Scottish corporation tax demands spark tensions with Northern Ireland

Northern Ireland first minister says Alex Salmond's plan to cut business taxes independently could see Scotland lose �1.5bn in Treasury funding

Tensions between the Scottish and Northern Irish governments have emerged over Alex Salmond's demands for the Treasury to give his Scottish National party administration the right to cut business taxes independently.

Salmond's Northern Irish opposite number, Peter Robinson, has warned him that Scotland could lose up to �1.5bn in its funding from the Treasury if it gets powers over corporation tax. The cut would be equivalent to 5% of Salmond's annual budget.

Speaking after a joint meeting between the leaders of the devolved governments in Edinburgh, Belfast and Cardiff, Robinson suggested this cost had to be borne in mind by Salmond when he pressed for the corporation tax powers.

"Every part of the UK would have to decide whether that's something they would be pushing for in these circumstances," he said.

Salmond has been under growing pressure from UK ministers, including the chancellor, George Osborne, to publish details of his proposals for a Scottish corporation tax, but has so far refused to do so.

He is urging David Cameron to give Scotland the right to set its own corporation tax rates as part of new financial powers he wants following his landslide election victory on 5 May.

He will take his case to a meeting between Cameron and the three devolved governments in London next week, where tensions between Edinburgh and Belfast could be further exposed.

Asked whether he agreed with Robinson's figure, the Scottish first minister said: "That's entirely dependent on the level of tax you would set and also whether you control the tax base or just the ability just to vary the rate.

"What's important is that, if we have the power to so, that would allow us to choose what's in the best interests of Scotland."

If Scotland set its own corporation tax, it would be in direct competition with both Northern Ireland and England in attracting companies to invest and move their headquarters.

But senior economists warned it would have a direct impact on Scotland's �30bn Treasury grant, which funds all Scotland's domestic services and policies, including hospitals, schools, policing, prisons and roads.

Salmond is already facing year-on-year cuts in funding. He has refused to drop popular but expensive free services such as higher education for Scots, prescriptions and personal care for the elderly.

Excluding North Sea oil revenues, corporation tax raises �2.8bn in Scotland every year. For every �100m of taxation powers given to Scotland, the block grant could be cut by an equivalent amount. Professor Hervey Gibson, an expert in the Scottish economy and supporter of independence, said the Treasury was legally barred from keeping Scotland's grant at the same level if tax rates were handed over.

"The legal position is that if Scotland were to reduce its corporation tax rate that couldn't be matched by any change in the block grant ? it would be entirely up to Scotland whether that just meant a smaller stream of revenue or whether it would draw in more investment, and increase the overall tax take, not necessarily from corporation tax," he said.

Professor Brian Ashcroft, of the Fraser of Allander Institute at Strathclyde university, said: "On day one we lose revenue as a result of lower rates, we lose a transfer payment as a result. Whichever way you look at it, the public revenues available to the Scottish parliament will go down, and that would be a major problem.

"Of course, he's offered a tax-cutting regime when he probably will have to fund current expenditure on the assumption that North Sea oil revenues have to be invested. This is a real dilemma and the Scottish people haven't been told the truth obviously, and that has implications for the short term."

Robinson and his deputy, Martin McGuinness, hinted strongly that they believed Northern Ireland had a much stronger case than Scotland. Both stressed that Northern Ireland's long history of violence and shared border with Ireland, where corporation tax is 12% ? less than half the UK's rate of 26% ? made its case unique.

McGuinness, speaking after the meeting, said this tax was of "critical importance" for the Northern Irish economy.

And Robinson said: "There's a very strong view in Northern Ireland that this is essential because of our unique circumstances; we have a neighbour to the south with a much lower level of corporation tax.

"It can't be ignored that we've come out of a very prolonged period of conflict, which has had a very adverse impact on our infrastructure and the catching up which is needed with job opportunities."

Severin Carrell

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