PwC warning over cutting corporation tax rate

PwC says a lot of research needs to be done on the real costs and benefits of cutting corporation tax

The implications of cutting Scotland's rate of corporation tax are "highly complex", PricewaterhouseCoopers (PwC) has warned.

The warning has come as the Scottish government prepares to consult on devolving the tax to Scotland.

PwC said it was essential to examine the effects of cuts in Northern Ireland, where a new rate of just 12.5% has been proposed.

It added that "robust research and informed debate" were now needed.

The comments from PwC follow a recent report from HM Revenue and Customs (HMRC) which argued that matching Northern Ireland's proposals could cost Scottish taxpayers about £2.6bn a year - a claim dismissed by the Scottish government.

The UK Treasury wants to devolve control of the business tax to the Northern Ireland Assembly, given its unique position in sharing a land border with the Republic of Ireland where corporation tax is 12.5%.

The Scottish government wants the same powers included in the Scotland Bill, currently passing through Westminster.

Block grant

However, PwC warned EU tax rules meant cutting corporation tax in Scotland would result in a reduction in the block grant, equivalent to the loss of revenue to Westminster.

Rhona Irving, tax partner at PwC in Scotland, said: "There is an enormous amount of work still to be done before the real costs and benefits of reducing corporation tax are clear.

"And, despite the recent figures from HMRC, we still don't truly know how much UK corporation tax comes from companies here.

"This is why it is so crucial that there is consistency in how the impact of reducing corporation tax is calculated across the regions."

Ms Irving said looking closely at the Northern Ireland experience would help inform the Scottish debate.

"This is a very complex area and a huge amount of research needs to be undertaken in Scotland as to the implications of reducing corporation tax, how it might impact on investment and - most importantly - what the implications might be for the block grant from Westminster," she said.

"As in Northern Ireland, the Scottish executive will have to bear the cost of reducing corporation tax, so it is essential that we establish that the long-term benefits to the Scottish economy significantly outweigh any costs to Scottish taxpayers."

She added: "Ultimately, any proposals to reduce the rate of corporation tax in Scotland need to be underpinned by the kind of robust research and informed debate that has occurred in Northern Ireland over the past year."

The Scottish government said it would issue a discussion paper soon that would "fully set out the arguments" for devolving corporation tax to Scotland.

Paper 'flaws'

A spokesman said: "Official figures show that corporation tax raised £2.6bn in 2009-10, so repeating the UK government's claim that cutting corporation tax could wipe out the entire revenue is clearly wrong.

"We will set out the flaws in the HMRC paper in our document."

He added: "Research shows that reducing the corporation tax rate in Northern Ireland can actually boost tax revenues, create new jobs and substantially raise the standard of living - and there is no reason why the effects in Scotland would be any different."

The Scotland Office said the PwC report was "an important contribution" to the debate on the potential devolution of corporation tax in Scotland.

A spokesman said: "It is essential that this is not only a conversation between governments but also that those in the business world make their views known.

"We are currently waiting for the Scottish government to produce its consultation paper on this issue which it said it would do before the summer.

"There are a number of outstanding questions which need to be addressed and the debate on this issue has to engage with the reality of hard facts and figures."

He added: "The UK government will not do anything to harm Scotland's interests and will read the responses of Scottish business with interest."