Business tax move may hit spending, says accounts body

The Scottish government is to make its own case on corporation tax

Handing powers to set corporation tax from Westminster to Holyrood could destabilise public spending, Scotland's accountancy body has claimed.

The warning came as Scottish ministers were making their case for the move.

The Institute of Chartered Accountants of Scotland claimed the volatile nature of the economy meant tax returns would be unpredictable.

The body also talked of a "race to the bottom", if more than one part of the UK had corporation tax-varying powers.

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

The Scottish government, which will this week publish it paper on corporation tax reform, wants the same powers included in the Scotland Bill, currently going through Westminster.

Corporation tax, excluding North Sea Oil, generated £2.6bn pounds in Scotland, during 2009-10.

Scottish ministers said separate analysis showed if Northern Ireland was able to pre-announce a cut in the corporation tax rate to 12.5%, 58,000 more jobs would be created, while living standards and economic growth would rise.

But the ICAS said there would be limited scope for a rates cut in Scotland, if public services were to be maintained at a time when they were already under strain.

Elspeth Orcharton, assistant director of tax at the institute, said such a move could also give rise to "profit-shifting" by companies which operate both north and south of the border.

"There are significant additional administrative burden and tax compliance costs for companies and HMRC, from changes necessary to monitor profit-shifting through, for example, transfer pricing legislation," she said.

"Determining the tax residence of companies, branches and permanent establishments would also create additional burdens."

Ms Orcharton argued devolving tax powers went against the goal of simplifying regulation, adding: "Of course, if you ask businesses if they'd like to pay less tax, they say 'yes'.

"However, a tax cut in itself can't deliver a complex public financial model for a small country in a global business world."

The UK government has calculated that matching Northern Ireland's proposals could leave a hole of about £2.6bn a year in the Holyrood budget, and up to £12bn over five years - a claim dismissed by the Scottish government.

Finance Secretary John Swinney, said: "Scotland must have control of the key economic levers and corporation tax as a vital source of competitive advantage in a global economy.

"Powers over corporation tax would enable us to boost investment, attract new businesses, and take the right decisions for Scotland.

"Full responsibility for corporation tax can give Scots a greater incentive to start their own business, provide Scottish firms with a competitive edge and help raise Scotland's standard of living."

Scots businessman Jim McColl backed the Holyrood government's call, adding: "Scotland needs all the powers at its disposal to give people the reason to bring their business and investment to Scotland.

"Corporation tax would provide a significant fiscal lever to provide necessary incentives providing a major boost for the Scottish economy at a critical time."