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Analysis: NI and Scots tax devolution steps closer

THE GENERAL ELECTION raises the prospect of two or three Finance Acts this year, and some key tax measures are being introduced outside the Finance Bill process. And then there is the devolution of UK tax powers, which has stepped up a gear in recent weeks.

The Corporation Tax (Northern Ireland) Bill, providing for the creation of a Northern Ireland rate of corporation tax, received its second reading in the Commons on 27 January. A Public Bill Committee of MPs will examine the Bill and is expected to report by 12 February. The UK government aims to have the Bill passed before dissolution of parliament on 30 March.

Northern Irish support

Responses to consultation showed strong support for a rebalancing of the Northern Ireland economy, the UK Treasury said in December 2011. About three quarters of the responses were in favour of devolution of corporation tax, the main arguments focusing on potential investment and growth impacts. Arguments were also made for creating a more level playing field with the Republic of Ireland, while opponents cited uncertainty regarding the cost and impact of a reduction in the tax rate.

The UK government took another three years to decide in favour of devolution. Earlier this month Northern Ireland secretary Theresa Villiers told MPs that implementation was dependent on the Northern Ireland parties delivering on commitments set out in December’s Stormont House agreement.

“The fact that Northern Ireland shares a land border with a low corporation tax jurisdiction means that the case for reform is strong for Northern Ireland, but [that case] is not made out in relation to the rest of the UK,” Villiers said in the second reading debate. In addition, the history of the troubles had left Northern Ireland’s economy with a high dependence on the public sector.

The Bill gives the Northern Ireland Assembly the power to set a Northern Ireland rate of corporation tax for certain trading profits. That rate will apply to all of the trading profits of a company that is a micro, small or medium-sized enterprise whose employee time and costs fall largely in Northern Ireland, and to a large company’s profits that are attributable to a Northern Ireland trading presence. Activities such as lending and investing activities are excluded, but back-office functions of such activities may qualify. The UK parliament will retain control over the corporation tax base. 

Financial secretary David Gauke said the purpose of the reform was to encourage jobs and growth in Northern Ireland – it was not about “profit shifting or a brass plate”. The government’s approach would ensure that “common international tax avoidance arrangements cannot be replicated within the Northern Ireland regime”.

The Scots’ play

Revenue Scotland is ready to “hit the ground running”, deputy first minister John Swinney declared this week. Scotland’s land and buildings transaction tax and the Scottish landfill tax will take effect on 1 April. The new tax agency is consulting on a draft charter of standards and values, setting out standards of behaviour expected of Revenue Scotland as well as taxpayers and their agents.

Draft Scotland clauses implementing the Smith Commission’s recommendations were published on 22 January. Clauses 10 to 12 will replace the income tax powers, so far unused, that were set out in Scotland 2012. The Scottish parliament will have the power – expected to be exercised from April 2016 – to introduce new income tax rates and bands without restriction for non-savings and non-dividend income above the personal allowance. MPs across the UK will continue to vote on the UK’s Budget, including income tax, and income tax will continue to be collected by HMRC.

The Scottish rates and bands will apply to Scottish taxpayers, as defined. Broadly speaking, a taxpayer is a Scottish taxpayer for a tax year if he or she has a close connection (as defined) with Scotland, or does not have a close connection with any other part of the UK and spends more days of that year in Scotland than any other part of the UK. All UK employers, not only those in Scotland, will need to be aware of the new regime. A capital gains tax clause will ensure that the rate of CGT paid by a Scottish taxpayer will continue to be fixed by reference to UK income tax bands.

Other measures deal with the assignment of VAT revenue and devolution of air passenger duty and aggregates levy.

Further work is required on the draft clauses, and the new Scotland Bill will not be presented until after the election. The UK government will organise a series of events and activities across Scotland, and comments on the draft clauses may be sent to draftlegislationcomments@scotlandoffice.gsi.gov.uk.

Amid the sometimes heated political debate about devolution and the impact of tax competition within the UK, business and tax professionals need to prepare for additional complexity created by the new Scottish and Northern Ireland tax regimes, as well as possible opportunities to save tax. Remember that talk of tax simplification? It seems a distant dream.

Andrew Goodall is a freelance tax writer and journalist

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