Corporate Tax Cost Up As Underspends Revised

Devolving corporation tax to Northern Ireland is likely to cost as much as £100m more than anticipated.

According to new Treasury figures, if Stormont gains the power to lower local corporation tax, it must compensate the UK Government by a corresponding cut in the amount of money it receives each year for spending.

A previous Treasury estimate put that at around £300m and it has now presented a revised figure of about £400m.

However, there was better fiscal news this week, when, on Monday, the Chief Secretary to the Treasury, Danny Alexander, set out a revised system of budgetary flexibility for the devolved administrations.

In January this year, Treasury rules initially changed without notice so that unspent money regionally would no longer be available to draw on to cover future spending plans.

At the time, Northern Ireland Executive Finance Minister, Sammy Wilson said: "The Treasury always allowed this. Then, without notice, a decision was made to take it away. It was really just swiping money which had built up in Northern Ireland to sort out a hole in their finances."

However, a new Budget Exchange scheme to replace the previous End Year Flexibility (EYF) scheme for managing public spending across years has now been announced.

Following proposals from Sammy Wilson, the Treasury has agreed with all the devolved administrations that a modified version of the Budget Exchange system will apply to their underspends during the spending review period.

This means that the respective administrations will be able to carry forward controversial 'underspends' up to an agreed cap.

Unlike Whitehall departments, there will be no requirement to inform the Treasury in advance of the following year of the expected underspend in order to carry over the funding.

This is a boost for NI's coffers as the Westminster's previous bid to claw back the unspent cash raised huge concerns in the corridors of power at Stormont.

Recognising unique circumstances, and following [Sammy Wilson's] proposal, Danny Alexander said: "I am pleased to announce this new system of budgetary flexibility which recognises the unique situation of the administrations.

"This agreement will give greater flexibility and certainty, allowing them to plan their budgets more effectively."

They will be able to carry forward underspends up to an agreed cap of 0.6% of their total Resource DEL (RDEL) budget or 1.5% of their Capital Budget (CDEL) each year.

The caps are equal to £153m RDEL and £38m CDEL for Scotland, £83m RDEL and £19m CDEL for Wales and £59m RDEL and £14m CDEL for Northern Ireland.

These amounts will vary depending on the respective administrations' budget in any given year.

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On the other side of the coin, the reason for the increased cost in devolving corporation tax is that the latest figure includes estimates for the profits earned by large UK companies - such as Tesco - who operate in Northern Ireland.

At present, they declare their profits in Great Britain, and it is thought that if corporation tax is lowered locally, some of those companies may declare their profits in NI instead to benefit from the reduced tax burden.

Factoring in these so-called branch profits has increased the potential cost of devolution by a third.

See: Stormont Budget Hit In Treasury Claw-Back