Business – Tax breaks not grants, says E&Y

Industrial development incentives should be switched from cash grants to tax breaks if they are to be fully effective north of the border, Ernst & Young has told the influential Commons Scottish affairs committee.

The committee is examining the effectiveness of the present regime in attracting inward investment from overseas to Scotland. E&Y warned MPs of ‘the increasing irrelevance of the UK’s principal incentive mechanism, regional selective assistance’. It added: ‘It is job-biased, discriminates against capital and offers virtually nothing for research and development-type operations’.

E&Y said Ireland and the Netherlands ‘have both profited handsomely from lower corporate tax incentive programmes … in the case of Ireland this has helped radically transform that economy into what has been described as “Europe’s Tiger”‘.

E&Y said grant clawback was a continuing problem in the case of closures and downsizing. By focusing on job numbers at a time when capital is replacing jobs in key emerging industries, Scotland was trying to attract industries where RSA was still effective in competition with lower-cost competitor location, it said.

‘Cash-based incentives such as RSA are inferior to tax as a means of attracting investors,’ the firm told MPs. ‘Corporate tax breaks represent a delay in income flow to the Exchequer for a set period. Meanwhile the taxpayer is receiving benefits in the form of income and indirect taxes, as well as overall employment gain.’

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