Second Reading (and Remaining Stages)

Corporation Tax (Northern Ireland) Bill – in the House of Lords at 3:30 pm on 17 March 2015.

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Moved by Baroness Randerson

That the Bill be read a second time.

Photo of Baroness Randerson Baroness Randerson Lords Spokesperson (Northern Ireland Office), The Parliamentary Under-Secretary of State for Wales 3:39, 17 March 2015

My Lords, it is very appropriate that we are discussing this Bill on St Patrick’s Day. I take this opportunity to wish noble Lords a happy St Patrick’s Day.

I shall start by highlighting the history behind the policy enshrined in this Bill. Since 2010, the UK Government and Northern Ireland Executive have shared a common objective to rebalance the Northern Ireland economy away from overdependence on the public sector and to drive faster economic growth. In 2011 this Government published a consultation document Rebalancing the Northern Ireland Economy. Among other things, the consultation considered the possibility of devolving corporation tax powers to the Executive and Assembly. Responses to that consultation from the business community and Northern Ireland political parties nearly unanimously supported the devolution of corporation tax.

After considerable work on the detail and technical work needed to make this measure possible, this Bill was introduced in the Commons on 8 January. The proposals will allow the Northern Ireland Executive and the Northern Ireland Assembly to set a different rate of corporation tax from the rest of the UK for most types of trading profits arising in Northern Ireland. The tax base, including reliefs and exemptions, will remain under the control of the UK Government. The earliest financial year for which Northern Ireland could set its own rate is 2017. This will allow time for businesses and agents to become familiar with the new rules.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

Can my noble friend tell me why this Bill—unlike for example the measures that gave income tax powers to the Scottish Parliament—has been certified as a money Bill and therefore all its stages have to be taken at once?

Photo of Baroness Randerson Baroness Randerson Lords Spokesperson (Northern Ireland Office), The Parliamentary Under-Secretary of State for Wales

I understand the noble Lord’s point, and indeed there are clearly constitutional issues in relation to this Bill, but it has been certified as a money Bill by the Speaker of the other place. It is important to bear in mind that unlike the other legislation to which my noble friend refers, this is a simple measure that deals entirely with one issue. I am sure my noble friend will agree it is a highly technical Bill and therefore akin to many other money Bills this House deals with.

I will go briefly over the aim of this policy and the key measures within this Bill. Northern Ireland has a unique economic position within the UK. It shares a land border with the very low corporation tax environment of the Republic of Ireland. It is more dependent on the public sector, with around 30% working there, compared with about 20% in the rest of the UK. Economic prosperity—GVA per capita—is persistently some 20% below the UK average, and has been for a number of decades and it has to deal with the challenging legacy of the Troubles.

Devolving corporation tax recognises these unique challenges. The Northern Ireland regime has been carefully designed to enable the Executive to encourage genuine investment that will create jobs and growth, while minimising opportunities for avoidance and profit shifting. It balances this with the need to keep the costs of a reduced rate proportionate, both for the Executive and in relation to any additional administrative burdens for businesses.

The design of the regime builds on the principles agreed in 2012 by the Joint Ministerial Working Group which included Ministers from HM Treasury, the Northern Ireland Office and the Northern Ireland Executive. Companies trading in Northern Ireland will attract a Northern Ireland rate on their qualifying trading profits only. Companies will continue to pay the UK rate on their profits from non-trading activities which do not generate jobs or economic growth in the same way.

The rules are designed to deter businesses from seeking to exploit, through profit shifting and avoidance, a rate differential between Northern Ireland and the rest of the UK. The regime will not provide opportunities for brass-plating. Because they offer significant scope for profit shifting without the benefits of bringing substantial new jobs, the regime does not extend to profits from financial trading activity, such as lending and reinsurance. However, the policy recognises the genuine growth and employment potential for Northern Ireland offered by back-office functions, so companies with excluded profits from certain financial trades may make a one-off election to bring a notional profit attributable to the back-office functions of those excluded trades within the Northern Ireland rate.

To reduce the administrative burdens for SMEs, a special regime exists for them. A simple in-out test will mean that the majority of the companies will be spared the burden and cost of apportioning profits. More than 97% of SMEs operating in Northern Ireland meet the 75% employment test threshold and will benefit from the Northern Ireland regime.

Although this measure should go a long way in helping the Executive to encourage genuine investment that will create jobs and growth, the Government have been clear that devolving corporation tax is not an end in itself. For the full potential benefit of corporation tax devolution to be recognised, there are a number of other areas of reform that need to be addressed, such as education, skills and infrastructure.

The Stormont House agreement set out that the progress of this Bill through Parliament would proceed in parallel with implementation of key measures to deliver sustainable finances. These include agreeing and delivering a 2015-16 budget that works; progressing the Welfare Reform Bill in the Assembly; and taking the steps required to put the Executive’s finances on a stable footing for the long term. The Northern Ireland Executive agreed their budget for 2015-16, passing their Budget Bill on 24 February, and the Welfare Reform Bill also passed through further consideration stage of the Assembly on the 24 February. Sinn Fein has since withdrawn its support of the Welfare Reform Bill through its final stage in the Assembly. There can be no doubt that this decision was a setback, and the Secretary of State for Northern Ireland chaired a meeting of the party leaders last week in an attempt to help them to resolve the situation. The party leaders have since held further talks, and the Secretary of State proposes to convene another meeting with them later this week.

Changes to the welfare system in Northern Ireland were a key part of the Stormont House agreement and, as the Secretary of State has made clear, it remains pivotal that all aspects of the agreement are implemented. In simple terms, the Executive’s budget for 2015-16 does not balance without progress on these important issues. The Stormont House agreement was a major step forward and, although there has been good progress since the beginning of year, there were bound to be bumps in the road. The Government remain determined to implement the agreement and propose to continue with the progress of the corporation tax legislation through this House. The legislation contains a commencement clause, and commencement will not take place until the conditions set out in the Stormont House agreement have been met and changes to the welfare system in Northern Ireland have been implemented. This means the devolved power will be “switched on” for the planned start date of April 2017 only if the Executive are delivering their side of the agreement, including achieving sustainable public finances.

The unique challenges faced by Northern Ireland have been recognised by all parties. This Bill will allow the Northern Ireland Executive greater power to rebalance the economy towards a stronger private sector, boosting employment, growth and the standard of living in Northern Ireland, with benefits for the wider UK.

I therefore hope that noble Lords will give this Bill a Second Reading.

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland) 3:50, 17 March 2015

My Lords, the Labour Opposition welcome and support the Bill and will do everything we can to facilitate its passage. However, that does not mean that we are not looking for further answers to questions that were asked in the House of Commons.

The Minister mentioned action to prevent “brass-plating”, as it has become known. We would like a bit more detail on how that would be stopped. She mentioned rebalancing the Northern Ireland economy. Concerns were expressed in the other place by the honourable Margaret Ritchie about regional imbalance within Northern Ireland, so that issue needs to be addressed.

Before I go any further, I should indicate again that we fully support the Government in looking to the parties in the Northern Ireland Assembly to implement the Stormont agreement. That is part of the deal, and we support the Government in insisting that the Stormont House agreement be implemented.

Some concerns remain that we would like to probe a little further. When government Ministers were asked about the effect of the devolution of corporation tax on the block grant, there was no real response to that. I merely repeat the question that was asked in another place: why were no models done? For example, if corporation tax was set at level X, what would be the effect on the block grant? I do not think that is too demanding a question to ask. Models should have been drawn up so that folk could have a better grasp of what will transpire in this area.

I share the sober assessment that this measure will not solve Northern Ireland’s economic problems or provide the necessary rebalancing of its economy. However, it should be implemented to try to rebalance the economy, as the Minister mentioned.

I want to spend a few minutes on the trade-off between a reduction in corporation tax and spending cuts. The impact of this legislation will need careful managing to ensure that it does not benefit only already wealthy people at the top and does not further perpetuate existing income inequality in Northern Ireland. This should not become a rich man’s Bill.

The importance of funding education in Northern Ireland cannot be overstated. Without adequate investment in education and apprenticeships, jobs and productivity will never increase. If Northern Ireland reduces its corporation tax rate to that of the Republic of Ireland, it will lose at least £300 million from its block grant. That figure was given by the government Minister in the other place. I believe in devolution and giving the Stormont Assembly responsibility for running its affairs, but that agreement should contain safeguards to make sure that there is no dramatic effect on the services that have been mentioned. The devolution of corporation tax—

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

How can the noble Lord say that he supports the Bill and at the same time say that there should be no dramatic effect, when the effect of the Bill will be to reduce the amount of tax paid by profitable businesses if corporation tax was equalised, as he said, by between £300 million and £350 million, which would be money not available for spending on public services? So the necessity is that there will be less money for public services and more money in the pockets of profitable businesses.

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland)

There is a bit of role reversal going on here. It is me who is supposed to attack the capitalists, not the noble Lord or the Minister. I am starting to feel a bit dizzy.

That is the balance that it is hoped to be reached. The noble Lord shakes his head. I would say to him, “O ye of little faith”. There will be a vested interest for Stormont Ministers to make sure that they balance extra corporation tax against a reduction in the block grant. I fully agree that one has to be very careful here so that this does not result in less money for services but we have been assured that there will be no dramatic impact, and I am always willing to listen to government Ministers. The noble Lord, Lord Newby, is looking a bit puzzled. I hope that he will comment on that point.

Has there been any study or consideration—perhaps the noble Lord, Lord Forsyth of Drumlean is right—of how the volatility of corporation tax might impact on Northern Ireland’s economy? That is a valid concern. While devolution is devolution, we are devolving the power and are therefore looking for some kind of guarantee in this matter. We hope that its devolution goes ahead in 2017, but a potential stumbling block is that Northern Ireland’s finances must be on a stable footing. It concerns us that we do not know the precise fiscal conditionality required before the Government devolve this power. Can they make any estimate of the resulting decrease in the block grant? There are various calculations, but I would like the Treasury people to have looked at that.

I repeat, in case of doubt, that we support the Bill. In the other place, highly contentious remarks were made to the effect that Labour had done a U-turn because it had previously attacked the devolution of corporation tax. That is quite untrue. We have expressed legitimate concerns, but if anyone wishes to pursue that point, perhaps they could turn to the minutes of the Public Bill Committee, where Nic Dakin asked the Secretary of State for Northern Ireland whether she had seen comment by the Institute for Fiscal Studies that,

“Corporation tax is not a good candidate for devolution”?

The Secretary of State replied that there were risks. The Labour Opposition are not using scare tactics but asking legitimate questions. This process is not the be-all and end-all but could and should be a helpful tool for Northern Ireland.

Briefly on the background to all this, Laurence Robertson, chair of the Northern Ireland Select Committee in the other place, indicated that when the committee was in the United States of America recently it watched violent scenes on the streets of Belfast and Northern Ireland, involving fires and smoke-bombs. That is the biggest turn-off when trying to attract industry into Northern Ireland. There is a two-way street here: devolution is coming from this place, after consideration, but there also has to be a payback, if you like, by people trying to work together—hard as that may be because the past is always there. The damage being done by those scenes is quite substantial.

We hope that this is a contribution to further periods of peace and stability in Northern Ireland. Going back in history, I think that great credit is due to Sir John Major for initiating this process and to Tony Blair and his team for pursuing it. It is to be hoped that the devolution of corporation tax will be a further measure along the road to peace and stability in Northern Ireland.

Photo of Lord Hay of Ballyore Lord Hay of Ballyore DUP 4:00, 17 March 2015

(Maiden Speech) My Lords, I welcome the opportunity to make my first contribution in this House on this hugely important Bill. When I first started my political career some 40 years ago, I could never imagine the opportunities I would have. Serving for seven years as Speaker of the

Northern Ireland Assembly was an incredible privilege, but to join your Lordships’ House is an incredible further honour of which I am proud but very humbled.

I appreciate the welcome and advice I have received from noble Lords on all sides of the House, not least from my two sponsors, the noble Lord, Lord Morrow, of Clogher Valley, and the noble Lord, Lord Browne of Belmont, two very hard-working Peers in this House. That needs to go on record. I also want to thank all of the staff who have done so much to welcome and support me in the House. I appreciate how important the work of parliamentary staff is to making the institution operate smoothly.

It is a great delight to join this place with Ballyore in my title. The townland of Ballyore and the village of Newbuildings gave me my first start in politics. The strong support I have received over the years certainly makes it close to my heart and I am glad to bring it with me symbolically to this House. Being a proud representative of the great city of Londonderry for four decades—a city close to the border with the Republic of Ireland—certainly made this debate on the devolution of corporation tax to Northern Ireland an obvious choice for my first contribution in your Lordships’ House.

I want also to put on record my thanks to the joint ministerial working group formed in October 2011 which did quite a bit of the detailed work on this Bill. It reported in October 2012 and I know of some of the hard, detailed work that was involved.

I know that there have been some concerns about how this Bill will fit into the delicate balance of constitutional arrangements in the United Kingdom at this time. However, we need to remember that the whole purpose of devolution is to recognise the differing circumstances of the regions and to allow decision-making to take account of those local differences. It is hard to imagine circumstances more different than being the only region of the United Kingdom to have a land border with another nation, let alone a nation with a much lower tax rate.

The economy of Northern Ireland also has the additional challenge of overcoming the legacy of decades of conflict and all that came with it. In this context we have performed well over recent years given all the difficulties that Northern Ireland has had. For example, in 2013-14 we had a record year of investment in Northern Ireland. Nearly 11,000 new jobs were promoted, 23 first-time investors came in, and month upon month unemployment figures have dropped. Northern Ireland has attracted more foreign investment than any other part of the United Kingdom.

We all recognise that corporation tax alone will not address the economic challenges that face Northern Ireland, but it is a very important lever for the Northern Ireland Executive to have to address the imbalances within our economy. Once the principle of the devolution of corporation tax has been agreed, it is for the administration at Stormont to examine the detail and agree the arrangements. Of course there will be difficult judgments to make and there will be major issues to take account of before the long-term benefits are seen in Northern Ireland.

Significant changes of this nature and significant returns seldom come without a level of risk. I would not seek to deny that the Assembly has had great difficulties in recent days and it is frustrating at times that the level and speed of progress made in this mandate of the Assembly was not as many would like to see. However, I do not so easily dismiss the distance we have travelled in the context of the problems we have had to overcome. No one in this House or in the other place would seek to pretend that government is easy, especially in Northern Ireland. Add to these factors the additional legacy of issues that we face in Northern Ireland, and perhaps fair-minded people will acknowledge that the situation we find ourselves in today bears no comparison to what we might have imagined 15 or 20 years ago.

There are many issues that Northern Ireland politicians still have to deal with, whether they are about the past or flags and parades. There are so many issues on which they have to try to reach agreement. They are difficult issues for politicians in Northern Ireland to deal with. We would all hope that we can implement the Stormont House agreement for the people of Northern Ireland so that once again, both politically and economically, we can all move forward. I would hope that sooner rather than later the issue of welfare reform can be resolved because, as the Minister has said, it is part of an overall agreement. It is not a matter of taking it in slices, whether it be welfare reform or the issue of corporation tax. The Stormont House agreement was a package. There are still some issues to be resolved, but I am hopeful that they can be resolved.

Photo of Lord Alderdice Lord Alderdice Liberal Democrat 4:07, 17 March 2015

My Lords, it is a great pleasure to follow the noble Lord, Lord Hay of Ballyore. I have been looking forward to his maiden speech for some time. He succeeded me as Speaker of the Northern Ireland Assembly, and when it was announced in August last year that he would be coming to your Lordships’ House, I thought, “That is wonderful”. It has taken quite a while, but that is because he has had something of a scare. Sometimes when people are appointed to your Lordships’ House they say, “My goodness, I was so surprised that I nearly had a heart attack”. The noble Lord took that further than most people, which set him back a bit, so it is wonderful to see him in this House and to hear him speak.

Colleagues will know of the noble Lord’s long and distinguished public service in Northern Ireland. He was elected to Londonderry City Council in 1981, became deputy mayor of the city in 1992 and mayor in 1993. He was elected to the Northern Ireland Assembly just after the formation of the Belfast agreement in 1998 and went on to be appointed Speaker in 2007. He served for some seven years until the latter part of last year. He has done a lot of other things as well. He was a member of the Northern Ireland Policing Board, the Northern Ireland Housing Council and the Londonderry port authority. He has held many distinguished positions, but what noble Lords may not necessarily know about—because it is not the kind of thing that is recorded in Wikipedia, Dod’s or whatever—is the kind of work that the noble Lord has done quietly and privately but most significantly, especially in the city of Londonderry. There have been many difficulties, but as a member of the Orange Order and of the Apprentice Boys of Derry, quietly and behind the scenes he has forged remarkable friendships. He has demonstrated real leadership and—I make no criticism of his party here—he was prepared to go out in front of his party on occasion to lead it on to developing relationships with people in the nationalist and republican community which later would become an everyday matter. He was out in front and doing these things in a quiet and thoughtful way.

Consider his experience in the Northern Ireland Assembly. I know, from talking to members of all political parties, staff in the Speaker’s office and staff in the clerking department, that he is held in great affection and regarded with great appreciation for the quiet, thoughtful work that he does. This House will find that he will continue that kind of public service here. He is a man of great courtesy and thoughtfulness, but also a man of real determination to make things better for his community.

One of the other distinctive things about him, which makes St Patrick’s Day a particularly appropriate day for him to come here, is that he is an Irish citizen. He was born in Milford, in County Donegal. One does not necessarily associate noble Lords from the Democratic Unionist Party with Irish citizens, although one never knows what the future may hold. For him, it is a very distinctive feature, and he comes here on St Patrick’s Day as an Irish citizen.

Of course, this is an important day for the Corporation Tax (Northern Ireland) Bill as well. The noble Lord, Lord Hay, knows, because of his experience on both sides of the border, that the relationship between north and south was one of the important strands that we were trying to address in the Belfast agreement. One of the economic dilemmas we have faced is that corporation tax on the other side of the land frontier is much lower than in Northern Ireland. It has been one of the great successes that led to the Celtic Tiger, with its positive and difficult sides, but it is an important challenge for us economically in Northern Ireland.

My noble friend raised some questions as to whether this was just a money Bill or whether there were other elements to it and whether the Speaker of the other place had gone a little far in his certification of the Bill. As a former Speaker speaking just after a former Speaker, I do not think the noble Lord would expect me to question what the Speaker in another place would say, but there is more to the Bill than simply the question of money. No one, I think, would believe that the Bill on its own will address all the economic problems of Northern Ireland—far from it—but there is an important principle here. There are those in Northern Ireland who seek better relations with the Republic of Ireland economically, politically, socially and otherwise. It is very important that nationalists and republicans have it put to them that it is possible to move to greater to greater tax harmony north and south of the border, but there are economic realities if you do that.

In Scotland, which my noble friend comes from, the Scots Nats have for years been claiming they wanted more powers, but they never used the income tax powers that they were given in the legislation of devolution. Had they not been given them, they would of course have complained. Here is the opportunity for nationalist and republican politicians, along with Unionist, Democratic Unionist and Alliance politicians, to face up to the political and economic challenges of instituting a corporation tax rate that is closer to that of the Republic of Ireland and different from that of the rest of the United Kingdom.

This is where we move from institutions of power sharing to the reality of responsibility sharing. We saw the dilemma of that just before Christmas last year, when the issue of welfare came forward, with all its social and financial implications. It was a real hurdle for people in the nationalist and republican communities to overcome.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I am most grateful to my noble friend. I apologise for interrupting him, but as he has mentioned the Scottish position, I am, unusually for me, defending the Scottish Nationalists. The reason that the tartan tax powers were never used, by way of explanation for them, was that they could only set the rate. They could not change the allowances. This is precisely the position in the Bill, which allows Northern Ireland only to set the rate, while the allowances and all the other conditions are set centrally. Does it not have the same problem that prevented the Scots from doing so?

Photo of Lord Alderdice Lord Alderdice Liberal Democrat

No, it is not. I think it is the same problem, but I do not think that is the reason the Scottish Nationalists did not go down that road. I think the reason was they like to eat their cake and have it. They liked the possibility of being able to complain that they do not have the power to do things, but then, when they have the power, but there is an actual cost to doing it, they do not do it. I think we will find exactly the same thing in Northern Ireland. We had this dilemma over the Stormont House agreement. Nationalists and republicans signed up for the agreement and knew perfectly well that the sums did not add up. Then, when there came to be a bit of pressure and people asked, “Well, how does this actually work out?”, they backed off from it, and now they will find themselves having to move forward. The truth is that the peace process is less like riding bicycle and more like playing an accordion, where people move backwards and forwards instead of straightforwardly. That is the reality of politics.

The Bill does not devolve corporation tax; it makes it possible for the devolution of corporation tax to take place—if there is responsible, political and economic governance in Northern Ireland, if there is a responsible budget that adds up, if parties then look at it and want the power, and if they then decide to implement it. In fairness, the world has changed economically over the last number of years and corporation tax in the Republic of Ireland may not stay at its current level, but in a sense those are secondary issues. This is about people having power to act responsibly and a responsibility to share that power in a serious fashion, taking into account all the dilemmas that are present.

On this St Patrick’s Day, when we share our patron saint as we share the piece of territory and the politics of the island, with different perspectives and different views but nevertheless with a sense of vision and hope for future, with all the difficulties and dilemmas that we have, this is an opportunity to challenge my colleagues at home to use the power and responsibility that are being offered to take us forward. I hope that none of us here or there will be found wanting in that regard.

Photo of Lord Trimble Lord Trimble Conservative 4:16, 17 March 2015

My Lords, it is a pleasure to follow the two previous speakers. Perhaps I may first say to the noble Lord, Lord Hay, how much we enjoyed his maiden speech and how pleased we are to see him here. I shall not try to emulate the achievement of the noble Lord, Lord Alderdice, in going through the noble Lord’s history, but I want to pick out the reference that was made to the noble Lord’s contribution to resolving some of the communal differences within Londonderry. To underline a point that flows almost from what the noble Lord was able to achieve, it is fair to say that the members of the loyal orders in Londonderry have always had a more realistic and more sober approach to problems than people in other parts of Northern Ireland, particularly in and around Belfast, who sometimes did not seem to understand what life was like outside.

Perhaps I may also say how much I appreciated the remainder of the speech of the noble Lord, Lord Alderdice, which focused on taking responsibility—and I agree with everything that he said in that regard. It will indeed be fascinating to see what impact that has on people, although what is happening at the moment does not encourage one to be sanguine about the matter.

The Minister said in introducing the Bill that she would go back into history, but she went back just to 2010. My own recollection of this issue goes back a bit further, perhaps another dozen years, and I shall reflect a little on that. Shortly after finding myself in office, I had a discussion with our finance people about corporation tax—the issue was being raised by businessmen in those days; indeed, even earlier—and I received from the officials I spoke to a very clear answer: that they did not think that the issue was important. They said that while the Republic had the advantage of being able to say, “Our corporation tax is so low”, they could put together a package in Northern Ireland which was just as good and just as competitive as what was available in the south. Much of that package was financial, too, in terms of providing facilities and premises at low rates or with rental and rate holidays, so there were substantial and even more focused benefits and assistance available in that way.

The second argument which the officials gave me for why this was not an important matter was the state aid issue. They said that if this was implemented it would be ruled in Brussels as being state aid. I am deep into the history here. This was before the Azores case and the issue of state aid was a complete block until jurisprudence in the European Union moved as a result of that case to enable people to contemplate it. However, that has consequences because, in framing this, we have to give attention not just to what we would like to do, but also to what Europe will require to be done. The third reason why I was not excited about this is broader and did not flow from anything said to me by the officials, who are strictly neutral in political terms. It flowed from my politics: I am a unionist and believe in the United Kingdom. Faced with this, one’s instinct is that we should act in accordance with what exists elsewhere. Furthermore, on the downside, if we go for a particular advantage for Northern Ireland this will give rise to resentment in other parts of the United Kingdom. That will happen in this case too and has already done in that the matter has been raised with regard to Wales and Scotland. I held that reservation quite strongly 17 years ago but I hold it less so today. When you look at the constitutional mayhem going on around us, it is a bit difficult to dig in for a purely unionist position when there are so few people in office—and elsewhere—who are paying any attention to that position or, indeed, the interests of the United Kingdom as a whole.

I leave my history behind at this point. I will not go on to the detail of the Bill. It is very focused, which is good, and I hope that all its technicalities will operate smoothly as and when it comes into effect. I am sure that if there are any technical problems they will be dealt with, but there are still some major issues which one has to have regard to. This is not a magic bullet. It may or may not be very beneficial but it is wrong to think that it will cure problems by itself. Some of the points raised by the noble Lord, Lord McAvoy, are appropriate here. Going back to the Azores case, if this was implemented there would have to be very significant reductions in the block grant to Northern Ireland to satisfy Europe. We cannot get round this—as used to happen so often with the issue of the Barnett formula—by having a private deal with the Treasury that perhaps nobody knew very much about. This is a European issue which will have to be dealt with very effectively. When it comes into operation there will be a significant reduction, against the background of the last few years when the Treasury has been withholding significant sums from the block grant because of failure to deal with welfare and other issues.

The reduction is difficult to quantify. We will not know until the time comes and there will, no doubt, be a bit of an argument about it. It might not be as bad as it could be, bearing in mind that corporation tax nationally comes down to 20% next year. Coming down from 30% to 12.5% or 10% would be a very huge reduction in the block grant. A reduction from 20% to 12.5% or 10% would not be quite so bad. So the problem may not be as big as it might be. On the question of it not being a magic bullet, we have to bear in mind that corporation tax is not the chief determinant of investment: there are other factors as well. In the briefing paper produced for us, there is a reference to the Varney report in which it was said that:

“In the most recent survey”— at the time the report was produced in 2007—

“the level of corporate taxation was ranked sixth in importance as a criteria for investment location, behind transport and logistic infrastructure, labour costs, telecoms infrastructure”.

Those were regarded by businessmen as more important than the issue of corporation tax, which underlines the need to be a little bit cautious about it.

We frequently refer to the benefit that the Republic of Ireland has received from its low corporation tax but we should remember that that benefit did not come immediately. It had corporation tax at a low rate for a long period without it coming through in increased FDI. That happened only in the late 1980s after the low tax rate had been in operation for over a decade, I think, before any significant benefits started to roll through.

The helpful note that has been produced for us by the Library has on page 8 a nice little summary from the OECD of its survey on Ireland. Referring to when the low rate of corporation tax started to pay off, it says:

“That began in 1987, with the fiscal and monetary consolidation that aimed at bringing the deficit down”.

It also refers to:

“The social partnership arrangements, which delivered tax cuts in return for wage restraint”.

The paragraph concludes:

“Alongside the tax cuts, expenditure restraint was also important”.

I find it quite interesting that this started to pay off once the Republic started to have sensible financial and fiscal arrangements. We hope we are on the way to sensible fiscal arrangements but we have not quite got there yet. I might come back to that later.

There is another general issue. We hope that the reduction in corporation tax is going to provide investment and that investment will then pay off in increased employment. If this is going to happen on a large scale, there will have to be some capacity available. Here is where the references that were made to rebalancing the economy become crucial. It has been the case for a long time that the public sector in Northern Ireland is far too big. The figure that was given was that it provides for 30% of employment. If you look at gross domestic product, it is nearer 70%. This is not healthy. This does not provide for a good economy. If we are going to hope for private investment leading to employment, we need to have people available for that. You are going to have to find ways to shrink the public sector if this is going to be successful. If you are not taking measures to shrink the public sector, you will quickly run into problems in terms of not attracting people to come and do business because there are not likely to be sufficient skilled people there to meet the demands of business.

We cannot keep putting this issue behind us or pretending that we can avoid dealing with it. We have known for decades of the need to deal with the large public sector. It is something that we tried to make a start on when Mark Durkan and I negotiated the programme for reform and reinvestment 16 years ago. Unfortunately, when direct rule returned in 2002, the officials told the incoming Ministers that the whole thing had been wound up and nothing further needed to be done. That was very far from the truth. Lots more needed to be done and many of the things that we were planning or thinking of doing still have not been done. I know that the parties in the Executive have a lot on their plate at the moment but I want to remind them that they really have to tackle the issue of a public sector that is far too big.

One advantage of reducing the size of the public sector can be seen in the recent expansion of employment in Wales, which was particularly high in the recent figures. Part of the reason for that was the cuts in the public sector. There were not so many juicy, well paid jobs in the public sector and consequently more people started thinking about starting their own businesses. Of course, it is from new small businesses that most employment will be generated. I hope that we see something done on that front.

Finally, I want to come back to something that was implicit—and explicit—in some of the things I have said, and that is the implications for elsewhere in the United Kingdom. If this is carried into practice—and, indeed, even before that—there will be pressure from Wales and Scotland for similar powers. I find it very difficult to see how the Government will be able to resist that. It is undesirable because it will mean that different parts of the country will be in competition in terms of tax and investment, although to an extent that happens already, certainly on the investment side.

One of the merits of the Bill is the way that it is closely focused on being available to companies that are genuinely regional and where there is a genuine employment. The provisions for keeping out the “brass plate” will limit the extent to which there is too much competition between regions, if this becomes available elsewhere. So I think that the Bill, in the way it is drafted, is possibly better suited to be followed in Wales and Scotland than, perhaps, earlier proceedings were. However, that leaves the problem of the English regions. That is a huge problem that should not be avoided. People in England will not be happy if they feel they are being unfairly treated. There is too much danger of that and too much feeling to that effect already in existence, and we should not feed it any further. We should be thinking more about it. The simple way is to encourage the Chancellor of the Exchequer to accelerate his programme of national corporation tax reductions, and we might end up—the noble Lord, Lord Alderdice, thought that this might never come into operation—with it never coming into operation because the corporation tax has been reduced so far throughout the United Kingdom as a whole that there is no need for it. That would be a very happy result.

Photo of Baroness Blood Baroness Blood Labour 4:31, 17 March 2015

My Lords, before I speak about the Bill, I would like to say what a pleasure it is to see the noble Lord, Lord Hay, here in the Chamber and to have listened to his maiden speech. I have known the noble Lord and seen his work for Northern Ireland over many years, especially in his home area of Londonderry and, more recently, as Speaker of the Assembly. It is a real pleasure to see him here this afternoon.

Corporation tax, I must admit, is not an area of work that I would normally speak about, as finance is not my strongest point. Suffice it to say, however, that I am concerned that the Bill before us is unproven territory. Many people back in Northern Ireland—and indeed in your Lordships’ House—have very different opinions on it and its value. My concern is that, if it becomes law in 2017, the block grant would be affected by money being taken out of it before any of the benefits would be seen from changes in corporation tax. It is almost like being asked to pay for your dinner before you have seen the menu.

I, like all my fellow Peers in this House, am not opposed to anything that would bring jobs, especially to Northern Ireland. Indeed, in my work in Northern Ireland over many years, I have believed that getting employment—especially for young people—is the answer to a number of problems, such as getting people off benefit. A big goal for me is getting jobs for young people, to take them away from the draw of paramilitaries. A lot of this work has been done through community development and social economy, but my problem in relation to this Bill, as I have already said, is that the block grant would be affected immediately.

Those of us in this Chamber who come from Northern Ireland are aware that we are already struggling to work within a very tight budget. For example, Sure Start, with which I am involved in Northern Ireland, has this year been informed that its budget will be cut by 4.5% to 5%. In my own area, that means a cut of almost £35,000, which means two jobs. Education—a very vital component for getting people into work—is also being cut. As we have seen every night in our local news and in our newspapers, schools are closing and having to pay off teachers and so on and so forth. Many community groups among which I work have been told that their grants will either be cut or, in some cases, done away with altogether. I am worried about this because this work is vital in Northern Ireland at this stage of the peace process.

With all this in mind, will the Minister clarify some points? Is there a rough idea of how much will be taken out of the block grant? I know that it depends on what rate is set: we have heard figures from as little as £150 million to £400 million a year, so I would like that to be clarified. Can she give us an assurance that education and health will be safeguarded, even with these cuts, in 2017? Finally, there is something that I do not fully understand—perhaps it has already been discussed here. Why will building societies and credit unions be unable to take advantage of corporation tax? Is there a legal reason for that or something else? I fail to understand why these organisations would be exempt, given the vital work that they do in a small place such as Northern Ireland.

Photo of Lord Shipley Lord Shipley Liberal Democrat 4:34, 17 March 2015

My Lords, I, too, congratulate the noble Lord, Lord Hay of Ballyore, on his excellent maiden speech. I strongly welcome the opportunity to speak in this debate. Quite often, matters relating to only Northern Ireland, Scotland and Wales come to your Lordships’ House and it is important that we put them into a UK context. I agree with my noble friend Lord Trimble. These matters relate to the integrity of the UK as a united kingdom.

To be clear at the outset, I fully support this Bill. It is the right thing to do. As my noble friend Lord Alderdice said, it is about responsibilities as much as powers. I welcome the fact that the responsibility for setting a level of corporation tax can be given to the Northern Ireland Executive and Assembly. The reason I support the Bill is that Northern Ireland has a land border with the Republic of Ireland. That seems crucial when considering powers over corporation tax. I accept, too, that the land border is also relevant in considering other taxes such as air passenger duty; I have no difficulty with APD being a devolved matter for Northern Ireland. Of course, in all matters of devolved taxation, it would be for Northern Ireland to decide the level, and if there is no need to reduce a tax level or if that proves to cost too much, then the Northern Ireland Assembly would not have to do that. It is all about the responsibility that it carries.

I want to concentrate on two issues in my remaining few minutes. First, there is the principle of no detriment to other parts of the United Kingdom. Secondly, there is the need to understand better than I think we do what is happening in a constitutional and financial sense across the various parts of the United Kingdom.

In terms of this Bill, I read the debate in the House of Commons and do not wish to revisit the points raised there, except to say that great care must be taken in relation to the inward investment consequences of any lowering of the rate of corporation tax and of any consequences which might be thought to distort competition with the rest of the UK. However, I am satisfied by the evidence given by Ernst & Young on corporation tax. It said—I took this from the Library Note—that it is actually sixth in a list of factors determining where companies invest. Transport and logistic infrastructure, labour costs, telecoms infrastructure, potential for productivity increases and the legislative and regulatory environment are all said to be more important. It may not be necessary to worry too much about the practical consequences of devolution as long as we have structures in place that can assess the impact of a lower corporation tax rate on competition, inward investment and all aspects of potential profit shifting from the rest of the UK to Northern Ireland.

One possibility—my noble friend Lord Trimble talked about this—of the devolution of the powers to Northern Ireland is that Scotland or Wales may want the same powers over corporation tax. That is more likely to be the case in Scotland, but it is rightly still a reserved matter in Scotland. As both Scotland and Wales share a land border with England, the wishes of England in relation to corporation tax in Scotland and Wales must be part of any further debate on that. In my view, England’s agreement must be sought on any devolution of corporation tax rates for Scotland and Wales.

I said that there are two issues I want to concentrate on. First, there is the no-detriment principle. I want to raise the question of air passenger duty. In the case of APD, I understand that there is no detriment to the rest of the UK in Northern Ireland having the power to reduce APD—there is no land border with the rest of the UK. But there clearly would be a detriment in the case of Wales and Scotland, where a land border means that passengers can move very easily across them. In Scotland, the power to vary APD is being devolved. It is a critical issue for those parts of England close to Scotland—or to Wales, should it get APD powers—where the viability of services could be at stake. The reason for that is this: just a small movement of passengers from one airport across a land border to another can make a crucial difference to the viability of some existing air services. This can matter. My point on there being no detriment is that it needs to be taken very seriously because it matters to the integrity of the United Kingdom. I noted that, in 2012, it was a key part of the Scotland Act. It is less obvious to me today that the importance of no detriment is fully understood. In the case of the devolution of APD powers to Scotland, I do not think that it is fully understood.

A second aspect of no detriment is that those parts of the UK that secure the right to lower what hitherto has been a standard national tax should make up the loss to the rest of the UK. We have discussed that in this debate. I hope we will ensure that the fiscal consequences of this are understood, agreed and then properly applied. I make it clear that I support all that happening, but it does have to happen.

That takes me to the block grant. Under the Bill, the Northern Ireland Executive and Assembly’s budget will be reduced to make up for the lost income to the Treasury. That seems to me to be the right approach, but it begs another question: is the block grant right in the first place? I ask this because there are stark differences in the amounts that each part of the UK receives in its public spending. Treasury figures for 2013-14 published last November show that Northern Ireland has per capita spending of £10,961. To be clear, that sum may be entirely justified. However, the part of the United Kingdom that receives the lowest amount is the East of England, with £7,950. That is a per capita difference of £3,000. In addition, Scotland and Wales get more per capita than any part of England, including London. As we move towards devolving more powers over taxation, should we not also understand better than we do why there are such very wide discrepancies in these public spending figures? I think that we simply must, as we devolve more and more.

My final point relates to the legacy paper recently published by the All-Party Parliamentary Group on Reform, Decentralisation and Devolution. It says that:

“Amidst the accelerating devolution of power, it will be important to have regard to those functions that must be retained partially or wholly at the UK centre, if it is to remain a cohesive state”.

It concludes by recommending that a constitutional convention should be established to ensure that,

“the process of reform will be open, inclusive and stands the best chance of securing a UK wide settlement, fit for the long term”.

That would be, it says,

“in addition to the implementation of commitments to transfer powers across the UK”.

Therefore, what is planned now would continue. Such a convention would operate independently of government and would include members of the public as well as political parties, local authorities and the nations and regions of the UK. I think that, in the context of this Bill and many of the debates and discussions that we have had, and no doubt will have in the future, the proposal to establish such a convention is very wise. I hope that the next Government will be able to give such an initiative their full support. I say that because I believe that it matters to the future integrity of the United Kingdom.

Photo of Lord Empey Lord Empey UUP 4:44, 17 March 2015

My Lords, I, too, congratulate the noble Lord, Lord Hay of Ballyore, on his maiden speech. As a speaker, he was followed by his predecessor as Speaker, the noble Lord, Lord Alderdice. Both of them exude an air of bonhomie and so on in this Chamber, but do not be fooled: I have seen them in action in the big chair and have often been at the receiving end of a tongue-lashing.

The earliest request that I can recall for corporation tax-varying powers to be transferred to Stormont was, I believe, made in 1983, when the late Ulster Unionist Assembly Member for South Belfast, Edgar Graham, believed that it would be a tool to help the Northern Ireland economy. Sadly, Edgar was assassinated later that year in the grounds of Queen’s University Belfast by the IRA. In those days, the rate of corporation tax levied was 38%, having fallen from a peak of 52%.

Since the early 1980s, there have been repeated calls for the rate to become a devolved matter, and the request has appeared in a number of election manifestos in recent years, including some of those presented to the electorate in 2010. Following the 2013 economic pact between the Northern Ireland Executive and Her Majesty’s Government, a timeline was established for reaching a decision. The Chancellor’s Autumn Statement in 2014 signalled the Government’s intention to proceed with devolution subject to Stormont agreeing a budget for 2015-16 and settling the welfare reform issue—and hasn’t that gone well?

There is widespread, but not universal, support for this measure. In addition to the five executive parties in Northern Ireland, Her Majesty’s Government and the Opposition, the consultation conducted in 2011 produced 700 responses, which were overwhelmingly in favour. At 87 pages, the Bill is a very complicated and technical measure, as the noble Baroness, Lady Blood, pointed out. It has to be to avoid the trap of brass-plating and other avoidance measures which all Members in this House wish to guard against, quite rightly.

The devolution of the rate-setting powers is controversial in the wider UK context, however, as has already been referred to. Both the Calman commission and the Holtham commission, looking at Scotland and Wales respectively, came up with slightly different approaches. Calman said it would not be appropriate for Scotland, while in the Welsh case, by recommending discussions with Westminster, the commission felt that its devolution in Wales could introduce budget volatility—I think we understand that.

The case in Northern Ireland has always been different, as the noble Lord, Lord Shipley, has just pointed out. The existence of the land border with the Irish Republic, which has the lowest corporation tax rate in Europe, differentiates the Province from the rest of the United Kingdom. That said, things are changing. First, the national rate has changed, as mentioned, from 28% at the beginning of this Parliament to 20% next year. This alone makes this measure less significant that it once might have been, but of course, what rate this Government might set could be raised by subsequent Governments over time.

Superimposed over all this is the wider question of where power actually resides in the United Kingdom as a whole. This measure is inevitably going to be seen in this context. In mitigation, it is a proposal that has been on the table for many years and was not dreamed up overnight like some of the other constitutional changes that have been brought before your Lordships’ House in recent weeks. I think this is either the fourth or the fifth legislative proposal to come before us in the last 12 months that devolves more power to the home nations. We really do need a joined-up approach to these matters, but that is an argument I suspect we will return to in the new Parliament.

The whole objective of seeking this power is to try and make Northern Ireland a more attractive place to do business and make it more attractive for foreign direct, as well as indigenous, investment. We all know, however, that tax rates, as the noble Lord, Lord Trimble, has said, are but one of a number of conditions that investors examine when making their decisions. Labour supply and skill levels in particular rate even more highly than tax rates, and other factors such as language, lifestyle, transport, broadband and proximity to markets are frequently seen as more significant.

That said, my view is that everything that can be done to help should be done, and even if this is merely a marginal consideration, it is worth trying. We know there will be a consequential reduction in available funds from London, but the tax can be varied in different ways and not necessarily all at once, thus easing the burden in the reduction of public spending. It also has to be said that, with uncertainty surrounding the situation in Scotland—who knows what might happen there in the future—we could be faced with lower corporation tax rates to our east as well as to our south.

The noble Baroness the Minister has confirmed the Statement made by the Government after the Stormont House Agreement that devolution of the tax would happen only in the event of agreement being reached on a balanced budget and the Welfare Reform Bill, and that is very welcome. I sincerely hope that that is the Government’s position, because if it is not and it is going to move and vary, we are in for a very rough ride.

These are important considerations, but while I support this Bill and am a strong supporter of devolution, I regret to say that I do not believe that the current leadership in the Northern Ireland Executive is capable of dealing effectively with these powers at present. For the first time since 1921, the Stormont Assembly has failed to balance its budget and was only saved from default by the offer of a Wonga-style loan of £100 million from the DEL reserve to be repaid in the following year. How could this be?

Sinn Fein and others say that the problems have been caused by Tory cuts. There is an argument about public expenditure levels, but a devolved Administration have to live within their own means, and policies pursued by Stormont have to be adjusted according to the amount they raise and spend themselves, augmented very substantially by the Barnett formula and consequential in-year adjustments. The NI Executive were informed of their budget allocations for the four years to 2014-15 in October 2010. When Barnett consequentials are taken into account, Northern Ireland did better than anywhere else in the UK. Reductions of 2.1%, 0.7%, 0.7% and 2% respectively were imposed over the four-year period. This did not include the additional £200 million which was provided to assist the PSNI.

Given the huge national deficit and the fact that the UK continues to borrow nearly £2 billion per week, the reductions to Stormont’s budget have to be seen in the context of the reductions imposed on Whitehall departments. The Department for Communities and Local Government has suffered a reduction of 25%, for example, and this has had a huge effect on local government services. Stormont has, fortunately, not been exposed to such cuts. I know that the Labour Party has indicated a commitment to reduce the deficit, albeit at a different rate, and I hope that the noble Lord, Lord McAvoy, on behalf of the Opposition, will state that it is their policy to continue to follow that path but that there will not be a buy-out policy to help Stormont every time it runs into difficulties. I hope that that will be the Opposition’s position.

Stormont was informed of its budget allocation for 2015-16 in June 2013. In other words, the Executive have had full knowledge of their available budget for almost five years. What happened? Did the Executive cut their coat according to their cloth? No, they did not. No meaningful action was taken until a crisis budget was mooted last year. All of a sudden, departments were asked to make in-year cuts, which are the least effective, most difficult and wasteful. Then a political crisis was manufactured over the welfare issue, even though it had been known about for four years.

Instead of planning gradual reductions in personnel in the Civil Service and other public bodies, things were left to the last minute and a crash-landing proposal to reduce the public sector by thousands was produced as a result of the Stormont House process. Many civil servants will leave in the next financial year, not on a planned and carefully prepared basis, but in a panic with expensive pay-offs, the funds for which will have to be borrowed and repaid over subsequent years. At the beginning of the financial year, Stormont’s borrowing was £200 million, but if the Stormont House process is fully implemented that will rise to £1.8 billion. Not only that, but a much overdue reduction in departments is being planned in parallel with this process. Can you imagine the utter chaos that these measures will create? Having amalgamated public bodies myself, I am sure it will take three years until departments settle down and rebalance the skill levels.

The finances of the Northern Ireland Executive have been disastrously mismanaged. The Executive have been seen to be incapable of operating within their means, and they have failed to plan ahead despite knowing their financial envelope for years in advance. It is a mystery to me that any Minister of Finance and Personnel who has presided over such chaos and mayhem can still remain in office. The antics leading up to the Stormont House process resulted in the humiliation of the people of Northern Ireland in front of not only the rest of the UK but the wider world as well. The begging-bowl strategy has sent a terrible message to investors at home and abroad alike.

As things stand today, devolution under the existing leadership is not working properly. Financial mismanagement, the squandering of millions of pounds on failed initiatives, such as the Education and Skills Authority, and enormous delays in implementing reforms are a sad testimony to the way things have gone. From being a major success story for Northern Ireland, we are now disinvesting in higher education. Only this week, it was announced that the primary modern language programme, introduced in 2007 to support primary schools to teach another language, was being scrapped. Two weeks ago, the same Minister announced £l million for an Irish-medium school for 14 pupils when all advice, even from that sector, advised against it. The continuing domination of our politics by arguments over flags, parades and the Irish language is deeply depressing.

The vision I and many noble Lords had for Stormont when we sought to restore devolution has not been realised. My noble friend Lord Trimble famously said that because one had a past did not mean that one could not have a future. That was in the context of being prepared to share power with republicans and others. We foresaw Stormont moving to a place where the political landscape would be dominated by how we would use our new powers to develop and grow our economy after years of terrorism, where we would tailor policies to the specific needs of our local community and not rely on hand-me-downs from Whitehall, which were largely London-centric under direct rule, where we could develop the accountable partnership-led Administration envisaged in the Belfast agreement and ratified in the referendum of 1998, where working with our partners in the rest of the United Kingdom and the Republic of Ireland would give us the opportunity to concentrate on making things better for the post-Troubles generations and remove the deprivation in those areas which had suffered most from the trauma of 30 years of conflict, and where we could try to bring some solace and support to the many victims of terror.

That vision has not been realised, but that does not mean that we should not persevere until it is. This Bill could make a marginal but, I believe, positive contribution to the Northern Ireland economy in the long term, and on that basis I support it, but I must say to the Government that if they continue to buy off Sinn Fein threats, either with money or by turning a blind eye to their related activities, no amount of tinkering will do any good. I urge Ministers to back those who are genuinely prepared to work for the good of all our citizens, who want real partnership working in Belfast, and stop rewarding those whose long-term intentions are inconsistent with a strong, peaceful and prosperous future for the people of Northern Ireland within the United Kingdom.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 4:58, 17 March 2015

My Lords, I hesitate to intervene in a debate on a Bill which is exclusively concerned with Northern Ireland. I do so because I am opposed to the Bill because I do not believe that it is a unionist measure. Indeed, in the Second Reading debate in the other place on 27 January, the Secretary of State, Theresa Villiers, in describing the proposed regime, which is different for small businesses and large businesses, said:

“Larger businesses will need to divide their profits between Northern Ireland and Great Britain, as they do now between the UK and other countries”.—[Hansard, Commons, 27/1/15; col. 744.]

The very fact that she should use phraseology like that goes to the heart of this Bill and to why it is thoroughly undesirable.

I realise that it is perhaps a little rude to be critical of a legislative provision for Northern Ireland on St Patrick’s Day, but on St Andrew’s Day we had the policy of further, not-thought-through devolution to Scotland, on Burns Night, we got the draft clauses which were subsequently amended and which do not work and on St David’s Day, we got votes for 16 year-olds as part of this continuing package of piecemeal dismantling of our constitution and our United Kingdom. All I can say is: thank goodness St George’s Day will be during the election campaign and there will be no opportunity to come along with further measures that relate to England.

Obviously there is great support from people who have a distinguished record of representing Northern Irish interests but I am genuinely puzzled as to what the point of this Bill is. Apart from it being called the Corporation Tax (Northern Ireland) Bill and the Speaker of the House of Commons having certified it as a money Bill, I can think of no reason why it should be a money Bill other than it enables the Government to rush it through Parliament as part of the deal they made for a balanced budget in Northern Ireland and for agreement to welfare reforms which are now being reneged on. Indeed, my noble friend said from the Dispatch Box in introducing this Bill that the Government have no intention of implementing it unless the deal they agreed, which is the reason this Bill is being rushed through the House, is actually met. This is a very shoddy way in which to go about major constitutional reform.

A number of things are being said, such as the Republic of Ireland benefiting because of its lower corporation tax regime. It is true that the corporation tax regime for some revenues is 12.5% but it is 25% for revenue that is not allowed. The reason this Bill takes 87 pages to allow Stormont to set the rate of corporation tax and prevent it from setting or changing any of the allowances is because it adds huge complexity to the tax system. Back in 2005 the then shadow Chancellor asked me to do a tax commission report. We laboured for a year and were charged with having a simpler, flatter, fairer, lower tax system. This is the antithesis of that. There are pages and pages explaining how dredging, films or a whole range of other activities will be affected and how large companies have to decide which of their profits have been earned as a direct result of Northern Ireland. I declare an interest as a director of a bank and an insurance company. Financial services are not allowed to take advantage of this although I think that if you can certify that 70% of the back-office activity is in Northern Ireland it is allowed, but only as a one-off option. What about call centres and things of that kind? The Bill creates huge complexity, which may very well tempt people to go to Scotland where they do not have to have two sets of accounts rather than Northern Ireland. All of this is being done in order to give Stormont the opportunity to set a different corporation tax rate. We assume, if it is about tax competition, that that rate would be set closer to the level of the Republic of Ireland for trading activities at 12.5%. According to the Government the cost of that will be £325 million. My noble friend Lord Shipley talked about distortions in air passenger duty. I think I am right in saying that Stormont already has the power to set air passenger duty but does not because it would cost £50 million to do so. Yet here we have something that could cost—

Photo of Lord Empey Lord Empey UUP

The air passenger duty issue was designed to enable the link between Belfast International Airport and New York to survive. It has been applied only to that route because it is the only direct route from Northern Ireland to the United States. No attempt has been made to alter domestic air passenger duty.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I understand that. I was making the point, perhaps wrongly, that one reason why it has not been done is that it would result in a reduction in the block grant—the point made so eloquently by the noble Baroness, Lady Blood. I think that my noble friend Lord Alderdice earlier referred to the position in Scotland, where the Scottish Parliament allowed its income tax raising powers to desist. They were never used. The reason they were never used was that using them would have resulted in a corresponding reduction in the block grant. It is not terribly electorally smart to tell people that you are going to put their income tax rate up by 3p and, in return, you are going to have the block grant—which is already very generous because of the Barnett formula—reduced by exactly the same amount, so you ask people to pay more tax in order to stay where they are. Exactly the same applies here, unless you believe that a reduction in corporation tax will result in more revenue. I do believe that that is the case, but I would prefer to see this Government, who have made fantastic progress in reducing the rate of corporation tax for the United Kingdom as a whole down to 20p for the next financial year, continue in that way. If we think that there is such a huge problem in tax competition from the Republic of Ireland, the answer to that is to reduce our corporation tax rates nearer those of the Republic of Ireland. But we do not do that because the cost would mean that we would have to make cuts in other public services, such as health and education. Exactly the same applies to Stormont.

Photo of Lord Alderdice Lord Alderdice Liberal Democrat

I am very grateful to my noble friend for giving way. The problem that I have found is that these changes are not made because they do not work for the Treasury here in London, and it regards the value for people in Northern Ireland to be far too small an issue, one that does not get any attention paid to it. That is the reason. The reason for the air passenger duty with respect to the United States is because it is so easy for people to go across the border and to fly out of Dublin. The whole point is that there is a land border. If Scotland was to leave the United Kingdom, I think that you would find that a lot of those kinds of changes became relevant. But it is very important to understand that the situation in Northern Ireland is quite different from that in Scotland, because it is so small, does not have a large financial industry and has a land border. Those are the many reasons why read-across to Scotland does not work, with due deference to my noble friend.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I think that the argument about the land border is overemphasised. I happen to know that people fly from Scotland to Dublin to go on international flights because the flights from Dublin are priced by the airlines at a very much lower rate. That has nothing whatever to do with air passenger duty or taxation and everything to do with the view of the commercial airlines of what the market will bear for their fares. It is a very simple thing to hop on an aeroplane—there are about six or seven a day out of Edinburgh and as many out of Glasgow—to go to Dublin and then to fly to wherever you want to go, to Hong Kong or the United States or wherever. So I do not think that that argument holds water; but perhaps that is a mixed metaphor, because my noble friend is arguing that it is about a land border.

I am totally opposed to giving air passenger duty powers to the Scottish Parliament because it will have a catastrophic effect on Newcastle and the rest of the north of England. Already the amount that we pay in taxes is very considerable. I am arguing that as a United Kingdom we should have a unitary tax system and that this tinkering is absolutely inimical to maintaining a United Kingdom. If as a United Kingdom we believe that reducing corporation tax will result in more revenue and business development, that should be the policy for the United Kingdom.

The noble Lord, Lord McAvoy, chided me for attacking capitalism when it was his job. I was merely pointing out to him the inconsistency of his position. If he supports this Bill and argues that he is in favour of these reductions in corporation tax to help business expand and grow, he cannot at the same time satisfy the noble Baroness, Lady Blood, in her concern about the impact—even if you believe, as I believe, that cutting the top rate of tax from 50% to 45% has resulted in revenues going up by £8.5 billion. I believe that tax cuts can have a dynamic effect. Similarly, when the Liberal Democrats insisted on putting up capital gains tax from 18% to 29%, what happened? The revenue went down by several billion pounds. My noble friend nods; I apologise for not being very positive. However, even if you believe that that is not the case, there is a time lag, and in between times you do not have the money and you have to take that money away from public services. The noble Baroness made that point. I do not think that will be particularly popular and it seems a very strange approach to a situation where people cannot agree on balancing the budget and on meeting their obligations as it is. So I think this Bill is a deal and a piece of constitutional tinkering which is misguided in its approach.

As a Scot, I am worried because I have not heard a single argument here today, other than there is a land border, which will enable me to fend off the devo-max brigade in Scotland and the nationalists who are now running rampant in the polls. The latest poll has them on 55%. That has all been caused by raising expectations and confusing two things—that is, confusing more powers with more money. Everyone in this Chamber knows that having more powers will actually mean less money, but it is being sold to the voters—I suspect that it may well have been sold in this way in Northern Ireland—that if their parliament has more powers, they will have better education and health services and better everything else. However, that is a fantasy. When people wake up to the fact that this is a misguided fantasy, they will blame London and our United Kingdom will be fractured. Therefore, I am very disappointed by this Bill.

However, I agree with my noble friends Lord Alderdice and Lord Trimble on the importance of stimulating the private sector. Scotland also has too large a public sector and we need to encourage business, but corporation tax is paid only by profitable businesses and businesses which are generating capital for investment. However, lots of businesses are struggling. If you want to encourage businesses and cut taxes—that is a priority—why not deal with business rates and levels of national insurance, as I hope my right honourable friend the Chancellor will tomorrow? Corporation tax is a very odd choice indeed.

For all that is said about the success of the tiger economy in the Republic of Ireland, corporation tax receipts went up so dramatically in the Republic when the rates were low because lots of businesses operating in the United Kingdom repatriated their profits to the Republic. According to leaks that have emerged before the Budget, the Chancellor says that he will take action against the Amazons and others who organise their affairs so that they pay tax in low corporation tax countries. The Government seem to be trying to have it both ways.

By the way, no one has mentioned the impact of all this on the Barnett formula. The Labour leader in Scotland is saying that if people vote nationalist, they will lose Barnett. If you continue to devolve more and more tax-raising powers to the constituent parts of the United Kingdom, by definition you will erode and lose Barnett. As was pointed out in the earlier part of the debate, we also have to think about why there is such a disparity in grant to the constituent parts of the United Kingdom. Therefore, as we go down this road, we must move towards a more needs-based system of funding which again will put pressure on Northern Ireland and the public services. So I am with the noble Lord, Lord McAvoy, in arguing that we need a constitutional convention and we need to look at these things as a whole and not on a bit-by-bit basis. Does the noble Lord wish to intervene?

Photo of Lord McAvoy Lord McAvoy Opposition Whip (Lords), Shadow Spokesperson (Northern Ireland), Shadow Spokesperson (Scotland)

Very briefly. The noble Lord has made an excellent case. If he cares to cross the Floor, we will always find room for him.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I suggest to the noble Lord that the Labour Party in Scotland is in enough trouble without me adding to its difficulties.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Shadow Spokesperson (Communities and Local Government) 5:14, 17 March 2015

My Lords, it is a pleasure to follow the noble Lord, Lord Forsyth. It is certainly safer than preceding him in a debate. I start by congratulating the noble Lord, Lord Hay of Ballyore, on his impressive maiden speech. The noble Lord clearly brings vast experience, which will serve us well in this House. It was with a degree of hesitation that I was going to speak in this debate because it looked as though most of those speaking had a long-standing commitment to this cause. I feel a bit more relaxed, having heard the contribution of the noble Lord, Lord Forsyth.

I do not propose to dwell on the historical or constitutional context of the Bill, other than to say that I am happy to follow my party’s lead, as my noble friends on the Front Bench have and will outline. We know that the Northern Ireland economy has underperformed in comparison with the rest of the UK, with some rebalancing of the economy to bolster the private sector being overdue, and reducing corporation tax for Northern Ireland would be one component of a package. The tax rate has a particular significance, given the sharing of a land border with the Republic, which has worked hard to retain its 12.5% rate.

My starting point and first observation, which other noble Lords have made, is that addressing the seemingly straightforward proposition of devolving the rate of corporation tax to Northern Ireland requires some 87 pages of highly technical legislation, albeit encompassing just six clauses and two schedules. This reflects in part the complexity of our corporation tax system, as well as the arrangements necessary to address state aid requirements. I do not argue that this complexity is unnecessary—that is for purposes of the Bill; I accept that it probably is necessary, although there are consequences of this complexity, which I will speak to shortly.

The proposition to devolve corporation tax and the implicit understanding that it would involve a reduction from the current rate, resulting in a boost to foreign or domestic investment, are perhaps not unreasonable. However, as other noble Lords have said—the noble Lords, Lord Trimble and Lord Empey, in particular—we should recognise that it is not necessary in all circumstances to determine the issue of where investment is undertaken. Investors looking to invest in the territory will have a range of requirements, not all the same. The transport infrastructure may be the most important issue for some; for others it may be availability of manufacturing or office space, and the cost of that. I have known housing for expatriate executives and proximity of international schools also to feature. The availability of a locally skilled workforce may be crucial.

Taxation is not just a matter of corporation tax. Particularly for smaller enterprises, the issue may be the personal income tax regime, and especially how international tax protection packages are treated—typically a feature of arrangements for employees seconded by an overseas investor. As for corporation tax, as our briefing identifies, it is not only the nominal rate of tax which is important; it is the effective rate, taking account of the variety of available reliefs, offsets and credits. The extent of these is illustrated by the detailed legislation included in the Bill to make them fit the devolved system. As well as defining a qualifying trade, the Bill covers variously the treatment of losses, intangible credits and debits, R&D credits, expenditure on land remediation, film tax relief and more besides. Obviously these other levers, as the Minister acknowledged, are not to be devolved.

Another point to bear in mind in all this is how any tax levied in Northern Ireland would be treated from the perspective of a foreign investor. Are the overseas profits untaxed at parent company level, or is the tax otherwise creditable against home country taxes on one basis or another, and when do they apply? The overseas effective rate may be more significant in the former, rather than the latter, case. We were advised at our briefing, which the Minister was kind enough to organise, that the UK’s double tax treaties would continue to apply to a Northern Ireland company, as defined; and this is obviously important. The Minister might just say whether the Government consider that any corporation tax levied at the NI rate on the uplift on back-office expenses brought within the regime would generally be creditable, given that the tax is based on deemed, rather than actual, profits. There is a potential multiplicity of factors which influence the attractiveness of the territory for inward investment. I have no doubt the Assembly is well aware of this but none of it negates the potential benefit of a devolved rate of corporation tax, which provides a strong opportunity to make a statement about Northern Ireland being open for business in a big way and hungry for investment. It is symbolic of a determination to have a business-friendly environment.

Of course, alongside the complexities of the tax legislation there is the necessity to work out the requirements of the block grant adjustment, to which a number of noble Lords have spoken, so that the arrangements do not fall foul of state aid provisions. This involves calculations of tax initially forgone by HMRC by direct and behavioural means—presumably that is at the 20% rate—as well as how a deduction should grow over time. We are told that much work is going on in this regard, particularly to be able to make the judgment of whether or not, for the purposes of the Stormont House agreement, the Executive are able to demonstrate that their finances are on a sustainable footing for the long term.

Can the Minister confirm my understanding that the starting adjustment to the block grant is to take the profits which are going to be taxable at the Northern Ireland rate at a 20% rate as its mechanism, so on day one you are balancing tax through Northern Ireland at possibly a 12.5% rate against a reduction in the block grant at the 20% rate? As I understand it, that is how it is intended to work. How that adjustment is changed thereafter is the particular focus of some work.

Any tax system which has complexity, new definitions and concepts, especially with differential tax rates involved, will inevitably attract the attention of the tax avoidance industry. Doubtless as we speak, countless accountants and lawyers are sharpening their metaphorical pencils to see what tax advantage may be gained when the arrangements are put into effect. In introducing the Bill, the noble Baroness said that we have dealt with the issue of brass-plate companies. That is only one potential part of tax avoidance; other mechanisms will doubtless be brought to bear.

The soundness of definitions around Northern Ireland company, Northern Ireland employee and Northern Ireland profits and losses, for example, are fundamental. For SMEs, as we know, a company will be a Northern Ireland company if at least 75% of its staff time and costs relate to work carried out in Northern Ireland. This is a novel approach for the UK. However, is it correct that this means that up to 25% of employee effort outside Northern Ireland can effectively qualify for the Northern Ireland rate? If so, what will be the overall consequences of this? In theory, this presumably means that this extra tax will be collected and retained by the Northern Ireland Executive but there will be an additional adjustment to the block grant. We were told that on introduction 97% of SMEs will qualify under this test.

A parallel point arises more generally should tax avoiders get away with organising income to be subject to the Northern Ireland rate with economic activity still remaining outside Northern Ireland. In those circumstances, who is bearing the risk of the overall tax forgone? Presumably it would depend upon when this all took place. Will it feature in the initial adjustment of the block grant and how the growth of the initial deduction is to proceed? If the reality is that Northern Ireland bears the risk of tax avoidance, who is going to bear the cost of compliance and making sure that effort is made to tackle that avoidance? Does that rest with the Treasury more generally or with the Northern Ireland Executive?

It is noted that the test for SMEs and staff time is a per company one and on the face of it there is a risk that, within a group, arrangements will be made to have split contracts. How is it proposed to address this? The provisions for identifying the Northern Ireland profits and losses of a large company follow a tried and tested route and adopt the principles that are attributable to a permanent establishment. Nevertheless, this approach can give rise to disputes, although unlike the international situation, the revenue authorities will be seeing both sides of the equation. Internal royalties and interest payable by the Northern Ireland regional establishment are to be ignored, but again this is only intra a single company. It does not seem to look at the wider group context.

I will not speculate about what might happen in the future should corporation tax ever be devolved to Scotland. There could be a three-way tussle to work out to which establishment profits are to be attributable across three territories. We know also that a number of international companies organise their affairs to avoid UK tax and try to sustain that on the basis that they can presumably argue that they do not have a permanent establishment in the UK. Indeed, it would be ironic if the wider avoidance measures now being taken by the Government caused them to seek the shelter of a permanent establishment in Northern Ireland.

Time does not permit me to go into this more. It is a pity that we are denied the opportunity of at least a detailed Committee process on this Bill. I do not argue that so much from a constitutional point of view, just that it would be good fun to get into some of the detail of these provisions. However, I accept that we must acknowledge the position of the elected House. This is an important and, I believe, ground-breaking measure which we hope will have the opportunity to be implemented and prove a stimulus to the economy of Northern Ireland.

Photo of Lord Bew Lord Bew Crossbench 5:26, 17 March 2015

My Lords, as I wish to say some cautious and possibly even sceptical things about the Bill, and the project of the Bill, I think in all fairness that I should begin by reminding the House of exactly why it has been brought forward by the Minister today. In his fine maiden speech, the noble Lord, Lord Hay, alluded to some of this. He, like Mr Mark Durkan in the other place, will be aware that in their own constituencies there are people who are working just over the land border for companies which are paying a very low rate of corporation tax. The land border is actually a real and perceptive issue in explaining why the Northern Ireland Assembly has decided to go down this road. There is, I think, a certain pride in the Northern Ireland Assembly that one thing has been done to address the old dependence of the Northern Ireland economy on the state; one move has been made that makes a gesture towards acknowledging the problem, and it is the decision of all the parties to ask for this power. I must say that there is an immediate difficulty: expectations are raised. The Northern Ireland Assembly may possibly find that the expectations raised by this will be somewhat disappointed. That is something which has to be borne in mind.

The Minister referred in her opening speech to the ways in which the project is now covered in the fog and ambiguities relating to the recent crisis of the Stormont House agreement, and I agree with her absolutely. However, even in the months leading up to the Stormont House agreement—and here I mention the “Wonga loan” referred to by the noble Lord, Lord Empey—it was clear that there was a difficulty in Northern Ireland about the public debate. It was very striking that in the days before the Prime Minister arrived it was considered to be the height of local patriotism by large sections of the Assembly to rattle the begging bowl as loudly as possible. No respect or attention was paid to such factors as a needs basis, and here I would mention the north-east of England or the West Midlands. Actually, if we had a block grant on that basis, on the face of it, Northern Ireland would really face significant reductions.

I say this not because I do not believe in the union and the necessity within the union for regions that are less well-off to be looked after in both the good times and the bad times. I was struck last Thursday in your Lordships’ House by a debate in which the noble Lord, Lord Shipley, spoke about the 70th anniversary of Dresden. He spoke as somebody whose father had been an air raid warden in Coventry on the night of one of the worst bombings. A number of other British cities were mentioned as having suffered the bombing. Actually, Belfast was the city that lost almost 1,000 people in one night, the second heaviest loss of life as a result of German attacks.

The union means that you are there in good times and in bad times, and that is the great attraction of the idea. I absolutely accept the argument that Northern Ireland has required and has received special and generous treatment from the Treasury in recent times, but there is a problem with devolution. As I am sitting beside the noble Baroness, Lady O’Neill, I cannot help thinking about her kinsman’s autobiography. Terence O’Neill, later Lord O’Neill of the Maine, discussed some of these issues. He explains in his autobiography that he could not convey, even to well educated people within Northern Ireland, that Northern Ireland, even in 1968, was subsidised by the Treasury. He had to take that into account in his relationship with the British Government.

One of the most remarkable achievements of devolution in Northern Ireland was to move away from the Government of Ireland Act, which set up an unsustainable basis for the funding of Northern Ireland, and replace it with the principle of parity. It was the achievement least understood by the population at large. That is the paradox of Northern Irish devolution. Devolution is again having that effect internally. The population does not seem to understand. The public debate is not sufficiently informed by the realities of the relationship to the Treasury.

There is a second ambiguity at the moment which was not alluded to by the Minister in her opening speech. That is the situation regarding future developments with respect to corporation tax. The Chancellor has spoken recently about the possibility of UK corporation tax going to 15%. The Republic’s corporation tax is now 12.5%. In real terms, the Republic’s corporation tax, because of devices known as the “double Irish”, is something like 3% to 4%. That is the clue to so much of the attraction of inward investment which has kept that economy afloat, but it is actually a remarkably low effective corporation tax.

By the way, this House has seen an unusual amount of capitalist knocking for the House of Lords this afternoon, but I would like to add my two-pennyworth. One of the implications of the discussion we have had is that the Varney report referred to, originally produced in the Treasury, said that corporation tax was not the decisive factor in the decision of companies to employ, and there were other factors, and it was really only number six. Actually, this Bill is impossible without the assumption that this polling, or this word from our capitalist class, is a lie. It is based on the assumption that they are simply not telling the truth about why they behave as they do, and that actually they follow the low rate of corporation tax. The experience of the Irish economy is the key thing, and all the other things that they talk about as vitally important are not really that important. They might fill in a form and say that, but look at how they behave. That is my little bit added to the unusual wave of anti-capitalist rhetoric sweeping the House of Lords this afternoon. This legislation is tacitly based on the fact that what companies tell us about their behaviour with respect to corporation tax is not the full truth—to put it as simply as that.

If the Treasury achieves the aim of getting 15%, and if the unusual mechanisms known as the “double Irish”—which pushed Irish corporation tax down to 3% or 4%, or so it is reported—are now coming under attack from the United Kingdom Government, the European Union and the United States Government, is it not reasonable to think that, two years down the road—in effect, this legislation has a two-year stay on it—the level of corporation tax in the United Kingdom may not be that much removed from the real corporation tax levels of the Irish Republic? The legislation is driven by a keen desire on the part of the Government and the Assembly to show that something can be done to attempt to rebalance the Northern Irish economy. We all have to respect that. However, it may be the case that, two years from now, it might not have quite the meaning it seems to have today.

I conclude with one technical point which came up in the debate in the other place. There was unanimity across a number of the Northern Irish parties—the SDLP, Lady Sylvia Hermon, the Alliance Party and some in the Democratic Unionist Party—about those companies entitled to come within the ambit of eligibility for lower rates of corporation tax. Essentially, the point was made that credit unions and mutual societies had a case to be included and were not an example of potential brass-plating. I have campaigned with Mr Mark Durkan in the other place for the credit unions of Northern Ireland. They are racy of the soil and are used by as many as 30% of population. It does not seem to me that mutual societies and credit unions are an example of possible brass-plate abuse. If we are going ahead, I think that there is a case—certainly, it was argued across a number of the parties—for looking at the categories that might be included within the ambit of the legislation.

Photo of Lord Lexden Lord Lexden Conservative 5:36, 17 March 2015

My Lords, the noble Lord, Lord Bew, is an old friend from academic life and it is good to follow him. It is good, too, to have an opportunity to congratulate the noble Lord, Lord Hay of Ballyore, on his maiden speech. It is clear that he was a faithful and dedicated servant of the Northern Ireland Assembly, just like his predecessor, my noble friend Lord Alderdice.

I share the hope that has been widely expressed in this debate that the Bill before us will assist the progress of Northern Ireland and help secure its longer-term prosperity. The important measure of devolution for which the Bill makes provision has not, like some other measures of devolution, been conceived in undue haste or brought forward with insufficient preliminary work. The case for devolving the rate of corporation tax in Northern Ireland was advocated powerfully in Ulster Unionist circles in the 1980s, as my noble friend Lord Empey has told us. It was taken up enthusiastically by my right honourable friend Owen Paterson when he was Conservative shadow Secretary of State for Northern Ireland before the last election. A commitment to action was included in the Conservative Party’s 2010 manifesto and in the manifesto of the Ulster Unionist Party then led by my noble friend Lord Empey. Indeed, it was the subject of discussion between the two parties as part of the work that was done with the aim of creating an enduring partnership between them. I regret that that aim was not in the end successfully accomplished. Ulster’s position in the United Kingdom would have been strengthened by such a partnership.

After the election, the coalition made clear in its Programme for Government that it would,

“work to bring Northern Ireland back into the mainstream of UK politics”— a commitment to lift all true unionist hearts. In the course of doing so, it would examine,

“potential mechanisms for changing the corporation tax rate in Northern Ireland”.

That examination began exactly four years ago with the publication of a government consultation document stressing the overwhelming need to rebalance the Northern Ireland economy by increasing the size of its private sector, which over several generations had shrunk so alarmingly.

From 2011 onwards, I inquired about the progress of the Government’s work through a number of Oral and Written Questions. There is little doubt, I think, that the announcement of the Government’s decision was delayed to avoid discussion of it during the Scottish referendum campaign of last year. The decision was finally made known in the Chancellor’s Autumn Statement last December, and I welcomed it in the debate on the Statement which took place in this House. It is important to remember that the Bill implements clear commitments that have been given to the people of Northern Ireland. It would have been extremely regrettable if a measure so long in gestation and enjoying such widespread support in Northern Ireland had not been carried into law before the election.

We are all extremely conscious of the acute difficulties that have arisen within the Northern Ireland Executive. It is obvious that they must be resolved if the scene is to be set successfully for the transfer of power over the main corporation tax rate to the Executive in 2017, the target date. I express my admiration for the tenacity and determination with which my right honourable friend the Secretary of State for Northern Ireland continues to work with the political parties in the Province to try and overcome the severe problems. Her predecessor, my right honourable friend Owen Paterson, pressed the case for the devolution of corporation tax with immense fervour. The arguments which he and many others made have been accepted widely, if not universally, in Northern Ireland. In these circumstances, it would be tragic if political instability in Northern Ireland should, at the final hour, deprive the Province of the prospect of benefits which so many economic experts predict and which so many business men and women hope to deliver.

When the Chancellor announced the Government’s decision in favour of devolution, in his last Autumn Statement, the Northern Ireland Chamber of Commerce and Industry declared that,

“our politicians must grasp this opportunity”.

There is no doubt that that is exactly what Northern Ireland politicians, as a whole, wish to do. I hope that, with the assistance of my right honourable friend the Secretary of State for Northern Ireland, they will be able to make that wish a reality and then go on to deal successfully with the challenges that will at once arise, most notably through the reduction of Northern Ireland’s block grant, which has rightly featured prominently in this debate.

This is a money Bill but, as a number of noble Lords have stressed, it has significant constitutional implications. It adds a new element to the unbalanced and asymmetrical arrangements that characterise the United Kingdom’s three devolved settlements and create resentment in undevolved England. The justification, as we all know and has been stressed often in this debate, is the existence of a low rate of corporation tax in Northern Ireland’s neighbour, the Republic of Ireland, with which it competes for international investment. Will the greater imbalance that this measure will introduce within the devolved settlements be accepted on all sides in Wales and Scotland? As we have heard, it is clear that it will not. Nationalist politicians in Scotland and Wales have said that what Northern Ireland has, they must have too. How will the main British parties react? That is the question to which we now need to know the answer.

This Bill has been conceived in the best interests of Northern Ireland and could serve those very well indeed. However, at the same time, it could add to the United Kingdom’s constitutional instability which, sadly, is so marked a feature of life in our country today.

Photo of Lord Browne of Belmont Lord Browne of Belmont DUP 5:42, 17 March 2015

My Lords, I congratulate my noble friend Lord Hay of Ballyore on an excellent maiden speech. During his long public service, he has continually sought to achieve consensus between the two communities in Northern Ireland and he has had a great deal of success in that. His fair-mindedness, negotiating skills and ability to remain calm when faced with adversity will enable him to make a useful contribution in this House.

I wholeheartedly support the Bill and it is fitting that it will complete its parliamentary stages on St Patrick’s Day. I am not suggesting that we will be celebrating the Bill in 1,000 years’ time, but it has the potential to transform Northern Ireland’s economy in the long term and to ensure a level of prosperity that the Province has not enjoyed before. Although today is the end of the parliamentary process, this is far from the end of the corporation tax story. To quote Sir Winston Churchill,

“this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.

Indeed, what a long beginning this has been. The campaign for the devolution of corporation tax for Northern Ireland in its present form dates back a decade. I thank the business groups that have supported the campaign to build a political consensus on this issue for many years. Their work helped to build support for corporation tax devolution not just among Northern Ireland’s politicians but among key Northern Ireland Office and Treasury Ministers. That support proved invaluable when difficult times came.

I pay particular tribute to Northern Ireland’s First Minister, Peter Robinson, who played a very significant role in championing this cause in the Northern Ireland Assembly. I also thank the present Government for taking the initiative on this and responding to the united political call from the Northern Ireland parties. I am sure that at times it would have been easier to accept the Treasury orthodoxy on such matters rather than to take a new policy initiative. Despite any doubts that it may have had, the same Treasury did not hesitate to commit itself to drawing up the Bill. I know that the policy of corporation tax devolution has not been enthusiastically supported by the Labour Party but I must acknowledge its role in ensuring the Bill’s smooth passage through Parliament.

Strictly speaking, the Bill does not devolve corporation tax powers to the Northern Ireland Assembly but allows the Assembly to set the Northern Ireland rate of corporation tax, with every other aspect of the regime remaining the responsibility of Her Majesty’s Revenue and Customs. That is why I think that those who have some concerns about the Bill on constitutional grounds are wrong. The Bill does not in any way undermine the union between Great Britain and Northern Ireland. Indeed, if this policy proves to be a success, it will mean that Northern Ireland will make an increased contribution to the United Kingdom economy. That can only be good for Northern Ireland in particular and for the United Kingdom as a whole.

There are others who argue that Northern Ireland will not reap the rewards of a lower rate of corporation tax but will pay too heavy a price in the reduction of public expenditure. Time does not allow for a comprehensive rebuttal of this argument but I will briefly make the following observations.

First, most economists agree that a reduction in the corporate tax rate is one of the most effective policy tools to achieve a rebalancing of the Northern Ireland economy towards the private sector, which in my view is an essential prerequisite for future economic prosperity. Convincing evidence is provided in a recent study by Ulster University’s Northern Ireland Centre for Economic Policy, which has estimated that the lowering of the corporation tax rate to 12.5% from April 2017 would result in the creation of 37,500 additional jobs by 2033. In simple terms, that means more jobs and better jobs. It means more money circulating in the local economy, and a higher standard of living and a better quality of life for everyone in Northern Ireland. In the longer term, it means that we have the capacity to fund public services at the level many of us would wish to see.

A lower rate of corporation tax is good not just for foreign direct investment but for our indigenous businesses. While a reduced level of corporation tax for Northern Ireland is not in itself a panacea for all our problems, the Bill as drafted provides useful safeguards on several technical issues. The separate arrangements for large companies and SMEs and the exclusion of profits from investment and certain other activities seem eminently sensible. This should discourage tax avoidance through brass-plating and encourage employment-creating trading activities and foreign direct investment.

Secondly, the experience of the Republic of Ireland would indicate that a lower level of corporation tax has been one of the key drivers of its economic success. It is no coincidence that, even at their lowest economic ebb, this is the one policy that the Republic of Ireland’s Government have refused to give up.

Thirdly, it must be recognised that this policy will involve difficult decisions about reductions in public expenditure. In my view, the Northern Ireland Executive will have to prioritise interdepartmental discussions to arrive at a budget agreement to facilitate the earliest possible implementation of the rate cut.

I do not pretend that significant issues and challenges do not remain, both in terms of agreeing all the final details and in relation to the other measures that the Northern Ireland Executive will have to put in place to ensure that the policy is a success. I am confident, however, that these challenges can be overcome.

After today, the next phase is the rollout of this power: it will pass to the Northern Ireland Executive to take forward. We now need the Executive to agree what the Northern Ireland corporation tax rate should be, from when it should apply and over what period it should remain in force. In these areas, with some compromise on all sides, I believe that agreement can be reached.

My party’s preference would have been for a 10% corporation tax rate, but it is prepared to go along with the emerging consensus that the rate should be 12.5%. The earliest possible date for the introduction of this rate is April 2017. Given that we have waited so long for this power, the rate should be introduced as soon as possible after that date. A quick decision will enable Invest Northern Ireland to go out and sell the policy to those investors for whom a low headline rate—

Photo of Lord Trimble Lord Trimble Conservative

I thank the noble Lord for giving way. He is talking about the desire to have quick decisions on this. Did I miss something? Did I miss him saying when the implementation of the Stormont House agreement would be sorted out through fully providing for welfare reform and implementing it? I did not hear that.

Photo of Lord Browne of Belmont Lord Browne of Belmont DUP

I am saying that this cannot be implemented until all these things are sorted out.

Finally, I hope that there will be a political consensus that the lower corporation tax is not merely a short-term experiment but a policy that will be in place for many years. That is what is needed to give the long-term confidence to businesses and investors that Northern Ireland is the place to do business. The Bill will provide a sound basis for the development of a productive economy fit to survive in the very competitive global economy. It is a good example of positive co-operation between the Northern Ireland Executive and the Westminster Government and I trust that it will be one of many in the coming years.

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury) 5:52, 17 March 2015

My Lords, this has been a fascinating debate, in which two obvious problems with the Bill have been identified that might not have been entirely anticipated. They broadened the debate to such an extent that I sympathise with the Minister responding to it. The breadth that has developed is obvious enough. First, questions have been directed to points of such substantial detail that we want answers this evening because this is a money Bill and we have no chance to press the issues any further. Therefore, I hope that the noble Lord—I know how scrupulous he is in observing time limits when he is winding up—will indulge himself sufficiently to respond to those very detailed points, one of which I will refer to in a moment, so that we can make as much progress as we can before we pass the Bill, defined as it is as a money Bill, by taking all its stages after Second Reading.

The second aspect that has broadened things was raised by the noble Lord, Lord Forsyth. He was not alone in this respect, although he probably presented the most challenging dimension on it. The noble Lord, Lord Shipley, accurately reflected this as well. They said that the Bill raises issues relating to devolution powers and the position of the United Kingdom.

I am absolutely delighted to welcome the contribution of the noble Lord, Lord Forsyth, on the prospects of a convention immediately after the election. He has only to vote Labour and he will help with that. Unfortunately, he is not allowed to but perhaps he can persuade the other members of his family to vote Labour to ensure that we have a convention after the election.

The noble Lord, Lord Shipley, also identified in his very useful contribution that there are real issues at stake here. I do not doubt that the noble Lord, Lord Newby, will be somewhat reluctant to indulge in that part of the debate to a very large extent. However, it is clear that this is a further step towards devolution, which is welcomed on all sides. We heard in all speeches—and know from the deliberations in Northern Ireland, particularly in the business community—that people are in favour of this measure. Of course, as the noble Lord, Lord Bew, indicated, that might be on the basis of a fairly limited perspective on what the implications are for devolution and the position of the United Kingdom as a whole—the interaction of the parts. We heard some very challenging contributions today. It is a great pity that we are able to raise them only in the context of a Second Reading debate that concludes very shortly.

Of course, we support the Bill and will give every assistance to its progressing satisfactorily. However, we have anxieties about it. Noble Lords raised the question of the trade-off between this and the block grant. Extending wider than that, there is the whole question of devolution arrangements as well. The Barnett formula came into the debate, too. We have anxieties on those issues and the Minister must recognise that when the Bill goes through, the hoped-for increase in revenue in due course will be balanced against the block grant. I hope he will appreciate that this has considerable ramifications for the Northern Ireland public.

My noble friend Lady Blood emphasised the fact that loss of resources for government might crucially affect the amount that the Government are able to invest in, for example, training and education. These are clearly issues of great importance to making a strategy for increasing the private sector’s capacity to compete successfully. Reference was made to the days of the Republic of Ireland tiger, but it was not just the business rate taxation that was crucial to Ireland. A great deal was made of that, of course. As the noble Lord, Lord Forsyth, reflected, certain companies hived themselves off to the Republic to take advantage of that, but other factors at play also made the Republic attractive at that time. Northern Ireland has a clearly important task to fulfil in matching up in certain respects.

That is why we are concerned about the effect of this. The Government have made it clear that there is a delaying timetable for the implementation of this measure. It is dependent on the Northern Ireland community, particularly the Assembly at Stormont, reaching an agreement that gives the Government confidence that there is fiscal security in the economy, and gives strength to that economy. Two years is a pretty short timetable to make that demand—it is a pretty substantial demand as well. The Minister must flesh out what his tests are for this demand being met before corporation tax reduction powers are vested in Northern Ireland.

None of us regards corporation tax as a panacea. It can play its part, and we are aware of the strength of opinion in the business community that it will help, but it is not a panacea for the economy; much more substantial improvements need to be made as far as the Northern Ireland economy is concerned. Therefore, the only thing I can say to the Government is that I understand their need for delay—they want to get the Bill through before this Parliament concludes and so they built in the delay before implementation—but delay is no friend in circumstances where things are not improving as rapidly as one would hope.

I hope the Minister will address these issues and at least have a shot at the broader constitutional problems.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I wonder whether the noble Lord, Lord Davies, can help me by answering the question that I put to his noble friend Lord McAvoy. I am just a bit puzzled. Of course the business community welcomes the Bill, because profitable businesses will pay less tax at the expense of the resources that are available for public services. Why is the Labour Party supporting such a measure?

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury)

My Lords, we see that there is support in Northern Ireland for the Bill, which will give some chance of rebalancing the economy to a certain extent. We are in favour of that, but recognise that the development of the Northern Ireland economy, as with all the other parts of the United Kingdom, will depend on much more fundamental issues than the rate of corporation tax. That is why we regard this as a marginal Bill in these terms. However, it would be fruitless of us to object to it, although I accept his point about why we did not address ourselves to other issues, rather than the reduction of corporation tax. He will know, because he is so well informed on Labour Party policy, that we propose to increase the corporation tax rate for the rest of the United Kingdom, with the specific objective of reducing business rates for small and medium-sized businesses. We think that is a quicker and more effective way of giving stimulus to the business community. There we are: on two areas of policy, the noble Lord, Lord Forsyth, and I are in full agreement. I did not expect to say that this evening.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

If it is the policy of the noble Lord, Lord Davies, that it is better to reduce business rates and that that should be applied to the rest of the United Kingdom, why is it not his policy to do that in Northern Ireland? If he believes that that is the right approach, why is he proposing something that he rejects as being the right approach in the rest of the United Kingdom?

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury)

My Lords, has the noble Lord not noticed that I am speaking from the opposition Benches? We are not in a position where we can implement our policies at present. It is only a matter of a short delay, as the noble Lord, Lord Forsyth, will readily appreciate. But at this stage, the Government put Bills before us and this is the Bill we have. I have only two alternatives: to reject the Bill whatever its benefits, or to accept it but state that we can do better. That is exactly what I have argued.

Photo of Lord Empey Lord Empey UUP

My Lords, I am sorry to have to interrupt this job interview for the best anti-capitalist speaker in the House, but will the noble Lord, Lord Davies, clarify one thing? I am assuming that the Opposition support the Stormont House agreement. That agreement has subsequently been ratted on by one of the parties to the it. It appears to some of us that the reason they are doing that is the hope that, after the election, were there to be a change of Government, the noble Lord’s party would be more readily prepared to put more money into the Stormont House process. Therefore, they are holding out in the hope that that might happen. Will the noble Lord clarify that that is not the Opposition’s position and that the Labour Party stands over the Stormont House agreement as it was dealt with at the end of December?

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury)

Is the noble Lord seriously asking me to clarify conjecture about why people have acted as they have done in Northern Ireland thus far? The Government have said that this will need to be resolved because the reason for delaying implementation of this measure is to give us time for that to be done. We will obviously take considerable advantage of such time when we come to power.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 6:05, 17 March 2015

My Lords, perhaps surprisingly, it was with a certain amount of affection that I looked at the possibility of speaking in this debate today because the first Question I answered from the Dispatch Box, nearly two and half years ago, was about the devolution of corporation tax to Northern Ireland. It was one of the most frightening experiences of my life. Despite that affection, I am not sure that I can share the worry, or sadness, of the noble Lord, Lord McKenzie, that we will miss the fun of Committee. There are many adjectives I could think of that would describe a Committee stage on this Bill, but I am afraid I am not sure that “fun” would be near the top of my list. Perhaps that shows a lack of imagination.

I am delighted to be able to congratulate the noble Lord, Lord Hay of Ballyore, on his excellent maiden speech. He brings with him a formidable reputation as someone who has been able to persuade people, in a quiet, effective way, to work together for the good of the community at large. It is clear that these qualities are still needed in Northern Ireland today, just as they ever were. Those qualities are going to be needed if we are going to see the kind of economic development that everybody who has spoken on the Bill wishes to see in Northern Ireland.

The noble Lord, Lord Bew, I think, stressed the key issue and the key difference that has characterised the debate today, which is one of expectation. Some in Northern Ireland have very high expectations for the Bill, while others, in your Lordships’ House, have very low expectations. There is very clearly, in this Chamber at least, no agreement on that. At one end of the spectrum we have the noble Lord, Lord Forsyth, and at the other, the noble Lord, Lord Browne of Belmont, but it is quite telling that the greatest enthusiasts for this legislation are those in Northern Ireland who, on a daily basis, are grappling with how to make the economy stronger. The political parties and the business community are extremely keen on this. To respond to the noble Lord, Lord Davies of Oldham, on whether we should do this or business rates, the business community have said that this is what they want. It is in response to a combination of the strength of feeling in the business community and of that in the political parties that the Government have entertained this measure.

Whatever view you take about the desirability of doing this, there is clearly a huge amount of uncertainty about what the outcome will be: there are many variables that we cannot possibly bottom out at this point, several years before it comes into force. However, for the rest of my time, I will deal with some of the concerns noble Lords have raised and clarify some of the issues which are clearly uppermost in people’s minds.

The noble Lord, Lord McAvoy, began by expressing the hope that there would not be brass-plating—companies just having a brass plate in Northern Ireland and doing business elsewhere. The rules in the Bill contain many features to protect against avoidance. In addition to the exclusion of investment income, the main one is the adoption of rules for large companies which are based on existing international principles. Pure brass-plating simply will not be possible because the rules require a physical presence in Northern Ireland and, more fundamentally, a calculation of Northern Ireland’s trading profits, as if the company were a stand-alone entity, so that concern should not be too great.

A number of noble Lords, starting with the noble Lord, Lord McAvoy, asked about the modelling of the impact of the different rates. The example that the Government have set is on the basis of a 12.5% rate of corporation tax in Northern Ireland, assuming a 20% UK rate. This is expected to be £325 million in 2019-20, which will be the first steady state year if implementation takes place in April 2017 and if the rate in Northern Ireland from April 2017 is 12.5%. Obviously, the Executive will have the power to consider the impact of setting the rate. The UK Government will continue to work with them on the detail of the block grant deduction.

The noble Lord’s question on modelling led into his second question about the impact on overall income for the Executive and what that could mean in terms of levels of public expenditure. This is a key question that the Executive will have to decide, but one way in which they might decide to progress—I am not saying that they will do this—rather than going through a very big change in one year, is to reduce the rate over a number of years, as we have done in the UK, so that you set a direction of travel, with a rate of 12.5% as the end-point. It would not be necessary to implement it all from year one. The reason why we have spread it over a number of years here is that it spreads the cost, while at the same time giving companies that are investing the UK a sense of where they are going to be in a few years’ time.

The other point in terms of how the Executive will be able to manage a potentially big reduction in their income is that the impact does not all come in in one go. Even if you were to reduce the rate to 12.5% from day one, the impact on the Executive’s budget would rise from £120 million in 2017-18 to £280 million in 2018-19, and then get to the steady state level of £325 million in 2019-20. So, in any view, you will have a phasing in.

My noble friend Lord Trimble pointed out that the Varney report suggested that there was a raft of other things just as important as this tax change for the viability and strength of the Northern Ireland economy, including the labour market, telecommunications and transport; obviously, that is true. We have, as a Government, been helping the development of high-speed broadband and the transport infrastructure in Northern Ireland. But if anybody thinks that we are going to get the full benefit of a reduction of corporation tax while standing still on all these other very important issues, they are clearly incorrect.

I believe that my noble friend Lord Trimble was the first to raise the issue of how the rest of the UK would see this change—a point very eloquently developed by my noble friend Lord Forsyth. As far as Scotland and Wales are concerned, the Smith commission did not recommend devolution of corporation tax, nor did the Silk commission in Wales. The suggestion that there will inevitably be the same kind of pressure from Scotland and Wales as there has been from Northern Ireland is not really borne out by the experience of the views of the political parties in those parts of the United Kingdom.

Photo of Lord Alderdice Lord Alderdice Liberal Democrat

I shall press my noble friend a little. There is a huge focus on what happens if this is introduced and all the modelling and so on. I emphasise to him that part of the purpose of this is so that those people who want to take Northern Ireland out of the United Kingdom and who want to harmonise the arrangements with the rest of the island are, by the device of this Bill, made to face the real political and economic consequences of any such process. The likelihood is that, whether because things would change or not, they will look at the situation, add up the sums and discover that going down this road is not what they want to undertake. This is a completely different thing from the situation in Scotland or Wales where there is not another country that people want to be part of that is a comparator or competitor. If Northern Ireland has this power and decides not to use it, that is a very strong pilot exercise to say to people in Scotland and Wales that there is no point in going down this road because it is not actually a serious economic goer. I want to emphasise that there is a political dimension to this in terms of Northern Ireland that is quite separate from any of the economic debate which has formed a large part of this debate.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

No, it is not accepted. My noble friend said that by giving more powers to Northern Ireland, and with it more responsibility, the case for breaking away from the United Kingdom will be blunted. That is precisely the argument which has been used by the Government in Scotland, where we gave more powers after we had won a referendum on independence, and the result is that the nationalists have surged. My noble friend says that no one in Scotland is crying out for corporation tax powers, but the Scottish nationalists are crying out for devo-max. In the past six months, they have gone up to 55% in the opinion polls, and the Labour Party, which has advocated more powers on the same argument as my noble friend has put, is facing annihilation. Can we not learn the lesson that by giving more powers to constituent parts of the United Kingdom, we break the unitary state which is the United Kingdom and give succour to those who wish to smash it up? When my noble friend says that Scotland is not like Ireland because there is no other country it can be, yes there is. It can be Scotland as an independent country outside the United Kingdom. That is the threat.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I am not sure that is a threat in respect of Northern Ireland. I disagree with the noble Lord about both the principle of devolution and its effect. The SNP is at 55% in the polls today but, if I were a betting man, I would say that it will not be at 55% in the polls in 10 years’ time when we have seen how it manages taking responsibility for Scotland’s own income. It seems to me that one of the great weaknesses about the current settlement in Scotland is that the Scots Nats or the Government in Scotland wait to get a cheque from England but, however big it is, it is not big enough, and they do not have the responsibility for raising the money themselves. Now, they will have significantly greater responsibly for raising the money, and that will mean that they have to take more responsibility. I think that is wholly beneficial. I just disagree with the noble Lord, I am afraid.

The noble Baroness, Lady Blood, asked about building societies and credit unions. The effect and the design of the scheme is that in order to attract genuine economic activity, some mobile trades and activities are excluded, including lending and investing. The rules in respect of lending and investing do not distinguish between types of entity, so banks and building societies are treated on the same basis for that purpose. In respect of credit unions, the Northern Ireland corporation tax regime applies only to trading activity in order to encourage genuine employment. The income from the loans that credit unions make to their members is not currently taxed as trading income, so credit unions do not pay corporation tax on that income. Given those special rules already in place, this income from loans will remain outside the Northern Ireland corporation tax rules. Perversely, to bring the profits within the trading income rules, and so within the Northern Ireland regime, would likely result in them paying more tax. I do not think that credit unions are being disadvantaged by this.

Photo of Lord Trimble Lord Trimble Conservative

I am going slightly off the noble Lord’s point on credit unions and back a little bit. I think it is a mistake to rule out financial services. Northern Ireland missed out completely on the changes that have taken place in financial services in the United Kingdom over the last 20 years. We do not have a significant financial service sector at all, yet that sector is much more profitable than nearly all the other sectors of economic activity in the United Kingdom. You are keeping the most valuable service sector, in which we do not have any significant representation, away from us. If you want to rebalance the Northern Ireland economy that really ought to be up at the top of the list.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I am afraid that the Government have not taken that view in the way they have produced this. They have thought about it and decided that they did not want to go down that route.

The noble Lord, Lord Shipley, talked about the broader impact of the measure and of APD on the rest of the UK. I agree with him—he will not be surprised to know—in that these things need to be dealt with under a constitutional convention. Nobody could claim that the devolution picture across the UK is anything other than rather piecemeal and the time is long overdue for us to try to bring a bit more coherence to it, not least in terms of the English question.

The noble Lord, Lord Empey, talked about the necessity for the parties in Northern Ireland to agree on the budget reduction. Everybody agrees that the budget reductions should have been embarked on earlier, but the process has now started and we are determined to encourage and support the Executive in the future as they grapple with these issues. We are totally clear that the Executive must balance the budget and, to do that, welfare reform must go ahead.

The noble Lord, Lord Forsyth, ranged widely over our constitutional issues and problems. He did not mention that Yorkshire Day is in the middle of the Summer Recess and therefore I will be denied the possibility of getting a big set of powers devolved to Yorkshire, for which I am extremely sorry—but we cannot have everything. I think the noble Lord’s characterisation of the extent to which this would complicate the system and make life difficult for businesses was slightly overdone. The rules we are introducing for larger companies are based on existing OECD principles which companies already operate. As he pointed out, the design seeks to retain coherence within the corporation tax regime as whole. Only one variable is being affected and the whole system is being administered by HMRC, with which all the companies already have relationships.

The noble Lord, Lord McKenzie, asked a number of detailed questions, some of which I hope I can deal with. He asked whether the notional profit attributable to back office was creditable in the rest of the UK tax computation. This notional profit forms part of the attribution of trading profits to the Northern Ireland regime, so will not feature as mainstream—to use the language of the Bill—profit; that is, non-chargeable at the UK rate.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Shadow Spokesperson (Communities and Local Government)

I am sorry, but my question was about not whether they are creditable within the UK system but whether they would be creditable to a foreign investor.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I shall have to write to the noble Lord on that point, but I suspect that the answer is yes. However, I am not confident, so I shall write to him.

The noble Lord asked about whether an SME that is determined to be within the Northern Ireland regime but has 25% of its activity within the UK has all its corporation tax charged at the Northern Ireland rate. The answer is yes—all its qualifying profits will be taxed at the Northern Ireland rate. It is estimated that more than 99% of the small and medium-sized businesses affected have 100% of their trading activity in Northern Ireland. That seems rather a large figure but, even if it was slightly less than that, the amount of potential tax forgone for the UK in one guise or another is very small.

The noble Lord asked how it would work in calculating the block grant. If and when this power is in place, the Executive’s funding will consist of three elements. The Barnett formula continues to operate, so there is the Barnett-based block grant. There is then a block grant adjustment, so there is a deduction from what they would otherwise have got, to reflect the CT revenues forgone. Then you put back in the CT revenues that you are collecting. That is the principle of it. I accept that actually doing it is quite complicated, but the principles are quite clear.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Shadow Spokesperson (Communities and Local Government)

I shall not make this a dialogue, but is the consequence that on day one the deduction from the block grant would effectively be at the current mainstream corporation tax rate and the benefit at the Northern Ireland corporation tax rate? Clearly there is a differential between the two, which is why you get a substantial negative in the block grant, at least on day one.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

Will the Minister just elaborate on that? Let us just say for the sake of argument that it is decided to drop the corporation tax rate to 12.5% on day one. The Government have made an estimate that that would cost £325 million. Would the block grant then have £325 million deducted on day one? Is it based on the estimate? Given that we know how volatile corporation tax is from year to year, how would that work? I do not want to be rude, but it does rather feel as though the Government are introducing a Bill without knowing how it will work in practice, or how much it will cost. It does matter, for reasons that the noble Baroness, Lady Blood, pointed out in her speech.

Photo of Lord Newby Lord Newby Lords Spokesperson (HM Treasury) (Whip), Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

First, Northern Ireland would not lose the £325 million on day one. As I said, there is a transitional period; it takes three years before the full effects work through, because of the time that it takes to get corporation tax returns sorted out. On the second point, on how it works out, the model that is being followed closely follows the model that has been agreed with the Scottish Executive in respect of income tax for Scotland. So a lot of work has been done on that, and the principles and the practice will follow from Scotland to Northern Ireland. I am happy to write to the noble Lord about it—it is extremely technical. But I can assure him that a lot of work has been done on the issue already.

I am well over time. I just say to the noble Lord, Lord Bew, that the double Irish arrangement is coming to an end, so he is right to the extent that the rate would go up there.

As I said at the start, this is a measure that is broadly supported in Northern Ireland by the political and business community. It has raised varying expectations. The view of the Government is that it has the potential to encourage genuine investment and help Northern Ireland to become competitive, boosting the entire UK economy and the standard of living of people across Northern Ireland. But it will be for those in Northern Ireland—business and politicians alike—to ensure that, if and when the Bill comes into effect, it has the desired effect.

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.