Northern Ireland

Corporation tax: Cost of lowering NI's rate 'may be lower than thought'

Corporation tax document Image copyright PA
Image caption Northern Ireland's rate of corporation tax is set to be cut in 2018

The cost of of cutting corporation tax in Northern Ireland could be "more modest" than currently thought, a report by Ulster University economists has suggested.

A cut in the tax will mean less revenue is collected for the Treasury.

Under European rules, the Northern Ireland Executive will have to make up the shortfall through a cut in its block grant from Westminster.

That cost is currently estimated at £240m a year by 2020.

Economic climate

The report suggested it could be lower if Northern Ireland was to mirror the experience of either the UK or the Republic of Ireland.

It pointed to the UK position where the rate of corporation tax has been cut from 30% to 21% since 2008.

It said that while overall corporation tax revenues have been volatile, they have "fallen only very marginally given the scale of the tax rate reduction".

The report, from the university's Economic Policy Centre, said that in the Republic of Ireland rates were reduced from 24% to 12.5% between 2000 and 2003 and tax revenues continued to rise strongly up to 2006.

It said this indicated "that the most important driver for the level of tax receipts is the prevailing economic climate".

It cautioned that the Northern Ireland rate cut, which is due to happen in 2018, is likely to be in "less favourable" global economic conditions than when either the Republic of Ireland or the UK reduced its rates.

The report does not include an updated economic impact of the proposed reduction, saying this is because "the method of paying for the tax cut has yet to be determined".

Image copyright Getty Images
Image caption The Northern Ireland Executive has the power to set the rate, so long is it can demonstrate sound finances

Executive decision

The Northern Ireland Executive intends to cut the corporation tax rate 12.5% in 2018.

The UK rate is currently 20%, though is due to be cut to 19% in 2017 and then to 18% in 2020.

The major parties at Stormont believe that cutting the tax will help tackle long-term problems in the Northern Ireland economy.

They think that if companies can keep more of their profits, it will unleash an unprecedented wave of investment and growth.

A bill passed at Westminster last year gives the Stormont executive the power to set the rate, so long is it can demonstrate sound finances.

Small and medium-sized companies, in which at least 75% of staff time and costs relate to work carried out in Northern Ireland, will qualify.

If this test is not met, the company will continue to be taxed at the main UK rate.

Large firms, such as multinationals, will need to have a "Northern Ireland Regional Establishment" (NIRE) - a fixed place of business, such as an office or factory, where it carries out its business.

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