Is a 12.5% Corporation Tax rate possible in Northern Ireland?

Northern Ireland's political parties are almost unanimous in supporting a reduction in the Corporation Tax rate to 12.5% – for Northern Ireland only. The south has a 12.5% rate, of course, and the belief appears to be that this low tax rate above all other factors is what has helped the south to overtake the north economically. Ironically, even unionists support north-south harmonisation in this regard.

Would it be possible for a new British government to change the corporation tax rate in Northern Ireland only?

There are two factors that would come into play: political considerations, and legal considerations.

Politically, it would be extremely difficult for any British administration to make a specific case for Northern Ireland – and not for disadvantaged areas of Britain. While Northern Irish producers might claim that they are competing against southern producers, this is really only true on the island of Ireland, and even then they are only a small part of the competition. Why, for example, should Scottish producers trying to sell into Ireland be disadvantaged vis-à-vis Northern Irish producers? Why, indeed, should Northern Irish producers be given a clear tax advantage when they sell into Scotland? Ditto for Wales, and the north of England.

Any advantage given to Northern Ireland only would be extremely unpopular in other parts of the UK, and would be seen as unfair and discriminatory. Any British government that introduced such a measure would be handing a political weapon to the SNP, Plaid Cymru – and if it was done by a Tory government – to Labour. And there is no reason why Northern Ireland uniquely should be given such a leg-up – it is a backward region, of course, but not dramatically more backward than many others.

Legally, the situation is fuzzy. Corporation taxation is a national responsibility, but the EU is trying to move towards a consensus on the harmonisation of tax rates. In particular the EU is trying to stop 'harmful tax competition', which includes "tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union". The criteria for identifying potentially harmful measures include "an effective level of taxation which is significantly lower than the general level of taxation in the country concerned".

Although no binding rules are in place, all the EU Member States – including the UK – signed a Code of Conduct for Business Taxation in 1997 in which they undertook;

"… not to introduce new tax measures which are harmful within the meaning of this code. Member States will therefore respect the principles underlying the code when determining future policy … "

Given the clear Tory distain for 'Europe', it is not excluded that they would ignore mere 'codes of practice', but a corporation tax rate that applied only to Northern Ireland would be clearly designed to damage the economy of another EU Member State – the south. As a Member State the south has clout – and plenty of latent support in the EU (such is the advantage of having been a good member for 37 years). The Commission would support the south, the European Court would take a very dim view, and at political level (European Parliament, Council) the UK would be in the dog-house for blatantly breaking a code of conduct it signed up to.

And why would the UK want that amount of hassle? To suit whom? A small number of Northern Irish business owners who see an opportunity to make more profit?

There is little doubt why the Tories, in their election manifesto, promised only to "produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland" – because that is as far as they intend to actually go, and any commitment beyond that would be a lie.

There will be no 12.5% corporation tax rate – certainly not presented as simply as that. There might be a fudge that allows other regions to benefit, and that, at the end of the day, does not provide much stimulus in Northern Ireland.

The only future for Northern Ireland is either continued welfare dependency (almost 70%!) or severe cuts in public spending that restore the profitability of the private sector by bringing wage costs down sharply. Northern Irish firms will only compete successfully when their costs are lower than their competitors – in the south, in Britain, in Europe – and as long as the public sector provides a better-paid option to private sector hard work this will not happen. The Tories know it, and in their hearts, so do all the Northern Irish parties.