This week saw the Conservatives striking a deal with the DUP. What does this mean for tax in Northern Ireland, and what is the knock on effect for the rest of the UK?
Tax features in the agreement between the Conservative Party and the DUP in four ways. While all are driven by the relationship between Northern Ireland and the Republic of Ireland, each is significant in its own right, so it’s important to keep an eye on them, as we can be sure that there will be implications for the rest of the UK.
First, the DUP deal brings a commitment to work towards the devolution of corporation tax rates, the timetable for its introduction, and how this might best be flexibly managed. Options are being developed for Autumn Budget 2017 with the prospect that the devolved powers may come into force on 1 April 2018. It is widely expected that Northern Ireland will then adopt a corporation tax rate of 12.5%, which is exactly the same rate that applies to trading income in Ireland. Interestingly, in Ireland non-trading income is taxed at 25%. Will the Republic of Ireland respond to a corporation tax rate reduction in the north by reducing its rate on non-trading income to 12.5%? If it does not, then it risks losing royalty income to the north. The scene is being set for a race to the bottom in corporation tax rates between Northern Ireland and the Republic of Ireland. Relative to the rest of the UK, a reduction in corporation tax rates to 12.5% will be less significant if the prime minister delivers on her commitment to reduce the corporation tax rate to 17% by 2020.
Second, a commitment towards recognising a limited number of new Northern Ireland enterprise zones, subject to proposals demonstrating good value for money. New equipment bought by companies in enterprise zones qualifies for 100% capital allowances for the first eight years from the date the enterprise zone is announced. This may suck in investment from elsewhere in the UK.
The remaining tax-related commitments relate to the tourism industry in Northern Ireland. These cover VAT and air passenger duty (APD). A detailed consultative report will be commissioned into the impact of VAT and APD on tourism in Northern Ireland, to recommend how best to build upon the growing success of that sector. This follows a 20 March 2017 recommendation from the House of Commons Northern Ireland Affairs Committee.
In Northern Ireland, tourism-related businesses pay 20% VAT, compared to 9% VAT for equivalent businesses in the Republic of Ireland. This creates a competitive disadvantage where businesses in Northern Ireland are forced to cut prices, reducing their ability to invest, or risking losing out on business by being too expensive. EU law currently prevents member states from setting different levels of VAT for different regions. After the UK has left the EU, this power will be repatriated to the UK. It is expected that the proposed report will investigate the impact of reducing the rate of tourism VAT in Northern Ireland once it is not necessary to adopt a one-size-fits-all VAT policy across the whole of the UK. Inevitably, if a lower rate of VAT applies to tourism in Northern Ireland, then the tourism industry in the remainder of the UK will renew its calls for a lower rate of VAT to help it compete in the international tourism market at a time when sterling is weak.
And so to the last of the tax-related commitments, APD. Similar concerns exist over the impact of APD on the competitiveness of Northern Ireland’s airports. The House of Commons Northern Ireland Affairs Committee notes that there is ‘compelling evidence that Northern Ireland’s tourism industry is missing out on significant levels of business’, with the UK’s aviation tax system placing Northern Ireland at a significant competitive disadvantage. Campaigners for change argue that devolving APD to Northern Ireland, with a view to ultimately abolishing it, would generate economic benefits which exceed the tax lost. While detailed work will be undertaken to model the likely impact, the ultimate test will be what happens in practice. With the prospect that both Scotland and Northern Ireland might follow similar courses, wider pressure for the UK to mitigate its APD regime will increase.
This week saw the Conservatives striking a deal with the DUP. What does this mean for tax in Northern Ireland, and what is the knock on effect for the rest of the UK?
Tax features in the agreement between the Conservative Party and the DUP in four ways. While all are driven by the relationship between Northern Ireland and the Republic of Ireland, each is significant in its own right, so it’s important to keep an eye on them, as we can be sure that there will be implications for the rest of the UK.
First, the DUP deal brings a commitment to work towards the devolution of corporation tax rates, the timetable for its introduction, and how this might best be flexibly managed. Options are being developed for Autumn Budget 2017 with the prospect that the devolved powers may come into force on 1 April 2018. It is widely expected that Northern Ireland will then adopt a corporation tax rate of 12.5%, which is exactly the same rate that applies to trading income in Ireland. Interestingly, in Ireland non-trading income is taxed at 25%. Will the Republic of Ireland respond to a corporation tax rate reduction in the north by reducing its rate on non-trading income to 12.5%? If it does not, then it risks losing royalty income to the north. The scene is being set for a race to the bottom in corporation tax rates between Northern Ireland and the Republic of Ireland. Relative to the rest of the UK, a reduction in corporation tax rates to 12.5% will be less significant if the prime minister delivers on her commitment to reduce the corporation tax rate to 17% by 2020.
Second, a commitment towards recognising a limited number of new Northern Ireland enterprise zones, subject to proposals demonstrating good value for money. New equipment bought by companies in enterprise zones qualifies for 100% capital allowances for the first eight years from the date the enterprise zone is announced. This may suck in investment from elsewhere in the UK.
The remaining tax-related commitments relate to the tourism industry in Northern Ireland. These cover VAT and air passenger duty (APD). A detailed consultative report will be commissioned into the impact of VAT and APD on tourism in Northern Ireland, to recommend how best to build upon the growing success of that sector. This follows a 20 March 2017 recommendation from the House of Commons Northern Ireland Affairs Committee.
In Northern Ireland, tourism-related businesses pay 20% VAT, compared to 9% VAT for equivalent businesses in the Republic of Ireland. This creates a competitive disadvantage where businesses in Northern Ireland are forced to cut prices, reducing their ability to invest, or risking losing out on business by being too expensive. EU law currently prevents member states from setting different levels of VAT for different regions. After the UK has left the EU, this power will be repatriated to the UK. It is expected that the proposed report will investigate the impact of reducing the rate of tourism VAT in Northern Ireland once it is not necessary to adopt a one-size-fits-all VAT policy across the whole of the UK. Inevitably, if a lower rate of VAT applies to tourism in Northern Ireland, then the tourism industry in the remainder of the UK will renew its calls for a lower rate of VAT to help it compete in the international tourism market at a time when sterling is weak.
And so to the last of the tax-related commitments, APD. Similar concerns exist over the impact of APD on the competitiveness of Northern Ireland’s airports. The House of Commons Northern Ireland Affairs Committee notes that there is ‘compelling evidence that Northern Ireland’s tourism industry is missing out on significant levels of business’, with the UK’s aviation tax system placing Northern Ireland at a significant competitive disadvantage. Campaigners for change argue that devolving APD to Northern Ireland, with a view to ultimately abolishing it, would generate economic benefits which exceed the tax lost. While detailed work will be undertaken to model the likely impact, the ultimate test will be what happens in practice. With the prospect that both Scotland and Northern Ireland might follow similar courses, wider pressure for the UK to mitigate its APD regime will increase.
