Corporation Tax (Northern Ireland) Bill — House of Commons, 2015-01-27
Topic: Macroeconomics
Nigel John Mills (Conservative, Centre-right): The hon. Gentleman is right. That is why we should look ahead and see what our tax system should look like. Nobody in the UK wants a business man with a business based in Amber Valley or Redcar to think, "I could save half my corporation tax by moving to Northern Ireland." That may help Northern Ireland, but it will not help the mainland. It will not help UK plc to attract more inward investment. We want fair competition. I accept that competition is good and that if we get investment somewhere in the UK, that is better overall, but we want investment coming in from outside, not moving around within the UK As a matter of fairness, if parts of the UK are to compete on corporation tax, those parts should not vote on the rate elsewhere in the UK. If Northern Ireland wants to set its own corporation tax, let us let England, Wales and Scotland set ours. If we devolve it further, the same fairness should apply. People in my constituency should be able to say, "Yes, we are competing, but we can choose whether to compete or not." I hope that before April 2017 some sort of mechanism is in place to ensure fairness. Devolving taxes without first settling that is dangerous in constitutional terms. I am not sure it would be tolerable for Scottish MPs, for example, to set their own income tax and then to set ours as well. I accept that that is probably more of a problem than corporation tax, but it is an example of the unfair tax system that we could end up with An excellent Library paper that runs through the research shows on page 13 that, looking at the behavioural response to a lower rate of corporation tax in Northern Ireland, even by year 4 we would see that profit shifting from the rest of the world into Northern Ireland would have an impact of £30 million a year, but that profit shifting from Great Britain to Northern Ireland would have an impact of £60 million a year. That is twice the impact of new foreign direct investment. Tax-motivated incorporation would have a potential impact of £45 million —even more than foreign direct investment into Northern Ireland. I hope that the measures in the Bill will reduce the likelihood of the latter possibility. The easiest way of competing will be to move around within a regime rather than try to attract investment into the UK that would not have come here in the first place That leads me to look at how cluttered some of these proposals will make the corporation tax system. This is not a simple set of things to understand. A company that has its tax base in Great Britain and Northern Ireland will have to work its way through some fairly complex situations. There were simpler options. We could have just had an allocation key that worked out one profit and then how much of it would be taxed in Northern Ireland and how much in the rest of the UK, based on employees and sales. It could have ended up a bit like the awful EU tax base that was thought up. However, within the UK, that might have worked, being easier to understand and removing some of the distortions of attempts at tax avoidance. Taxation based on sales is much harder to fix There are still some gaps in these proposals. It is absolutely right that we have stopped allowing finance companies to get the lower tax rate. Otherwise every large corporate would have had a finance company based in Belfast doing its finance for the rest of the UK and moving profit over there artificially. That would have been unacceptable How do we stop other things happening that we might not like? What about intellectual property planning? If I move all my brand names over to Northern Ireland, can I charge large royalties in the rest of the UK and artificially move profit in that way? That is not caught by the restrictions in the Bill. It is not moving jobs or creating real value; it is just moving assets around a regime and trying to get a tax advantage On the flipside, there are some wrinkles in how we have tackled the finance company exemption. Under the definitions in clause 17, I am not sure what happens in the case of a company trading in Northern Ireland that makes a lot of profit, ends up with some cash at the end of the year, and thinks, "Okay, I’ve got another important investment project in 18 months’ time, so perhaps I’ll lend this cash around to somewhere else in my group of companies and make a bit of interest income." It is then engaging in a lending activity. Has that blown it out of the whole lower rate because it now has an excluded activity, or is only the interest taxed at the higher rate, and because it is a very small part of its activity, that is okay? I am not quite clear about how we tackle real, practical situations such as that I am not convinced that the situation for small and medium-sized companies is entirely fair. The hon. Member for East Antrim (Sammy Wilson), who is no longer here, said that some construction companies in Northern Ireland end up with lots of building work on the mainland because that is where the work has been. If, during the year, such a company gets a big contract on the mainland, it then has to track whether the profit from that becomes more than a quarter of its total activity. If it is 26% by the year end, it pays 20% corporation tax on the whole of its profits, whereas if it is 24% at the year end, it pays 10% on the whole of its profits I accept that for the vast majority of SMEs that do not trade on the mainland and operate just in Northern Ireland, that will be a very simple situation, and one small contract will not hurt. However, I suspect that SMEs trading in both areas will be in a worse position than a large company, because a large company that had 26% of its activity on the mainland would still get the lower rate for most of its profits, but a small company will lose it for most of its profits. Perhaps there could be a way of allowing an SME to elect to be in the large company regime if that better reflects its needs. Another option would be to have two separate companies and split their activities, but that does not strike me as a very easy situation. There are some issues that may lead to unintended complexities We need to think through exactly which activities we do not want to qualify for the lower rate. We have a new diverted profits tax coming, whereby if someone moves an activity that ought to be somewhere else, we will try to tax it at a higher rate than our UK standard rate. Under one of the provisions, someone who is being taxed at a rate of less than 80% of the UK rate will be caught. Clearly, Northern Ireland is likely to have a tax rate of less than 80% of the main UK rate. If a Northern Ireland company has an internet trading business or a mail order business in Belfast and takes careful steps to avoid having an establishment on the UK mainland, could that company be caught by the diverted profits tax, triggering a higher rate than if it was in the UK? How can we stop people artificially putting trading activity using very few employees into Belfast, rather than doing it on the mainland, to get the lower rate? I accept that no one wants the rate to apply to activity involving no employees, but I sense that certain activities that do not require much labour might be moved, which is not what we intend I welcome the principle of the Bill. I have some concerns about rushing it through now without thinking about how it affects the UK as a whole—we need to do that if we are to get a tax system that is sustainable in the long term—about how cluttered we are making our corporation tax system and about whether things in the Bill’s details might make the system work in a way that we do not want, but I suggest that we think through such issues in Committee.