As we have heard, the amendment tabled by the hon. Members for Foyle (Mark Durkan) and for Belfast East (Naomi Long) aims to bring otherwise excluded trading profits of building societies and credit unions within the scope of the Northern Ireland rate of corporation tax. As it covers two different areas, I will respond to each in turn.
It may be helpful to remind the House that the design of the Northern Ireland regime has been guided by a set of principles agreed between the Northern Ireland Executive and the UK Government. The principles were agreed in the joint ministerial working group process in 2012. Once again, I am grateful to colleagues in the Executive for their co-operation and their constructive approach in those discussions.
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In brief, the regime must be attractive to businesses, including in having only proportionate administrative burdens; it must encourage genuine economic activity in Northern Ireland; the costs for the Northern Ireland Executive must be proportionate and kept to a minimum; and the regime must satisfy state aid rules. I mention those principles to provide the background to why we designed the regime in the way we did, in keeping with the approach agreed with the Executive. I understand the intent behind the amendment, but its effect could be to undermine those principles and create wider risks to the regime.
Let me respond to the points raised about building societies. As we know, to limit the risk of profit shifting from the rest of the UK, the Bill excludes profits from certain highly mobile activities and trades from the Northern Ireland corporation tax rate. Chapter 17 in clause 1 lists those excluded activities, which include lending and investment. Excluding those activities is
important because it helps to target the regime at only genuinely employment-generating activity in Northern Ireland. It also limits the risk that Northern Ireland ends up with a significant increase in the cut to the block grant, without any genuine economic activity. I believe that all Members will agree with such a principle, which was supported in our constructive and considered debates on Second Reading and in Committee.
Colleagues from across the House agreed that the design of the regime must limit incentives and opportunities for artificial profit shifting, as I believe the proposals do. Hon. Members will see that the Bill does not distinguish between different types of industry or business—for example, it does not exclude financial services, banking or building societies—but the nature of the excluded trades and activities means that they are those predominantly carried out by the financial sector, including building societies. Excluding trades and activities, rather than types of business, ensures that the rules do not have an adverse impact on a particular type of business structure; the focus is on the mobility of the activity.
The mobility of profits for building societies is similar to that for banks, and building societies and banks both carry out similar activities, as defined in chapter 17. It is therefore hard to argue that building societies should be treated differently from other organisations, such as banks, that carry out the very same types of activity. To do so could undermine the principles that I have outlined, particularly the principle of limiting profit shifting. Furthermore, there is a risk that the amendment would provide building societies with a competitive advantage over banks, which was never the intention of the reforms.
Similarly, to treat building societies differently on the basis of whether all or only some their activity is in Northern Ireland could lead to an uneven playing field. It might provide opportunities for companies to profit shift—for example, by setting up subsidiaries in Northern Ireland without bringing additional private sector employment.
In line with the objective of attracting genuine growth and employment, we will however allow companies with certain excluded trades and activities the option to make a one-off election for their back-office functions to qualify for the Northern Ireland rate. Not only do those activities not pose the same risk of profit shifting as the excluded activities, but they provide a fertile area of employment in Northern Ireland, so we take the view that it is right to allow them within the regime.
Such activities are generally to support other profit-making activities, rather than to be directly profit making in themselves. Therefore, we will compute a notional profit for the activities, which will be chargeable at the Northern Ireland rate. It will be calculated by applying a 5% mark-up to the costs of the Northern Ireland back-office activity. For example, if a company has eligible costs of £1 million from back-office activities, £50,000 of its profits would be chargeable at the Northern Ireland rate. That levels the playing field with companies that provide back-office functions through stand-alone companies—in other words, companies whose back-office functions are not part of an excluded trade. Such stand-alone companies will have their profits charged at the Northern Ireland rate because they will be carrying out a non-excluded trade—usually that of providing services. I believe that that is the fairest approach. It places all
companies with similar lending and investing activities on a similar footing, while supporting the services sector and minimising the risk of profit shifting.
Let me turn to the part of the amendment that deals with credit unions. The hon. Gentleman tabled a similar amendment in Committee. As I said then, although I share his support for credit unions, I believe that the amendment is unnecessary. The amendment seeks to change the part of the Bill that excludes certain financial trades and activities, and to bring credit unions within the scope of the Northern Ireland corporation tax rate.
The Bill does not explicitly include or exclude credit unions from the Northern Ireland rate, as has been mentioned and as I said in Committee. That is because the part of the Bill that excludes lending activity is not relevant to credit unions. Credit unions already benefit from special corporation tax rules and those will continue to apply once the Northern Ireland regime and rate commence. Under those special rules, when a credit union makes a loan to its members the related income is removed from the trading income charge, so credit unions do not pay corporation tax on loan interest that is received from members. Credit unions are not permitted to make loans to non-members. Therefore, they are subject to corporation tax only on capital gains and income arising from the investment of surplus funds, as the hon. Gentleman acknowledged.
Those types of income are wholly outside the Northern Ireland regime. That is because a key part of the regime is that it applies only to trading profits, and not to investment income or capital gains. That design feature was agreed between the Government and the Northern Ireland Executive. Therefore, such activity is unaffected by the new rules and the new rate. The fact that trades and trading activities relating to lending and investing are excluded is not relevant to credit unions. Changing the rules to bring the income of credit unions within the trading income charge would almost certainly have the perverse effect of increasing the tax that credit unions pay, because their trading income would then fall within the corporation tax net, which it does not currently.
I hope that hon. Members will agree that the amendment is unnecessary in relation to credit unions. As for building societies, it would create risks of profit shifting and of an unlevel playing field across businesses with similar activities. I hope that hon. Members agree that that would be unfair and would not fall within the guiding principles of the Northern Ireland regime.