Ulster corporate tax cut could destabilise UK tax system

A RATHER OLD idea that has resurfaced in the run-up to the general election: cutting Northern Ireland’s corporation tax rate. While the election may herald the move, it’s relatively politics-free given it has almost cross-party support.

It’s an idea not without merit. Dublin’s low rate of 12.5% rather undermines the UK rate currently operating in Belfast, and with most in Ulster working in the public sector, business needs stimulating. The temptation for anyone operating a business in Northern Ireland, then, is to incorporate across the border and take advantage of the favourable rates.

Sizeable companies including Google and Apple have set up tax bases in Dublin following its business-friendly tax policy.

Questions and answers

Moves towards the introduction of a Northern Irish rate were made with the Corporation Tax (Northern Ireland) Bill gaining its second reading in Commons in January, with the government aiming to include it in the Finance Bill in March.

Of course, it’s a situation that demands addressing, but the prospect of dropping the rate towards the Republic’s raises more questions than it answers.

One such question is who, exactly, are we competing with? Is it the Irish or ourselves? There is a danger of creating tax competition within the UK itself, undermining the mainland rates.

There are, of course, a couple of ways of addressing that. One, according to advisers, is that – in the Treasury’s eyes – Northern Ireland is seen standalone within the UK, and as such may introduce additional layers of complexity in order to prevent a slew of companies artificially relocating to Belfast. Part of that may entail keeping two sets of accounts, for example.

More radical 

The other, more radical, possibility is that the whole country moves its corporate rate south of 20% – even as low as to match the Irish – so as to negate the discrepancy and increase attractiveness to foreign investors á la the current policy.
The balance to strike will be a difficult one. There is no question that the current situation is damaging Northern Ireland’s economy, but destabilising the UK’s could prove disastrous.

Given the support from several parties for the policy, it seems pertinent to prepare for the eventuality. But given the solidity of the plans – it appears simplification will take a hit – something that most consider a necessary evil.

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