UK government rejects corporation tax cut for North
A British government expert today ruled out calls for the reduction of corporation tax in the North.
Cuts to 12.5% in line with the Republic would cost almost £300m (€420.7m) a year in lost tax receipts and would displace existing businesses from the rest of the UK, David Varney's report said.
Company owners have been lobbying for a major reduction to promote investment. The top rate of 30% for large companies is to be reduced to 28% by April.
The dossier said: "The likely displacement of both capital and profits from the rest of the UK, and the fact that this would be subject to a lower rate of corporation tax, mean that a reduced rate of corporation tax for Northern Ireland would certainly come at a long-term cost in reduced resources to be shared by the UK regions or in the financing of public services.
"The policy would result in a net cost of about £2.2bn (€3.1bn) over 10 years, with no prospect of full cost recovery over the long run."
The vast majority of the 60,000 local companies pay a lower rate of 19% which is being increased to 22% in 2009.
The Republic's low corporation tax has been a key factor in its economic success.
Varney said there had been little evidence put forward on other differences north and south of the border such as infrastructure, currency or VAT rates.
He added that lower corporation tax would force HM Revenue and Customs to impose administrative burdens and warned there would need to be significant legislation.
"There could also be a strong reaction from other economies and regions, which, if realised in their own policy changes, would further accentuate the revenue costs for the UK," he said.
He added there was uncertainty about the amount of foreign direct investment that would flow from the cut.
"The academic evidence is that skills, rule of law, industrial relations, the potential for innovation and the quality of infrastructure are more important in determining the 'business fit' of potential investment.
"Indeed in many of these areas, taxation needs to be raised to fund the delivery of these public goods."
Varney said the £51.5bn (€72.2bn) financial and economic package agreed with the British Treasury last May and the peace process created the right platform for a proper business environment.
A major investment conference is planned for next spring to attract US companies.
Despite significant growth in employment, living standards still lag behind other parts of the UK and there is some reliance on service industry jobs such as call centres.
The North also has the highest percentages claiming incapacity allowances and working-age people economically inactive.
The report said 90% of the North businesses employed 10 people or fewer, with agri-food, retail and manufacturing pre-dominating.
It said there was no instant solution to solving the North's problems, despite the faster growth rate.
Improving skills, reducing the size of the public sector relative to the economy as a whole and increasing the number of business start-ups were all recommended in the 132-page report.
"Promoting entrepreneurship, spending more on research and development, increasing the ratio of capital to workers in the economy and the percentage of the workforce with higher qualifications all have a significant bearings on regional labour productivity," it added.
