Europe thwarts Northern Ireland tax spin

The contrast between chancellor Gordon Brown’s announcement of a new 100% tax relief for plant and machinery investments in Northern Ireland last May, and its quiet withdrawal a fortnight ago, could not be sharper.

Brown announced the measure in a high-profile speech in Belfast’s parliament buildings, as part of a package of economic aid measures aimed at securing prosperity after the hoped-for peace in the run-up to the referendum on the Good Friday peace agreement.

He said: ‘Every pound invested in plant and machinery in the coming four years will be fully offset against tax and therefore be wholly tax-deductible.’ He added: ‘99% of businesses in Northern Ireland will benefit.’ Nobody in the province could have failed to notice the positive headlines, and the measure was widely lauded as a boost to the small and medium-sized business sector at which it was aimed.

Now jump forward to a fortnight ago. The government appeared to have a sudden attack of shyness as it was forced to reveal it would have to withdraw the 100% first-year capital allowances for large swathes of the province’s businesses. Freight and agriculture – two hugely important industries in the province – were the main victims. The announcement was buried deep in a dry Inland Revenue press release. Ironically, it was titled: ‘Increased capital allowances for SMEs in Northern Ireland.’ When contacted by Accountancy Age last week, leading firms, business groups and freight industry representatives in the province – those most directly affected by the measures – were stunned.

After the initial surprise passed, most commented cynically on the fanfare with which the government had unveiled the measure and its reticence in announcing its withdrawal.

Brian Bloomfield, Northern Ireland representative of the Freight Transport Association, sums up feelings in the province when he says: ‘After all the fanfare, this measure turns out to be worth nothing more than a bag of beans.’ Wilson Graham, partner at PricewaterhouseCoopers in Belfast, warns many businesses have already made investment decisions on the basis that they will get immediate 100% capital allowances.

The English ICA attacked the government for using too much spin in its announcements on tax after this year’s Budget and is equally critical of the Northern Ireland fiasco.

Describing the handling of this latest move as ‘more of the same’, Peter Bickley of the institute’s tax faculty says: ‘The government concentrates on spin and publicity when announcing things, but makes nowhere near the same song and dance about withdrawing them.’

When the Tories spotted the U-turn, financial secretary Barbara Roche was forced into the embarrassing position of explaining that the government had been forced to reduce the scope of allowances because of tax competition rules imposed by the European Commission business taxation group chaired by her boss, Paymaster General Dawn Primarolo.

‘When we introduced the measure, we said in our press release it would need to be cleared with the EC as a potential state aid,’ Roche told MPs last week.

That much is true. The point was made in a small, vaguely worded paragraph at the end of the notes to last May’s Inland Revenue press release announcing the measures.

But at the time, the government appeared happy to gloss over this and there was nothing in the chancellor’s stirring words to indicate he would have to withdraw the measure.

The about-face also appears to have been missed by tax offices in the province, some of which have already accepted tax computations showing the 100% capital allowances.

Freight hauliers, already angered at rises in fuel and vehicle excise, will be particularly badly hit, a point made by opposition MP David Heathcoat-Amory. ‘The allowances are being restricted in areas in which the situation in Northern Ireland has got worse such as haulage,’ he told the Commons last week.

‘The government’s tax measures on road fuel have made the haulage industry uncompetitive and the problem is especially acute in Northern Ireland which has a land border with another member state, so the industry can easily be undermined by lorries using cheaper fuel from the Republic.’

John Stringer, chief executive of the Northern Ireland chamber of commerce and industry, agrees. ‘Right now, the whole sector is under extreme competitive pressure from the Republic because of our much higher vehicle and fuel taxes, and to lose 100% capital allowance possibilities would represent another serious setback,’ he says.

The debacle says more about the government’s relationship with Europe than its commitment to Northern Ireland. In her address to the Commons Roche revealed much about the way the government has to engage in tussles with the European Commission when it announces tax breaks such as the 100% capital allowances.

‘There would have been no point in restricting the scope beforehand,’ she said. ‘As the house is aware, the state aid rules are complex and subject to negotiation. We bid high, knowing we might have to compromise at the end of the day.’

Fair enough – and there is no doubt the motives of the government in attempting to introduce the measure were laudable. But these arguments will hold little sway with embittered hauliers and farmers.

This episode will also add to the growing feeling among accountants that the government’s tax announcements are spin-driven, confusing and ill thought-out.