Corporation tax devolution: the process
Peter Cheney considers the steps needed to devolve corporation tax powers.
Devolving corporation tax in Northern Ireland would be a first for the UK but the national fiscal and political landscape is rapidly changing.
Tax devolution is normally advocated by nationalists as a move towards sovereignty. The Coalition Government, meanwhile, believes that the regional tax variations concept can stimulate economic growth and also reduce the block grants paid out by Westminster. The DUP, UUP and Alliance support devolving corporation tax to boost the regional economy.
In theory, the Scottish Parliament can already change the basic income tax rate by 3 per cent. In practice, this has never been used and is no longer feasible, as the Scottish Government has refused to pay the administration costs.
This power is being superseded by the Scotland Bill, which currently allows for:
• a Scottish income tax (on top of 10 per cent set by Westminster);
• devolving stamp duty and landfill tax rates;
• borrowing powers for current expenditure when tax receipts are less than expected; and
• a Scottish cash reserve to manage fluctuations in devolved tax receipts.
The devolution of policing and justice last year was relatively straightforward, as it involved reserved matters. These can be devolved through an Order-in-Council, which does not require a full parliamentary debate.
Under the Northern Ireland Act 1998, “taxes or duties under any law applying to the United Kingdom as a whole” are excepted matters i.e. they cannot be devolved without an Act of Parliament. The Government of Ireland Act 1920 expressly banned Stormont from legislating on “corporation profits tax, and any other tax on profits”.
Campaigners have focused on varying the rate. However, giving Stormont policy responsibility for the tax base would let it define which profits should be taxed. This is unlikely as the Treasury will want to maintain Westminster’s final authority. HMRC would still collect the revenue here but also charge the Executive for that service.
The Treasury paper does not say whether the Executive would be allowed to borrow money to manage volatility in tax receipts.
Legislation to devolve corporation tax could be announced in the Budget and introduced through the subsequent Finance Bill. A ‘normalisation Bill’ suggested by Owen Paterson is another potential route.
A Bill goes through the following stages in each chamber:
• first reading (formal introduction);
• second reading (a debate on its general principles);
• committee stage (either in a public Bill committee or on the floor of the House);
• report stage (debate on amendments considered in committee); and
• third reading (a short final debate without amendments).
Labour and left-wing Lib Dems are likely to voice opposition. Labour’s 2010 manifesto, though, did back a lower UK- wide rate for companies holding patents. The main local opponents will be Sylvia Hermon and John Taylor (Lord Kilclooney). The legislation would easily pass through the Commons. The Coalition Government, though, has been defeated 21 times in the Lords.
The Assembly could follow the Scottish Parliament’s approach to the Scotland Bill:
1. establish an ad hoc committee of MLAs to report on the Bill;
2. debate a legislative consent motion on the Bill’s principles;
3. debate another legislative consent motion after the Bill has gone through Westminster.
The last stage would give the Assembly a say on any amendments made in Parliament.
As Mike Smyth states (see page 51), devolution would have to comply with the Azores judgement’s three conditions. The Irish Government is supportive but other EU member states may protest to the European Commission if they consider the move to be anti-competitive. The views of those 25 countries need to be assessed, perhaps by the UK’s Permanent Representation in Brussels.
The whole process will only start after negotiations between the Executive and the UK Government and it depends on the go-ahead from Chancellor George Osborne, which is expected this autumn.
