With this it will be convenient to discuss new clause 2—Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate—
“(1) CTA 2010 is amended as follows.
(2) After section 357WH (Allocation of Northern Ireland profits etc of firm to company), insert—
‘357WI Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate
(1) As soon as practicable after the completion of the first financial year in respect of which the Northern Ireland rate is set by the Northern Ireland Assembly in accordance with the provisions of section 357IA, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes to chargeability of trading profits to corporation tax at the Northern Ireland rate made in Schedule 7 to the Finance (No. 2) Act 2017.
(2) A review under this section shall consider in particular the effect of those changes on the extent to which companies are based in—
(a) Northern Ireland, and
(b) Great Britain.
(3) A review under this section shall also consider the effect of those changes on the extent to which the profits or losses of companies and firms are Northern Ireland profits or losses.
(4) A review under this section shall also consider the effect on employment in—
(a) Northern Ireland, and
(b) Great Britain.
(5) A report of the review under this section shall be laid before the House of Commons within one calendar month of its completion.’”
This new clause requires HMRC to carry out a review after the first year of operation of the Northern Ireland rate of the effect of the changes in Schedule 7 on the location of companies in Northern Ireland and in Great Britain, the extent to which trading profits and losses are treated as subject to the Northern Ireland rate and on employment in Northern Ireland and in Great Britain.
As with my contributions earlier this afternoon, I will set out why the Government have included this measure in the Bill, before turning to new clause 2.
Clause 25 and schedule 7 make amendments to the Northern Ireland corporation tax regime. The Government are committed to supporting growth across all parts of the UK. Creating a stronger Northern Ireland economy will benefit the entire United Kingdom.
Northern Ireland faces a unique set of circumstances and challenges. That is why, in 2015, this House legislated to devolve corporation tax rate-setting powers to the Northern Ireland Assembly, subject to commencement regulations. The introduction of the regime received nearly unanimous support from Northern Ireland’s political leaders and business community. The rate-setting powers given to the Northern Ireland Assembly are another tool to help rebalance the Northern Ireland economy by revitalising private enterprise and attracting new investment.
This clause and schedule amend the regime to allow all small companies with trading activity in Northern Ireland the opportunity to benefit from future changes in the Northern Ireland corporation tax rate. They also make changes to ensure that the regime is robust against abuse and ready for commencement once a restored Northern Ireland Executive demonstrate that their finances are on a sustainable footing.
It may help the House if I set out how the devolved rate regime has been designed to focus on incentivising genuine investment in Northern Ireland. The regime was set out in the Corporation Tax (Northern Ireland) Act 2015.
The Minister is making a powerful case as to why the devolution of corporation tax is a good thing for the Northern Ireland economy, but should the same case not apply to Wales and Scotland, because it creates an imbalance if one devolved Government have a set of fiscal powers that the other devolved Governments do not have?
I thank the hon. Gentleman for his intervention, but there is, of course, one key distinction between Wales and Northern Ireland, and that is that Northern Ireland has a land border with the Republic of Ireland, which has a corporation tax rate of just 12.5%. It is particularly important in that context that we make these provisions.
The Minister makes a fair point about the land border, but large parts of Wales, including my part of Wales—the west of Wales—have a sea border with the Republic of Ireland.
I do not think it is within the scope of this particular clause to start getting too much into the devolutionary settlement for Wales.
The regime was set out in the 2015 Act, which, subject to commencement regulations, will devolve corporation tax rate-setting powers to the Northern Ireland Assembly. The Government have committed to working with an incoming Northern Ireland Executive on options for commencement, including on timing and adjustments to the Northern Ireland Executive block grant to reflect tax revenues forgone by the UK Government.
There are two key features to the regime’s design. First, the devolved rate will apply only to a company’s trading profits; investment activities, which are highly mobile, are not in scope. Secondly, the Act requires large companies with a substantial trading presence in Northern Ireland to calculate their Northern Ireland profits separately from the rest of their profits. That calculation must follow internationally accepted principles for attributing cross-border profits. Broadly, that means that companies with profits generated in different tax jurisdictions must calculate their branch profits as though each branch were an independent entity. These profit attribution rules are important to make sure the regime works as intended.
An SME with 75% or more of employment time and costs in Northern Ireland would have all its trading profit taxed at the Northern Ireland corporation tax rate. An SME below the 75% threshold would have all its trading profits, including those generated in Northern Ireland, taxed at the UK corporation tax rate.
Does the Minister accept that the introduction of this will allow for the rebalancing of the Northern Ireland economy in a very beneficial way? It will allow us to generate more investment and, potentially, more private sector jobs. Of course, this corporation tax will not apply to the financial service sector, so it will not wrongly attract businesses away to Northern Ireland.
My hon. Friend makes the very powerful point that this is not about brass-plating and shifting profits; it is about generating growth in a very important part of the United Kingdom.
Since we legislated in 2015, we have heard that some small businesses want the option to benefit from the Northern Ireland corporation tax rate on the proportion of their profits generated by trading activity in Northern Ireland. The changes made by clause 25 will give all SMEs trading in Northern Ireland the potential to benefit from the devolved rate, should they choose to do so. That will be done without watering down the rules, and it will ensure that the regime is focused on incentivising genuine economic activity in Northern Ireland. Like large companies, those SMEs that opt to take advantage of this measure will be required to calculate their Northern Ireland profits according to well-established principles. These changes deliver a fair outcome for small companies.
Let me be clear that under these rules a company’s trading profits will be taxed at the Northern Ireland rate only if the company has a substantial physical presence in Northern Ireland and if that is where the economic activity that generates the profit takes place.
New clause 2 would require HMRC to conduct a review of the impact of the changes in schedule 7 on the corporation tax system, the location of companies and the levels of employment across Northern Ireland and Great Britain. A mandated formal review is not an appropriate response to a regime that has been carefully designed to be robust in relation to avoidance and abuse, and one that, as I have said, builds on tried and tested rules when doing so. As with all policies, the Government will monitor the regime closely once it is commenced to ensure that it operates as intended. I urge the Opposition not to press the new clause.
Does the Minister accept that those who espouse the peace process also want to see an economic dividend post that process? Therefore, why would anyone want to vote against something that allows that economic dividend, building upon the peace in Northern Ireland?
My hon. Friend makes a powerful point. This is about strengthening Northern Ireland’s economy, society and infrastructure, to the end that we all seek, which is a stronger and more united Northern Ireland.
In conclusion, these provisions include changes that will ensure that the regime is robust against abuse, in order to maintain the regime’s focus on encouraging genuine additional economic activity in Northern Ireland.
I thank the Financial Secretary for introducing this group. This is an important debate, not only for the future of Northern Ireland, but for this country’s overall approach to taxation and devolution.
We know—we have discussed it frequently throughout this process—that our country faces a substantial tax gap. The official estimate of the UK’s tax gap is at least £36 billion, up from £33 billion in 2010, but that is at best a conservative estimate, given that the Government’s definition of the tax gap excludes convoluted corporate structures, which we know are used by multinationals to minimise their tax liabilities. The view that the tax gap is underestimated is shared by the Institute for Fiscal Studies and the Public Accounts Committee. I think that we all agree that that £36 billion, and possibly more, is money that should be used to fund our public services, and that everybody should pay their fair share.
Corporation tax is an important part of the UK’s tax revenue. In 2016-17, HMRC collected £56 billion in corporation tax receipts. Although it is important that we keep the rate competitive, particularly in the light of the UK’s exit from the European Union, it is worth noting that we face a law of diminishing returns in this regard. At 19%, the UK’s corporation tax rate is already one of the lowest in Europe. We should be confident that we do not need to plunge the rate to rock bottom in order to encourage businesses to invest and domicile here. The UK plays host to a wealth of resources that enable it to be globally competitive, including our legal system, our language, our time zone, our infrastructure, our regulatory bodies and, most of all, our people.
It is equally important that Northern Ireland is equipped with the tools to compete in that international landscape, as has been brought to the fore recently with the punitive tariffs aimed at Bombardier in the United States. As the Financial Secretary has explained, the corporation tax rate has already been devolved to the Northern Ireland Assembly, through the Corporation Tax (Northern Ireland) Act 2015. Now that that legislation has been decided, it is for Northern Ireland’s politicians to work together and use those powers to see where the line lies between a lower tax rate and the broader appeal of Northern Ireland as a business destination. At present, the decision has been that 12.5% best achieves those ends. It is not my intention to revisit those arguments today, and nor would it be appropriate to do so, given the reasons already outlined.
What is relevant, and the reason Labour has proposed new clause 2, is the relationship between that rate and the rest of the UK. The gap between 12.5% and 19% represents a significant potential for arbitrage between Northern Ireland and the rest of the UK. Some businesses might base their decisions on where to domicile purely with regard to taxation, and that is a risk that we accept—indeed, we already compete with the rest of Europe on that basis. Our concern is that the Government are introducing measures that could be exploited by companies that will seek to abuse the proximity between Northern Ireland and the UK simply to divert profits and benefit from a lower tax regime, which would benefit neither the UK nor Northern Ireland.
The hon. Gentleman spoke a few moments ago about the importance of competitiveness throughout Europe. Does he agree that the argument that he is making runs counter to the attempts to make Northern Ireland’s private sector business more competitive, when we have a difficult relationship with the Irish Republic and its very low corporation tax, which he has alluded to?
I take the hon. Gentleman’s point, but I would not agree with his characterisation of the situation. We are making the case that our amendment will really benefit Northern Ireland, because if the relationship was abused and firms sought to benefit from the lower rate without investing in Northern Irish jobs or business production, that would surely defeat the purpose of having a lower corporation tax rate—that is the sole point of trying to devolve the rate to Northern Ireland. Our concern is that loosening the rules could lead to brass-plating, where UK businesses are given a loophole that allows them to domicile their businesses in lower-tax jurisdictions while they continue, in reality, to operate in the UK.
The hon. Gentleman recognises that the one sector in which the proposals might be abused, the financial services sector, is specifically precluded from taking advantage of them. Could he provide the House with an example of a sector that he thinks would abuse the rules?
I do not agree with the hon. Gentleman’s assertion that only the financial services sector will seek to do that. We are proposing a very reasonable review of the measure after one year, and he has nothing to fear from such an amendment.
Labour, more than any other party in this House, has consistently made the case for a level playing field between larger and smaller businesses, but a level playing field cannot be simply an equal race to the bottom in which smaller businesses are given the same tax avoidance opportunities as larger ones. That is not to say that the rule changes will necessarily lead to a flight of small and medium-sized enterprises rushing to domicile in Northern Ireland. We note that the majority of enterprises operating in the UK are honest and committed to paying their fair share. We should be vocal in praise of that contribution and its role in making the UK economy a success. However, opening what could become a loophole is significant, and it is critical that we protect against unforeseen consequences.
At this stage we have little indication of the potential impact of this measure, because behavioural effects are notoriously unpredictable to model. For that reason, we have tabled an amendment that calls on the Government to review the measure as soon as is practicable after the completion of the first financial year in which it has been fully in force. The report of that review would be presented to the House within one month. That would allow us to understand fully the impact of chargeability, see how companies are responding and react accordingly if the measure is being treated as a loophole. In turn, if evidence shows that the measure is forging stronger business links between Northern Ireland and the rest of the UK, and that the impact to the Exchequer is minimal, at least a proper assessment will have been made.
We are at a critical time when the UK economy simply cannot afford to lose revenue to tax avoidance. We have heard in the Chamber many times the arguments about why it makes little sense to drop corporation tax rates to below European averages. To do so betrays a lack of confidence in the many attractions of the UK as a domicile for ambitious companies that seek to grow their businesses. We should not be compounding revenue loss by opening a back door to even lower corporation tax rates without a framework in place to assess the impact properly.
I am sure that the hon. Gentleman agrees that one of the biggest economic challenges that we face is the huge and gross geographical wealth inequalities within the British state. Is the Labour position that fiscal devolution has no part to play in the strategy for dealing with geographical wealth inequalities?
The hon. Gentleman is not correct in that assessment. I certainly agree with him that regional disparity in the UK is one of the principal economic challenges that we face, but I do not agree that the solution is a race to the bottom in corporation tax rates between different parts of the UK. That would be neither effective nor the right way forward, and it would almost certainly fail to address the problems that he raises.
I put it to the House that new clause 2 is a sensible, pragmatic and effective proposal to deliver objectives that are widely shared by Members from all parts of the House: a prosperous Northern Ireland, an effective partnership across the nations of this country and a competitive UK with strong public finances supporting quality public services.
First, I welcome the proposal in the Finance Bill, which adds to the previous decision about devolving corporation tax to Northern Ireland and giving us autonomy to make decisions about what the appropriate level may be.
I am a bit bemused by new clause 2. The argument is that devolving corporation tax to Northern Ireland and our having a different rate will somehow or other open the door to abuse. That objection could of course have been made, and more appropriately made, when the decision was made to devolve the tax in the first place. If it is open to abuse, it will create the kind of problems described by the shadow Minister, but if that were the case, I cannot understand why these issues were not raised at the time we voted on the principle of devolution. I suspect this is more to do with the fact that the Labour party is opposed to any reduction in corporation tax.
Let me address a couple of the points that have been made about extending this to small and medium-sized enterprises. The Minister made it quite clear that the criteria are, first, that they have to have a physical presence in Northern Ireland; and, secondly, that they have to register profits commensurate with the activities they engage in in Northern Ireland. That of course will have to be shown—by accounts, by employment, by the physical infrastructure that such a business would have in Northern Ireland—so there are already safeguards anyway. It can be measured whether an SME is simply moving paper money to register profits in Northern Ireland, or whether it is creating genuine jobs.
The biggest safeguard will be the decisions made by the Executive in Northern Ireland—if, indeed, an Executive is ever up and running again in Northern Ireland. We hope there will be, but that is one of the problems at the moment. It is not in the interests of the Northern Ireland Government to allow the situation that has been described by the Labour spokesman, for the simple reason that the payment for the devolution of corporation tax comes from the block grant. If we allow companies simply to migrate their business to Northern Ireland, register their accounts in Northern Ireland and declare their profits in Northern Ireland, but they do not actually create any physical activity in Northern Ireland, we will have to pay the amount of tax lost from the block grant. There will be no better policeman or policewoman of this than the Northern Ireland Executive themselves.
The review asked for—if there is any point in a review after a year—is therefore superfluous. First, there is the evidence that the company has to produce, and then there will be the scrutiny of HMRC. When we negotiated the devolution of corporation tax, compliance costs were built in, because of the additional scrutiny. It will also be in the interests of the Northern Ireland Executive to ensure that the system is not abused. For all those reasons, I believe that the new clause is superfluous. It is not needed, and we will therefore vote against it.
I want to raise one additional point. My hon. Friend Sammy Wilson has set out very well a number of our concerns about the proposed new clause. We have looked at this issue in the Northern Ireland Assembly, and I had the privilege of being the Chairperson of the Finance Committee when we considered the detail of it. We listened to concerns from small business and to those outlined by the Opposition spokesperson, but the key objective is to attract new business and jobs to the UK. We do not necessarily want movement from the rest of the UK to Northern Ireland. This is about foreign direct investment, trying to create new jobs and contributing positively to the economy of Northern Ireland and of the UK.
In Northern Ireland, we have looked at this issue for many years. It has been scrutinised by committees. We have had a range of consultants and others look at the detail of the proposal because we want it to work. As my hon. Friend the Member for East Antrim said, we do not want it to be simply an exercise in brass-plating or anything like that. We want jobs, employment and further investment in Northern Ireland.
One of the big issues in terms of the movement and type of jobs we want is certainty. Certainty is essential if we are to get commitment from companies—hopefully, big companies—to move into the UK for the first time and to invest in plant and staff recruitment. The proposal in new clause 2 to have a review after 12 months will create uncertainty. What international business would look at the UK and invest in plant, employees and recruitment when one of the big incentives to moving—the lower corporation tax rate—could be removed following a review after just 12 months? It is essential that we remain positive about the measure and have certainty about it. I reiterate: we want new jobs for the UK, and we want them in Northern Ireland.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
New Clause 2