The Chancellor of the Exchequer, Rishi Sunak, presented his 2021 Budget to Parliament in early March and confirmed speculation that the main corporation tax (CT) rate would increase from 19 to 25 percent with effect from 1 April 2023. The increase was not unexpected given the unprecedented levels of government spending on various support measures in response to the COVID-19 pandemic. Businesses across the UK are concerned that increasing the CT rate amidst the disruption of Brexit and the pandemic will weaken the UK’s proposition as a location for multinationals of the indigenous and international variety. However, it is an ill wind that blows nobody any good and the increase to the UK’s CT rate presents an opportunity for the Northern Ireland (NI) Executive to leverage Northern Ireland’s devolved power dating from 2015 to set its own regional CT rate. A lower rate of CT in the region coupled with the dual benefit of having access to both the UK and the EU’s single market for goods could put Northern Ireland in a unique position to attract foreign direct investment into the region, particularly in the manufacturing and distribution sectors. But why hasn’t the NI Executive pressed the button on a regional CT rate to date? In this article, we consider first how Northern Ireland won the unique power to control its own CT rate and we will also look at the choices open to Northern Ireland now in light of the upward trajectory of the UK’s main CT rate.

The path to devolved power

Chartered Accountants Ireland has spearheaded the campaign for a devolved CT rate for Northern Ireland for many years. This has required the time, energy, and tenacity of volunteers of Chartered Accountants Ireland’s tax committees and Ulster Society, and a policy commitment by the Institute. The Institute made countless submissions to various government inquiries, review groups and to HMRC and presented evidence to the House of Commons’ Northern Ireland Affairs Committee in Westminster. The goal driving the campaign was to match the Republic of Ireland’s 12.5 percent CT rate to attract FDI, create high-value jobs and generate a strong and sustainable local economy for Northern Ireland. As members of an all-island body, chartered accountants in Northern Ireland could see first-hand the economic prosperity engendered by the Republic’s 12.5 percent rate and rationally wanted the same for Northern Ireland. The years of hard work in lobbying efforts culminated in the Corporation Tax (Northern Ireland) Act 2015.

The Act provides for the first step in the devolution of power to the NI Assembly to set a Northern Ireland rate of CT. The rate would broadly apply to the trading profits of a micro, small or medium-sized enterprise company if its employees’ time and costs fall largely in Northern Ireland. The rate also applies to the profits of a large company attributable to a Northern Ireland trading presence termed a ‘Northern Ireland regional establishment’. But the legislation came with conditions; while the Act did receive Royal Asset in 2015, the potential concerns of its impact on the NI budget due to EU State aid rules meant that the legislation could only be “switched on” via a Treasury Regulation. This would only be done if the NI Executive was able to demonstrate that its finances were on a sustainable footing to support a CT rate reduction for the region.

An EU Member State’s devolving tax rate varying power must satisfy the European Court of Justice judgment on the “Azores Criteria” which set out the conditions necessary for regional differences in direct taxation to avoid State aid. One of these criteria states that the full fiscal consequences of a regional reduction in the national tax rate must be borne by that region. This was the purpose of the “switching on” mechanism.

The NI Executive was working towards the goal of getting Northern Ireland’s finances on sustainable footing and were committed to setting a tax rate of 12.5 percent from April 2018. But power-sharing collapsed in Stormont in January 2017 and the NI Assembly was suspended until January 2020. By this time, the headline CT rate across the UK had reduced to 19 percent and was due to reduce to 17 percent in April 2020. The NI Executive was also facing budgetary and funding pressures and then the pandemic struck.

The Executive’s Minister for Finance Conor Murphy provided media commentary in 2020 to the effect that Brexit, the pandemic, and the change to Northern Ireland’s economic and political circumstances meant that the need to introduce a NI 12.5 percent CT rate had reduced in significance. The Finance Minister’s stance came as a disappointment to the North’s business community. Chartered Accountants Ireland’s Ulster Society contended that in light of Brexit and the impact that it could have on Northern Ireland, the economic opportunity originally presented by corporation tax devolution was of even greater importance than before. However Northern Ireland like the rest of the world was consumed in coping with the pandemic and talk of the 12.5 percent rate change fell silent for most of 2020. The debate is reignited by the Budget day announcement that UK CT rates will increase to 25 percent in 2023.

Is it still a good idea?

Northern Ireland’s Finance Minister Conor Murphy has set up a Fiscal Commission to assess the Executive’s tax varying powers and he hopes that the Commission’s report will also provide a comprehensive picture of the costs and benefits of further fiscal devolution measures. The review will examine issues such as whether a cut in CT could be paid for by raising income tax. It is expected that the Commission will take about nine months to complete its work and the goal is that it should be ready to publish its conclusions before next year’s Northern Ireland Assembly election.

Global international tax reform measures such as the proposal for a minimum global tax rate of 21 percent now will also have a bearing on Northern Ireland’s plan for a regional tax rate. The OECD is due to deliver its consensus-based findings on global tax reform in July.

While the UK is no longer part of the EU, State aid rules still apply under the terms of the NI Protocol. From 1 January 2021, EU State aid rules only apply to measures which affect trade in goods and electricity between NI and the EU when aid is within the scope of Article 10 of the Protocol. The State aid provisions of Article 10 will, in practice, primarily apply to aid for manufacturers and sellers of goods located in NI that trade with the EU so State aid rules may still be a consideration in the “switching on” of this legislation.

Once again, the future of Northern Ireland’s regional CT rate will rest on the findings of a government review and possibly on international factors outside its control. However, the fundamental reasons to introduce a 12.5 percent CT rate have not changed since the legislation came onto the Statute books. The economic boost such a rate would bring to the region is as tangible today as it was all those years ago when Chartered Accountants Ireland started its campaign.

Norah Collender is Professional Tax Leader with the Advocacy and Voice Department of Chartered Accountants Ireland