Tom Griffin (London, The Green Ribbon): Sir David Varney published his long-awaited review of tax policy in Northern Ireland this week. As most observers expected, Varney rejected the case for a corporation tax cut to match levels in the Republic.
What was more surprising was that that was all he did. His original remit was to consider ‘how current and future tax policy, including the tax changes announced in the Budget 2007, can support the sustainable growth of businesses and long-term investment in Northern Ireland.'
In the event, he concentrated almost exclusively on refuting the case for a corporation tax cut put forward by the Economic Research Institute of Northern Ireland, saying:
Such a policy would run the risk of encouraging profit shifting from the rest of the UK to Northern Ireland...to counter this - and only in part - HM Revenue & Customs would have to impose substantial administrative burdens. There could also be a strong reaction from other economies and regions, which, if realised in their own policy changes, would further accentuate the revenue costs for the UK. The UK is successful in attracting cross-border investment, the benefits of which flow back to the Exchequer in tax revenue. The devolved countries share in that success through the ‘Barnett' formula, which distributes resources so that the funding can be put to best use by those closest to the policy
Rather than attempt to address the wider aspects of his remit, Varney announced a second review, which will report ahead of a US investment conference in May. Northern Ireland Finance Minister Peter Robinson said he was disappointed with Varney's conclusions: "All of the main Northern Ireland parties, along with business interests, presented a strong case to Sir David on the need to grant Northern Ireland a dispensation on corporation tax. However, we have always urged caution about the potential outcome of the Review."
"We will continue to argue the case for a reduction in corporation tax," he added. "The issue will not go away." First Minister Ian Paisley suggested the review's implications for Scotland had been decisive: "I believe that the prime minister is afraid of Scotland, because Scotland has been the backbone of the labour movement and now the bowl is broken... for the first time Labour is no longer in charge of affairs in Scotland."
Ironically, Labour moved only last month to address the issue of tax powers for the Scottish Parliament, by proposing a Scottish Constitutional Commission. Announcing the plan, Scottish Labour Leader Wendy Alexander said:
I believe it is for the Commission to consider the proper balance between devolved, reserved and assigned taxes if the accountability of the Parliament is to be strengthened and relative need still respected. We should approach this with an open mind but there are constraints here. Some suggest VAT for example but EU rules appear to preclude VAT variation within a state. So it could not be a candidate for devolution, although could be considered for partial assignation. Likewise the issue of Corporation tax variation within a state also raises issues of compliance with EU rules [the Azores judgement] as well as potentially distorted transfer pricing
Varney provides one crumb of comfort for supporters of fiscal devolution, in that he dismisses the EU's Azores ruling as an obstacle. "A move to a differential corporation tax rate for Northern Ireland would be possible in principle," he states. "However, it would involve legislative changes and legal issues would affect the design of such a scheme. Also, the fiscal consequences of such a move would have to be borne immediately by the Northern Ireland Assembly." That suggests that it would also be legally possible to devolve corporation tax to Holyrood. By the same token, Varney's conclusions may well be an indication of how the Treasury responds to such an idea.