on the things that should happen to alleviate the pressure of business rates.

I return to the specific challenges faced by Northern Ireland. As I said, there are unique reasons why this change makes sense for Northern Ireland and not for other parts of the United Kingdom—I am thinking in particular of the arguments made by the SNP in relation to Scotland, which we heard a little about on Second Reading. However, it would be a mistake to think that changes to corporation tax rates alone will succeed in turning the Northern Ireland economy around. It can certainly provide a huge boost to the efforts needed to achieve that, but I fear that it may not succeed on its own.

There are a number of other drivers of economic growth: in particular, labour costs, skills availability and infrastructure are incredibly important. When looking at why the Republic has been so successful, many commentators would say that the broader policy framework is just as important as the very low rate of corporation tax. Many Members have already alluded to the importance of other policy drivers in achieving the economic growth in Northern Ireland that we all want to see. However, we did not hear much from either the Secretary of State or the Financial Secretary about the Government’s view on what further policy changes might be needed. I hope that I can persuade the Financial Secretary to say what he thinks the rest of Northern Ireland’s policy environment will need to look like for the full benefits of this change to be felt by its people. In addition to discussions about the headline rate and what must be done to achieve its devolution, are there any discussions going on now between the Treasury and the Northern Ireland Executive about the rest of the policy framework?

The Financial Secretary may well say that some of those matters are already wholly or partly devolved to the Northern Ireland Assembly, but when considering a move that might have a negative impact on other parts of the UK, I would think that the UK Government would have at least given some thought to what else should be done within Northern Ireland to ensure that the measure is successful for both the people there and the UK as a whole. I would welcome his comments on that. Has the Treasury made an official assessment of other policy changes needed to make this measure the success we all want it to be?

The Financial Secretary will be aware that the Republic of Ireland’s economy has had some well-publicised problems in the past few years, despite its low corporation tax rate. This measure is partly about enabling Northern Ireland to compete better with the Republic when it comes to investment. How confident is he that the measure will provide the anticipated stimulus to Northern Ireland’s economy, particularly given what has been happening to the economy in the Republic of Ireland?

The Financial Secretary is right that we have already had a fair bit of discussion about issues in relation to the Azores judgment, the block grant and the formula, but he will not be surprised to hear that I want to press him further on those. As he confirmed in his opening remarks this afternoon, the block grant reduction is currently estimated to be in the region of £325 million. That is a significant element of Northern Ireland’s budget and will require some significant changes. I suspect that the Members from Northern Ireland have a better idea than me of what that will mean for people and communities on the ground, but I imagine that the impact will be significant. The issue of how the formula is calculated and how it will work will therefore be incredibly important.

I take on board the Financial Secretary’s point that these matters still have to be nailed down. They are subject to further discussion and, I hope, large areas of agreement between the Northern Ireland Executive and the Government, although it would only be fair to point out that they might be an issue of some contention and a stumbling block to progress.

I listened to what the Minister said about the Azores judgment and how it does not set out any formula that should be applied. In the oral evidence session, he also said that there is no element of standardisation, because each formula would have to be worked out on the basis of individual fiscal constraints within different countries. Post-Azores, however, are there any other constraints in EU law or arising from other judgments that might help give us an idea of the parameters in which the formula will operate? Or is everything left to the rather more broad-brush comments in the Azores judgment?

What discussions has the Minister had with the European Commission about the devolution of corporation tax to Northern Ireland? Are discussions already under way to mitigate the potential risk of legal challenge? It would be helpful to know that.

We touched on this in questions when looking at when the reduction to the block grant will happen. The Minister said that both things would have to happen, because of cash flow, at “broadly the same time”—those were the words he used when I asked him a question in the oral evidence session. I want to press him on whether, realistically, there are therefore any EU state aid constraints to that part of the measure.

Again this comes back to the formula, but for the Treasury to make an assessment of behavioural changes in connection with corporation tax is not something new to it—we have often discussed behavioural change. Is standard methodology used by the Treasury when it looks at the behavioural changes of companies due to changes in taxation laws, whether nationally or under international taxation rules? Will that form the basis of discussions with the Northern Ireland Executive on nailing down the formula, because the behavioural changes bit will probably be the most difficult to nail down? It would be helpful to know whether there is a standard methodology and, if so, what it is.

Much of the debate on tax avoidance and the scope for profit shifting took place earlier in connection with the amendments tabled by the hon. Member for Amber Valley, but I want to pick up on the point about the pressure on the Northern Ireland Executive to ensure that profit shifting is not occurring. It is in no one’s interest to see the rest of the UK lose business to Northern Ireland because of profit shifting. It is not in Northern Ireland’s interests either, as the financial burden will fall on the Northern Ireland Executive because they will have to pay back more money and suffer greater losses to the block grant. We cannot yet envisage policy measures to head off potential profit shifting, apart from the standard areas of risk, because companies might come up with ingenious things that we have not yet thought about or been able to turn our minds to. Who will have policy responsibility for coming up with regulations or other legal changes to head off future types of profit shifting?

In oral evidence, the Minister’s official, Mike Williams, made a good point about the joint role of HMRC in the risk assessment of possible profit shifting and tax avoidance. HMRC is sitting on both sides of the fence, so it will see early what is going on and, we hope, it will be able to take remedial action to eliminate such activities. Nevertheless, might that joint role cause a problem when it comes to policy responsibility on profit shifting?

I am sure that as soon as the Northern Ireland Executive clock that profit shifting is occurring and is damaging to them—they will have to pay back more money to the Treasury—they will want to take action quickly. Will a HMRC team be working specifically with the Northern Ireland Executive on these issues? Will there be a named contact and a named official working together to look at this policy area? Is there potential for a conflict of interest? If there is a disagreement between the Northern Ireland Executive and the Treasury about the extent of behavioural change and what is counted as profit shifting, where does the resolution of that conflict lie and would HMRC’s role be somewhat constrained in a potential conflict, given that it sits on both sides of the fence, as Mike Williams said? It would be helpful if the Minister could give some indication of what might happen in a scenario such as that.

We learned from the oral evidence session that the resourcing cost of the measures, particularly that relating to profit shifting and other avoidance activity, will be paid for by the Northern Ireland Executive. I do not believe that we have heard any numbers on what that cost might be. Forgive me if I have missed something, but it would be helpful if the Minister could tell us the projected costs.

On the broader issue of tax avoidance and the UK’s role on the international stage, the Minister has already discussed the base erosion and profit shifting, or BEPS, process in previous debates on the Bill. That process is incredibly important and we support the Government’s work on the matter. Some in the international tax justice community might unfairly refer to the measure as an onshore tax haven. We would all dispute that; it would be an unfair and incorrect characterisation of what is happening. The Minister will know better than me, because he is closer to the discussions, that perception is important in the world of international tax fairness, especially bearing in mind the OECD processes, particularly BEPS. It would be helpful to hear some detail about the reaction of our international partners and whether concerns have been expressed and dealt with.

What is the Minister’s most recent assessment of the extent of tax-motivated incorporation? In the last figures that I saw, HMRC estimated that the cost would be £10 million in year one, £25 million in year two, £35 million in year three, £45 million in year four and £50 million in year five. Is there any more recent assessment of that?

We have already discussed conditionality, but I do not feel that we have received a detailed answer. I do not think that the Minister will go further than what he said when I pressed him previously, but I raise the matter again because it will be a significant issue for the Northern Ireland Executive if ultimately they are to receive the powers in April 2017. Alongside the calculation of the formula for the repayment of moneys from the block grant, it is a potential area of dispute that could have the power to derail the process.

The condition that the Northern Ireland Executive have to get their finances on to a stable footing is a significant hurdle for them to clear, but that has not really made it into the coverage of the change. As the hon. Member for East Antrim mentioned previously, the devolution of these powers is by no means a done deal; there is a significant amount of work still to do. I was less surprised that the conditionality criteria that must be met have not yet been finalised between the Government and the Northern Ireland Executive; I was more surprised that we do not yet have a timetable for the staging posts of the discussions leading to the decisions on what the criteria will be.

Can the Minister tell us today, or at least by the time the Bill completes all its stages in both this House and the other place, whether the Government can give an indication of some timetabling over the next year or two, so that, for example, we know when the decision about the formula will be made, and when the decision about the criteria to meet the condition around sustainable finances will be made? Then at least the Northern Ireland Executive will know what timetable they need to work to, in order to jump through the hoops that are still to be decided on; at least the timetable would give us some idea of what we need to consider moving forward.

I turn to some of the detail of the clause. There is a point that I raised with the Minister in the oral evidence session. Some of the tax commentators and tax professionals that he and I are very familiar with are concerned about the complexity of the legislation. This Bill is both very straightforward and quite complex. It is short, and clause 1 contains most of the measures. Nevertheless, the Bill runs to 90 pages and contains cross-references, both to other provisions within the Bill and to external provisions in other statutory measures, and even an EU definition. The Bill has 20 algebraic formulae, and in its final three pages a listing of more than 50 defined expressions.

For people in the tax community, such as accountants, lawyers and other professionals, I suppose it is usually the case that there are long-running technical consultations wherein they can raise points that only they, rather than MPs in Bill Committees, are in a position to spot. That is not necessarily the process that has occurred with this Bill. The Minister has helpfully said that he will keep an open mind as to whether further changes of clarification and so on might be needed in future Bills. However, will he consider the case for a fuller and lengthier technical consultation, to make sure that there are not straightforward things in the Bill that, with a bit more time, the professionals would have been able to examine, which could have eased some of these potential issues?

Finally, I will touch on chapters 4 and 5 of the new part 8 of the Corporation Tax Act 2010. Because of the amendment tabled by the hon. Member for Amber Valley, we have had already had some discussion about the opting-in capacity of small and medium-sized enterprises into the large business rules and how there is, in theory, the potential for SMEs not to be well served by the inability to opt in to those rules.

The Chartered Institute of Taxation has raised a couple of more practical issues for SMEs that particularly relate to the SME work force test. It notes, for example, that for flexible geography businesses such as construction, there might be practical issues, because quite a few Northern Ireland construction companies are based in Northern Ireland but tender for work throughout the UK, and indeed beyond, and they send people wherever the work is. They employ people with different employment statuses.

The Minister and I have discussed the employment status of various people in the construction sector several times, and it is not always a straightforward matter. The Government have legislated to take account of some of the ways in which those statuses are used to avoid tax. What consideration has he given to this problem in the construction sector, to the definition of employment and to the impact of different types of employment status when it comes to the question of who should ultimately be included in the work force for an SME to meet the test set out in chapter 4?

The CIOT also states that for relevant smaller businesses there will need to be a measure of whether at least 75% of the business’s staff time and costs relate to work in Northern Ireland. That will inevitably add to the compliance burden on businesses. Obviously, for small businesses, that can be a particular problem. Can the Financial Secretary tell us what assessment has been made of that burden on small businesses? Are there things that HMRC can do, from a more educational perspective, to help small businesses with their approach in dealing with companies that have acted in good faith, but may find themselves falling foul of the rules?

I am grateful to the Financial Secretary for his clarification of excluded trades and back-office functions. Taking into account what he has said and what Mr Williams said in oral evidence, my understanding is that he and his officials will keep an open mind about whether more definition is needed in legislation. Perhaps the first preference would be to consider slightly more detailed guidance from HMRC. A yes or a no answer would be helpful on that final point.

Sammy Wilson (DUP, East Antrim)

It is a pleasure to serve under your chairmanship, Mrs Osborne.

I do not want to go into the detail of the first clause, because I do not understand most of it, to be truthful. I have read through it and all I can imagine is that some of the people in KPMG must be salivating at the opportunities that the Bill will present to them and their clients. However, I want to raise a few issues.

First, I thank the Financial Secretary, who has been to and fro over the years working with the Northern Ireland Executive on this issue. I thank him for his endurance and also for the interest that he has shown. I suppose we always knew there would be a political solution at the end of the day, and I am glad that we have now reached this position. However, the measure is not a silver bullet for the Northern Ireland economy. Indeed, investors have put many factors ahead of the reduction in corporation tax as the types of things that would influence them to locate in Northern Ireland. Nevertheless, it is an important element in helping the Northern Ireland Executive to rebalance the economy. That is not something that we have yet achieved.

I welcome the effort that the Government have made. The one thing that we in Northern Ireland wanted to see was this legislation on the books before the end of this Parliament, and we seem to be on a path to doing that. However, there are conditions that still have to be met by the Executive in Northern Ireland, and I want to press the Financial Secretary on that. Welfare reform has been mentioned, which I think will get through the Assembly now because the parties seem to be committed, but there is this also idea of a sustainable budget.

The matter cannot be devolved unless there is a sustainable budget, for the simple reason that the quantum of the reduction in the block grant of about 3% will cause significant changes to be made in departmental budgets in Northern Ireland. It is difficult for the Assembly and for politicians in Northern Ireland to get to the position where they can work out a system or budget if they do not have certainty as to the cost. I can understand the Financial Secretary’s argument that there are still significant negotiations to be had between the Treasury and the Executive in Northern Ireland. However, there is no point in imposing a condition—and it was the Government who rightly imposed the condition on the Northern Ireland Assembly—without pinning down the figures, and if there is still uncertainty about what must be done to comply. As to the figures that have been floating around—and not just for the initial handover—the hon. Member for Foyle and the shadow spokesperson tried to get the Minister to explain how the continuing costs will be calculated; certainty about that is important.

The other condition laid down was that a budget would be agreed for the next year of the Assembly. That will be done, but the relevant budgetary considerations in relation to a sustainable budget are not for 2015-16, but for the years afterwards. That is why we need clarity about the costs.

I am heartened by what the Minister has said today. I will pass it on to colleagues in Northern Ireland, because the figure of £325 million is not just the direct costs; behavioural costs have also been built in. I was especially heartened by his replies to the hon. Member for Amber Valley. I hope that he is right in believing that the ability and mechanisms to prevent the moving of huge amounts of profit are built into the Bill.

As I said in an intervention, the moving of profits is not in the interest of the Executive in Northern Ireland. The whole idea of devolution is to bring jobs to Northern Ireland, not paper transactions about profit movement. Indeed, if that happens, we will have failed, because we will be paying out money and getting no reward for it. That is why vigilance on the part of HMRC is important. I do not doubt that the Northern Ireland Finance Minister and the Minister at the Department of Enterprise, Trade and Investment will keep a sharp eye out for such movement, but if it is identified, HMRC should immediately deal with it.

At one stage, about a third of the costs of devolving the matter to Northern Ireland were in anticipation of behavioural effects, many of which were to do with profit movement. If the Minister will stand over the assurances that he has given today, I am sure that those negotiating on behalf of the Northern Ireland Executive will say, “That figure, then, should be pressed down—squeezed—and the total cost to the Northern Ireland Executive reduced.”

The question has been asked whether resources will be attached, to ensure that there will not be movement of profits. I understand that payment by the Northern Ireland Executive is still built into the costs: they will pay to ensure that the compliance regime is resourced. At one stage, more than £10 million was attached to that. I hope that not only will there be safeguards set out in the Bill, but additional resources to make sure there is compliance. The Minister’s assurances, together with resources from the Executive, should deal with some of the fears expressed by Members such as the hon. Member for Amber Valley.

The last thing is the issue of definitions. The Minister mentioned tightening the definitions of back-office facilities, especially regarding the financial services industry. This is not an unimportant issue for Northern Ireland because over the past few years, the one area where we have been successful in attracting jobs, especially high-paid jobs, has been financial services and, in particular, in what would be defined as the back-office areas of that industry. That could be legal departments, call centres in Northern Ireland, or analysis of the kinds of business that are done there. It has been a prime source of new jobs for Northern Ireland.

The DETI Minister is concerned that if the definition of a financial service is too tight, some of what she and Invest Northern Ireland have defined as back-office functions could be closed out from being offered these kinds of incentives. I hope that there will be further discussions about that so that if the definitions need to be tightened, or at least clarified, that can be achieved.

I hope that the Bill will have the transformational effects that we hope it will have for the Northern Ireland economy. Things still have to be done back home, but there has been good scrutiny so far, as well as support from the Minister and, indeed, from the Opposition. I know that this has been a difficult issue for the Labour party; I noted the attempt by the Minister to bait the Opposition spokesman on the issue. Nevertheless, having listened to the parties in Northern Ireland, it has been agreed that the provision would not be opposed, and we welcome that.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I appreciate the terms in which the Minister addressed clause 1, which is very large. He spoke not only to its details, but to the other working implications in respect of the block grant that arise and will rest on the Bill.

As the hon. Member for East Antrim mentioned, part of the problem is that we now have more understanding of the implications for companies’ tax status and position than we have of the budgetary situation of the Executive and the Assembly. As he said, it is not important just that we know the numbers, but that we understand the method. We still do not quite know the method. The Minister was honest enough to say that some of that still has to be worked out, but there is a difficulty in that people will say that, in the Committee and elsewhere, we are talking up what we hope will be the benefits of the Bill, but are not clear yet what the costs will be and how they will be counted or managed. That needs to be addressed and the Executive and the Treasury need to move further and faster if people are to be reassured that there is not a big gonk to come in a couple of years’ time.

We asked the Minister how the measures would affect the block grant, and there still seems to be some uncertainty about that. I know from talking to some parties—certainly, some parties were saying this during the talks at Stormont house—that they are content that the only hit on the block grant is simply the marginal difference of whatever the reduced rate would be from those companies. Otherwise, everything else in the block grant would be there.

The Minister seemed to say that no, the block grant will take the hit of the whole 20%, not just of the estimated differential, meaning that the Executive will have to complement the lower block grant with the lower rate of corporation tax revenue raised. That will create its own budgetary challenges for the Executive, along with knowing when they can count on having the money. Will they be allowed to continue spending on the basis that it is known or thought that the revenue will come in, or will they have to wait, as with the regional rate grant? The regional rate grant is a discrete tax that falls to the Executive and Assembly at the minute, and they can add that money only on the basis of having received it.

That is important in terms of the sustainable budgetary environment about which the Minister and Ministers in previous debates have spoken, as well as the hon. Member for East Antrim. We can talk about having a sustainable budget only when we can credibly tell people that we know what the budgetary regime will look like after corporation tax is devolved for certain qualifying activities. We need to know how the block grant will be counted in terms of corporation tax. That is why, in the evidence session the other day, I asked whether we were essentially considering a form of tax assignment, like what we are considering in relation to Scotland and like what many people in England now seem to favour for local government and local government conglomerates here. I still think that we need more clarity on that, if the Minister can say anything in that regard.

The issue for the block grant is not just the corporation tax raised from those companies that qualify for the lower devolved tax rate but the rest of the corporation tax raised. Will that be deemed to be assigned or counted towards the block grant, and how so? The Minister said earlier that the answer to some of the questions that we have raised might lie in considering how devolved tax matters will be handled in Scotland. The issue of tax assignment arises there in terms of transparency, because with some matters in Scotland, it is clear that the tax assignment arrangement means that the Barnett formula allocation for Scotland will include certain assigned taxes, such as the first half of VAT and so on. Are we facing a situation in which the Northern Ireland block grant in future, under a hopefully revised Barnett formula—well, revised as we would want it revised, not as others might want it revised—might include a clear element of tax assignment? I say that not because I believe that that would be a bad thing; it could actually be a good thing in terms of ensuring greater clarity.

I note that the hon. Member for Birmingham, Ladywood mentioned that some people were concerned that creating a devolved corporation tax window in Northern Ireland would lead to insinuations about an onshore tax haven. Clearly, we all want to protect our reputation from any such impression. The companies operating in the region will want to be protected from any such insinuation, as will the Government here, given the lead role that they are taking on base erosion, profit shifting and other issues.

The more transparency we can have on the difference to our budget and our budget management system, the better, as well as clarity that there is not room for a lot of buckshee activity to be passed off as happening in Northern Ireland when it is really elsewhere because profits are being shifted, along with plates of various commodities. I do not know why everybody is obsessed with brass, or why it can only be brass; in the age of innovation, there are plates of many other kinds. I am quite sure that the Treasury is alert to the fact that plates come in more forms than just brass, as we all should be.

That raises the important questions of how we want to make use of this benefit and why we have wanted power over elements of corporation tax to be devolved or, going all the way back to the Good Friday agreement, to have what we described then as “fiscal discretion” in some areas. Yes, of course it is to foster and encourage more of our own businesses to grow and, when they grow, to stay; it is also to ensure that we do not lose jobs in Northern Ireland when businesses grow, become big players and are acquired. We have had the experience of firms growing, being very successful and then being acquired and their jobs being removed. It might well be that when some of those firms are acquired in future, there is more of an incentive for the new owners to keep the jobs in Northern Ireland. That is one reason why I had concerns about amendment 3, tabled by the hon. Member for Amber Valley. It could have had an unforeseen consequence if it was used against a company that had made a decision to maintain an acquired establishment in Northern Ireland.

When it comes to canvassing for inward investment, we want to ensure that Ministers and others, such as Invest Northern Ireland, who will be making the sales pitch are not open to any sneering insinuation that they are somehow trying to sell a tax avoidance location. That is another reason why we need clarity through dedicated and bespoke Northern Ireland guidance. No one will then have the sense that anything is being done or sold in any other terms, and we will all be protected.

Ministers have made the point that part of the logic of doing this is to ensure a more balanced economy in Northern Ireland. Clearly, steps will be taken under the Stormont House agreement in relation to getting the right size for our civil service and wider public services, but simply downsizing in the public sector will not give us a balanced economy in a dynamic sense unless we also do more to grow our private sector. We hope that this capacity in terms of corporation tax will give us one plank in the platform we need for that growth.

As we have seen in the experience of the south of Ireland, corporation tax alone is not what drives growth. Originally, the low rates of corporation tax in the south attracted low-end jobs doing basic assembly, with little spin-off business for indigenous companies in the economy and not much value added in terms of skills. That changed over the years because of significant investment in skills, in further and higher education and in infrastructure in the Republic. If we want Northern Ireland to be in a better position to compete with the south in terms of the levels of investment and growth, we have to be realistic. The Assembly will not have the same power over corporation tax as the Oireachtas in Dublin does. Differences will remain at a number of levels. We must also recognise that more needs to be done in the north in terms of skills, further education and expanding higher education significantly.

We see developments in further and higher education here, some of them linked to Treasury measures and some to the growth deals and city deals that are coming forward. The Assembly and the Executive in Northern Ireland need to look at more tools of that kind. I have asked the Chancellor and Ministers questions in the Chamber about Northern Ireland being able to pick up more on enterprise zones. We now have one enterprise zone. I will not go into my issues on how that was chosen or how that came about, but I favour the idea and I want us to have more than one, and not least one in my constituency. I would also like us to develop our own version of the city deals. A city deal has been done in Scotland involving the devolved interests, local government and other local stakeholders and the Treasury, and I would like to see the same done in Northern Ireland.

Having a more balanced economy can work only if we have a more balanced region, and we do not have a balanced region in Northern Ireland. The west is badly depleted, not least the north-west, where we have enduring levels of high unemployment. There is a huge need to expand higher education and for infrastructure. Many of those issues are the subject of plans that have been agreed by all the parties and across all the main sectors. For instance, in my city of Derry there is the One plan. Our own version of a city deal may well be a way of taking some of those measures forward and ensuring that a city such as my own is in the best position to benefit from the devolution of corporate tax powers to the Assembly.

It is clear from what the Minister is saying and what we heard from the officials who gave evidence the other day that there will be careful monitoring of what happens and of how companies adapt to the new corporation tax environment. There will be a measured consideration of behavioural impacts and any consequential adjustments that need to be made, but I am not sure that that can all be done from the remote assumed sophistication of some HMRC offices here in Britain. HMRC’s move to remove more of the capacity on the ground in Northern Ireland will hamper some of that monitoring. The local tax officers are in a better position to know what is going on, how things are being done and to make an assessment.

I say that based on experience of the terrible treatment that people have had from HMRC. Cross-border workers have had an absolute nightmare with tax credits, precisely because there is no local tax office that they can turn to anywhere in Northern Ireland. Firms operating on a cross-border basis are having huge difficulties with their declarations and their attempts to reclaim money paid in tax in the south. They are having huge difficulty with some of the arrangements, and they are dealing with an office in Liverpool, which keeps saying, “No, we lost that,” or, “We have not got it.”

From everyone’s point of view, it would be better if we have a new differential regime in Northern Ireland. The more there can be a local accent to how the system works, the better that is for everybody. HMRC would not lose anything by that, because, if we are going to follow through on the terms we heard the other day, this would be different from other interjurisdictional issues, because HMRC would be on both sides of what was happening. There is a case for asking HMRC to revise its plans to foreclose essentially on three tax offices in the border areas: Newry, Enniskillen and Foyle house in Derry, in my constituency.

The Minister touched on the issue of intellectual property. It strikes me that that is another area where room has been left in the legislation for future adjustments and interpretations. The qualifying line for that—it is intellectual property only after a certain date—gives rise to a slight wrinkle, in that some people will question whether they should wait until that point even if they have an idea that is ready before then. I raise that only to make sure that no unintended consequences arise from the provision. The point needs to be made—there cannot just be a big bang and then everybody can find a new place. I accept the need for a qualifying timeline; I simply want to make sure that people do not wait for that day one if they have natural and strong business ideas that should move forward.

My only other questions relate to the compliance-related costs that will fall to the Executive. We should make sure that there is always clarity about those costs. It will be good if we can avoid any kind of tension or contention between the Executive and the Treasury on those matters. We know are dealing with an unequal relationship—we have to be honest about that. The interpretive power always rests with the Treasury—it always has the last word on all such matters, whether interpretations about behavioural effects, decisions on the block grant or the rest.

Both the hon. Member for East Antrim and I are former Finance Ministers in the Northern Ireland Executive, so we know that mentality of, “We are the Treasury, so we don’t have to give you a reason.” We have all had experience of trying to find out how a decision was made on what was or was not counted under the Barnett formula. An example might be the Olympic spend; back in my days, it was the spend on metropolitan railways and other things. If it is always going to be left to the Treasury and there is then a grumble from the Executive, again, that will undermine the credibility of what we are trying to do.

With the various measures in the Stormont House agreement, some of them very difficult, we are trying to make sure that we have a more sustainable basis economically, to make some infrastructure investments and to make some structural changes that are difficult but have to be made. In doing those things, we have to take people with us who may have different interests or many misgivings. The Assembly and the Executive will best be able to do that if they do not face questions about their own credibility or their competence to deal with the Treasury and get a good deal, or even questions about whether they know what deal they have got. The very questions that the Minister addressed are questions that we cannot comfortably leave for long.

David Gauke (Conservative, South West Hertfordshire)

We have, not surprisingly, had a full debate on clause 1. I will attempt to address the various questions raised.

I will go back to the beginning and the speech by the hon. Member for Birmingham, Ladywood. She made the point, as others have, that corporation tax is not the only issue and policy—to use the phrase of the hon. Member for East Antrim, it is not a silver bullet. The Government recognise that there are other measures of relevance for Northern Ireland. Many of the relevant issues are devolved and are in the hands of the Northern Ireland Executive; it is principally their responsibility to come forward with policies that will help Northern Ireland to grow. Whether that is matters to do with planning or whatever, it is not for me to be prescriptive this afternoon.

I will point out, however, that the financial package that was part of the Stormont House agreement included a contribution to capital funding of up to £500 million over 10 years in respect of projects to support shared and integrated education, subject to individual projects being agreed between the Executive and the UK Government. There is also up to an additional £350 million borrowing for infrastructure projects. The UK Government are taking measures to assist the Northern Ireland Executive on education and infrastructure, both of which are important in the context that we are discussing.

On the benefit to the Northern Ireland economy, I will make a general point—I thought for a moment that we might have consensus on this. Lower corporation tax can mean a higher return on investment, and a higher return on investment can drive up productivity. There is therefore a strong case for lowering corporation tax, as the Government have done over the course of the Parliament.

Control of corporation tax in the context of Northern Ireland can be a powerful lever to rebalance the economy and to increase private sector investment. The potential impact of the policy will depend on the rate set by the Northern Ireland Assembly and the Executive. The intention clearly is to rebalance the economy by encouraging growth. Devolution of taxes can provide macroeconomic benefits, as well as achieving wider political or social goals, although it is difficult to quantify any possible benefits or costs. Today we are devolving the power to set the rates; the Bill does not set the rates themselves, so the impact will depend on what happens with that.

The block grant and various associated issues were mentioned, as were the discussions with the European Union. By way of background, the EU state aid rules—specifically, the Azores criteria, as I said earlier—mean that Northern Ireland’s block grant must be adjusted to pay for the devolution of a corporation tax rate-setting power. There is no standard EU formula, because member states all have different tax systems and different ways of funding devolved Administrations, but the approach that we and the Northern Ireland Executive are working on is based on the arrangements agreed with the Scottish Government on the Scottish rate of income tax. I have already set out information about the Azores criteria and explained the key points. In terms of what is happening with the Commission, I can confirm that we are in discussions, which I hope to be completed later this year. As for state aid, let me be clear: we are confident that the regime is within state aid rules.

The hon. Member for Birmingham, Ladywood also asked about the details of the questions that need to be answered on the block grant adjustment. That is a fair question, but the answer is somewhat complicated. To be fair and to ensure that I am as accurate as possible, probably the best thing for me to do is to write to her about it. We do need to agree detailed arrangements with the Northern Ireland Executive. We expect to have a reconciliation process at some point after the end of each financial year.

Such a process is already planned in relation to the Scottish rate of income tax. Before the start of each financial year, the Scottish Government budget will be set using forecasts of the block grant adjustment and the income tax revenues. About 12 months after the end of the financial year a reconciliation process will replace the forecasts with what happened, with adjustments applied in the following year. As I said, the UK Government and the Northern Ireland Executive will have to agree precise arrangements for estimating the initial tax revenue forgone on the appropriate index.

The hon. Member for Foyle referred to cash-flow issues, which brings us back to what I was saying about the readjustment. There are couple of income streams: the revenue coming in from corporation tax receipts and the block grant that goes through to the Northern Ireland Executive. We need to work in a constructive manner to ensure that those flows work as smoothly as possible, which will help in terms of deduction and revenue in. We will agree the cash-flow basis for deduction and revenues.

On resourcing costs for assessing profit shifting, which was an important point raised by the hon. Lady , a memorandum of understanding between the Northern Ireland Executive and the UK Government will cover areas such as the costs, processes, governance and accountability. Work on that is ongoing.

The hon. Lady also raised the cost of tax-motivated incorporation. That number has been revised significantly downwards since the number she quoted was published. For 2019-20, the first year of the steady state, TMI is estimated to be only £5 million, presuming a 12.5% rate in Northern Ireland and a 20% rate for the rest of the UK. That revision has resulted in a significantly reduced figure.

The hon. Lady asked whether there was a conflict of interest for HMRC in ensuring that the correct sum is reached when determining the right amount to be paid at the right time by businesses operating in Northern Ireland. HMRC always has the same aim: to ensure that the right amount of tax is paid at the right time. Where there are disputes between companies and HMRC, it will ultimately be for the courts to arbitrate. HMRC’s relationship in reporting to the Northern Ireland Assembly will be part of the governance arrangements we will set up, which I described in the debate on amendments 6 and 7 tabled by the hon. Gentleman.

On help for small businesses with the work force test, HMRC will produce detailed guidance to assist small businesses with applying the regime. There is no plan for a further formal consultation that would be lengthier and technical, but the Treasury and HMRC are always open to representations from business and we have made it clear that we can amend the provisions before the regime comes into force. However, up to now, the reception has been positive: there is recognition of the hard work put in by HMRC and the Treasury. Perhaps I should say, in words that will be familiar to the hon. Lady, that we keep all tax matters under review.

On back-office and excluded trade, our position, as Mike Williams made clear to the Committee earlier this week, is that “back-office” is not defined, so it has its usual meaning. I assure the Committee that HMRC will provide detailed guidance on matters such as excluded trades. I understand that businesses that are likely to be affected will have a clear idea of what their back-office functions will be, but the guidance will be available for those that do not. Many firms already identify those cost centres for their internal management accounting, so that should not be too much of a difficulty.

The hon. Member for East Antrim asked on what implementation was conditional, and what would happen in future. One condition of the Stormont House agreement was that legislation for changes to the welfare system would be pushed through, and I believe that that is on track. It is crucial for the Executive to demonstrate that they can deliver sustainable budgets as they prepare to take on corporation tax-setting powers. The Stormont House agreement rightly makes that a condition of any decision to turn on the Executive’s power to vary the Northern Ireland corporation tax rate. We are all determined to work to put the Northern Ireland Executive in a position to make use of the power.

The question of intellectual property was raised by my hon. Friend the Member for Redcar and touched on by the hon. Members for Foyle and for Birmingham, Ladywood. As I have said, the risks of benefiting from shifting existing intellectual property are removed by including only intangibles created post-commencement within the Northern Ireland rate. Existing profit allocation rules will apply to new assets and may be strengthened further by the base erosion and profit shifting project recommendations. The Bill also amends the existing intangibles regime targeted anti-avoidance rules to provide protection against manipulation prior to disposals.

The hon. Member for Foyle spoke about HMRC officers. That point is a familiar one for him; he is nothing if not persistent. I am not persuaded by his case that proper enforcement of the new regime requires additional resources to be placed in Northern Ireland. It is worth bearing in mind that the costs of implementation are borne by the Northern Ireland Executive. Although I hear what he has said, if substantial new resources were to be put into HMRC—I argue that that would not be the most cost-effective thing to do—the cost would be picked up by the Northern Ireland Executive.

I hope that those points of clarification are helpful to the Committee. Agreement over the governance of compliance costs is important, as the Northern Ireland Executive must meet the additional costs that arise as a result of devolution. They are likely to form part of governance discussions, which I expect to commence shortly. As I have mentioned, Scottish income tax arrangements provide a good starting point for those discussions. There is a formal memorandum of understanding between the Scottish Government, HMRC and the Treasury, and a similar memorandum of understanding will be agreed for the Northern Ireland Executive and the Treasury.

Clause 5 - Commencement

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 2, in clause 5, page 67, line 36, at end insert—

‘( ) Section 1171 of CTA 2010 (orders and regulations) does not apply to the power of the Treasury under subsection (3)(a).”

Mark Durkan (Social Democratic and Labour Party, Foyle)

Can the Minister assure us that there is no intention to use the power to switch on the legislation, which remains in the hands of the Government, to impose policy choices on the Executive? Some of us perceived strong-arm tactics being used in relation to welfare reform. The Assembly thought it could make certain choices, but now it cannot. Can he assure us that there is no plan to abuse the power relating to sustainable budgets and the Treasury’s judgment to enforce policy directions on the Executive?

David Gauke (Conservative, South West Hertfordshire)

I return to what I said a moment ago. There is certainly no intention to abuse the power. The intention is to ensure that the Stormont House agreement is fulfilled, which requires the Northern Ireland Executive to ensure that their public finances are on a sustainable footing. That is the purpose, and I assure the hon. Gentleman that we will not abuse the power.

Sammy Wilson (DUP, East Antrim)

Just so it is on the record, does the Minister accept that that was not the interpretation of all parties in Northern Ireland? Indeed, the implementation of welfare reform was an essential part of balancing the budget, insofar as while it was not implemented, substantial moneys were going from the block grant back to the Treasury.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that intervention. I was attempting to address the general accusation of strong-arm tactics, and I have a lot of sympathy with what the hon. Gentleman has said. With those comments, I beg to move that the amendment be accepted and the clause stand part of the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful to the Minister for his explanation of the clause and the amendment. I will be brief. Everything he said highlights again that the onus is back on the political process that must now be undergone for the Northern Ireland Executive to show that they have put their finances on a sustainable footing. In the clause 1 stand part debate, I asked whether there was potential for the Minister, until this Bill completes all its stages in this House and the other place, to give an indication of the timetable we might be working to over the next year or year and a half or so. I did not catch an answer to it in his previous remarks. Will he return to that point?

David Gauke (Conservative, South West Hertfordshire)

First, I am grateful for the hon. Lady’s support for the clause and the amendment. All I can say at this point is that the earliest possible date of implementation, as set out in the Stormont House agreement, will be the financial year beginning 1 April 2017. As the agreement states, the powers will be commenced from April 2017, subject to the Executive demonstrating that their finances are on a sustainable footing for the long term, including successfully implementing measures in the agreement and subsequent reform measures. A moment ago, we nearly had a rerun of some of the debates in Northern Ireland on that matter.

Beyond what is set out in the Stormont House agreement —agreeing and delivering a final balanced budget for 2015-16 by January 2015 and the Welfare Reform Bill passing through consideration stage in the Assembly by the end of February 2015—the UK Government are working with the Northern Ireland Executive to agree further detail. I do not think I can set out any more information at this point, but we hope to make good progress on that.

Mark Durkan (Social Democratic and Labour Party, Foyle)

I thank the Minister for accepting an intervention; it saves me from trying to make this point separately after he sits down. There is some concern, not just because of the experience on welfare reform, where the block grant was fined unless the Assembly passed a Bill that it otherwise would not have wanted to pass. Without going back to all that, will the Minister assure us that the judgment that is made on budget sustainability in a couple of years’ time will not hinge on the Treasury saying to the Executive, for instance, “You do not have a sustainable budget unless you introduce water charges. You do not have a sustainable budget unless you introduce some other measure, or unless you raise revenue in another direction”? That is people’s concern in relation to the switch-on power—that the switching on will be withheld unless and until other things happen, a bit like the welfare reform experience.

David Gauke (Conservative, South West Hertfordshire)

Let me say this: my approach to looking at the finances of the Northern Ireland Executive as a whole, in their totality, is that they need to be on a sustainable footing. When it comes to public finances, whether in Northern Ireland or in the United Kingdom—public finances are the sum of its parts—this is a matter of looking at the totality of the public finances and the full context. I do not think I can say much more on that point. The hon. Member for East Antrim was in some respects making the point that it was credible to address the sustainability of the public finances of the Northern Ireland Executive only if welfare reform was included—that is the argument I think he would make and there is a lot to be said for it. Nevertheless, in terms of how the Treasury will view that in future, I would not go beyond the wording set out in the Stormont House agreement.

With those remarks, I commend the amendment to the Committee.

David Gauke (Conservative, South West Hertfordshire)

On a point of order, Mrs Osborne. Before you put the final question to the Committee, I want to stand briefly to thank you for your guidance today and on Tuesday. I also thank Sir David Amess for his role. I know that his day in the sun was cruelly taken away and that he will feel a degree of emptiness next week. I must say that he conducted the Programming Sub-Committee with great dispatch: we completed it in approximately 60 seconds, so his service on this Bill was most efficient, as indeed has been the scrutiny today. I thank all Members for their participation. Although we have managed to progress more quickly than anticipated, the Bill has been properly probed. I am delighted by the support of the five parties represented today for the direction of the Bill; it is heartening.

I thank the usual channels: as always, my hon. Friend the Member for Croydon Central and the hon. Member for Scunthorpe managed to arrange matters in good spirit. I thank the hon. Member for Birmingham, Ladywood. Once again, our paths have crossed in a Bill Committee, as they have on numerous occasions over the course of the parliamentary year. So much for a zombie Parliament: I think we have done about five Bills between us. I also thank the Clerks, the Hansard reporters, the police and the attendants. I thank the officials from the Treasury, HMRC and the Northern Ireland Office, and I thank my hon. Friends the Members for Dartford and for Harrogate and Knaresborough, who passed inspiration to me as and when necessary.

I hope that the smooth progress made on the Bill can continue. The hon. Member for East Antrim, who has had much to do with this project in more than one capacity over many years, pointed out that it was important to the people and parties of Northern Ireland that we get this legislation on to the statute book in the course of this Parliament. We have made a big step towards achieving that goal today, and I am delighted that we have done so. Some of us, particularly the hon. Gentleman and I, have been working on this matter for many years, so I am pleased that we have reached this point.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Further to that point of order, Mrs Osborne. I associate myself with the Minister’s remarks, particularly his thanks to you and Sir David Amess. I thought that his 60 second estimate was rather generous; the time we spent in the Programming Sub-Committee was considerably shorter, but that was entirely down to Sir David’s excellent chairmanship. Long may it continue.

I, too, thank the officials from the Treasury, HMRC and the Northern Ireland Office, as well as the Clerks, the Doorkeepers, the police, Hansard, the Whips for keeping us all in line so very well, and Members from across the House. Although the debate has not taken up all the sittings allocated, it has been detailed and we have had high-quality contributions from Members from across the House. That is a sign of how important some of these issues are to not only Members with a direct interest but all of us who want both Northern Ireland and UK plc to succeed.

I also thank the Minister. He is right: so much for a zombie Parliament. He and I alone are keeping the legislative flame alive in this Parliament. I see more of him than I do many of the rest of my colleagues. I look forward to discussing the Bill further as it continues its passage through the House.