Northern Ireland: The low tax dream

Northern Ireland’s economy has picked up and work levels with it. Lawyers can almost taste the possibilities from much lower corporation tax

In the years immediately preceding the financial crash the Northern Ireland economy routinely tracked above that of the UK as a whole, Scotland and its southern neighbour Eire.

But the past few years have seen the province struggle, with growth slumping below the other countries’. Northern Ireland’s reliance on the public sector has been a major hindrance, resulting in very little work and few deals.

belfast

Last year things changed for the better. The Northern Ireland Composite Economic Index, used by the Government as an indicator of economic growth, saw three consecutive quarters of growth, bringing annual growth to 2.6 per cent.

Meanwhile, M&A data from Experian shows the number of transactions rising by 47 per cent, from 53 in 2012 to 78 last year. Total deal value was up by 36 per cent, to £1.6bn. This is the highest total deal value recorded for Northern Ireland since 2006, while the volume of deals was at a 10-year high.

NI3

The deals

The biggest deal last year was the secondary buyout of Luxembourg-incorporated Carmel Capital, including wholly owned Northern Irish subsidiary Phoenix Natural Gas. The £700m deal saw Terra Firma dispose of Carmel to a private group led by Australian infrastructure fund manager Hastings, including Hastings’ Utilities Trust of Australia and the RBS Group Pension Fund.

Pinsent Masons and Linklaters advised Phoenix, with Slaughter and May acting for Terra Firma and A&L Goodbody Belfast partner Peter Stafford acting for the acquirers.

Indeed, A&L Goodbody had a standout year, advising on 28 deals worth £1.1bn in total. But the international nature of many transactions is starkly demonstrated by the fact that, of Experian’s top 10 legal advisers by volume, only two – Mills Selig and Tughans – are Northern Irish, while Irish firms A&L Goodbody and Arthur Cox, alongside Pinsent Masons, are the only firms with Belfast offices.

NI2

In the top 10 legal advisers by value rankings Carson McDowell is the only indigenous Belfast firm. Alongside the three firms with Belfast offices are City bluechip Slaughter and May, UK nationals Addleshaw Goddard, Eversheds and Walker Morris, US giant Morrison & Foerster, and King & Wood Mallesons SJ Berwin.

The rankings illustrate the way foreign direct investment into and out of Northern Ireland is now a key part of its economy. Several of the largest transactions involved Northern Irish assets being bought by investors from elsewhere, mainly mainland UK or the US.

NI1

Investors look again

The reason for this, believe lawyers, is that the fundamentals of the region have not changed, and with investors now used to the difficult environment, they are perhaps more inclined to take a risk.

“We’re seeing a much bigger dealflow and institutional investors looking at Northern Ireland again because the prices are still right,” says Cleaver Fulton Rankin managing partner Karen Blair.

“A year ago people realised things weren’t going to get much worse, nor much better, and so just started doing stuff again,” adds Carson McDowell managing partner Michael Johnston. “We’re starting to get a pipeline of transactions again.”

Key sectors identified include waste and energy, retail development, projects and infrastructure, and social housing, while interest has been noted from private equity houses, including big US names.

Thompson
Thompson

“Construction is still finding it challenging but with infrastructure work coming through you’ll start to see a recovery,” adds A&L Goodbody Belfast managing partner Mark Thompson.

Work is also still flowing to and from Northern Ireland’s southern neighbour, notably from the Irish National Asset Management Agency’s (Nama) sale of the ‘Project Eagle’ loan portfolio. The portfolio consists of loans owned by Northern Ireland-based debtors and secured by assets in Northern Ireland, the Republic, Great Britain and other European locations, and has a par value of £4.5bn. In early April, Nama announced New York-based venture capital company Cerberus Capital Management had won the bid to buy the portfolio, reportedly at a bargain price of about £1.3bn.

Carson McDowell finance partner Sinead McGrath says the deal could kick off a wave of property activity, depending on what Cerberus does with the portfolio.

“There’s a hiatus around some property activity, pending seeing how that works out,” McGrath adds.

A good year

Coulter
Coulter

Although not all sectors are back in full flow, the pick-up in M&A and a continuing stream of work related to distressed assets has meant a good year for Northern Ireland’s firms. Tughans managing partner Ian Coulter says firm turnover was up by double digits in 2013/14, with a particularly strong performance from the corporate, commercial, litigation and property teams, where revenue rose by around 25 per cent.

At Carson McDowell, Johnston says preliminary figures show a revenue rise of about 15 per cent.

Most Belfast firms, suggests Coulter, are in recruitment mode at all levels. Lateral partner hires remain relatively rare, although Carson McDowell picked up a trio of partners from Pinsents – including McGrath – last year, and another two Pinsents partners moved to smaller local firms.

Trainee recruitment is up, which is good news for a market that still produces too many law graduates for the number of training contracts available. Thompson says A&L Goodbody has taken on six trainees over the past two years and is retaining all its 2013 intake on their qualification in September, while Tughans has also increased its trainee intake.

“When it comes to qualified lawyers there’s no excess,” notes Blair. “We’ve been trying to recruit both locally and in London. There certainly isn’t a volume of qualified lawyers out there looking for jobs.”

Mid-level associates appear to be in shortest supply, with Thompson noting that, with local firms playing a larger role on many Northern Irish deals, the quality of work they might find in Belfast – coupled with an arguably better work-life balance – may go some way towards tempting people back home from jobs in Great Britain.

“If we could get good London returnees we’d snap them up,” agrees Johnston.

A corporation tax cut?

Looking ahead, a key issue for Northern Ireland is likely to be corporation tax. There has long been a sense that the province struggles in relation to the Republic of Ireland on this front – the republic has a 12.5 per cent corporation tax rate while Northern Ireland offers the UK rate of 21 per cent for most businesses.

However, the UK Government has promised that, should Scotland’s September vote for independence fail, it will give both Scotland and Northern Ireland tax-raising powers. That finally opens up the opportunity for the Northern Ireland Assembly in Stormont to cut corporation tax.

The powers would come with an important caveat. HM Treasury gives Northern Ireland a ‘block grant’ of around £9.4bn a year. EU rules stipulate that ceding tax-setting powers to the province would mean the Government would have to cut the grant by around £700m, meaning the private sector would have to substantially increase profits to fill the shortfall.

Nevertheless, the business community is generally in favour of the proposal to cut corporation tax to match that of Eire. 

Johnston points out that getting tax-setting powers does not necessarily mean Stormont would use them, but says there is “significant pressure” for the Northern Ireland Assembly to make a move.

“When there was talk about trying to take the lower corporation tax away there was a violent reaction,” he says. “I think we’d see the benefit of having lower corporation tax in Northern Ireland.”

“It’s potentially very positive – it would drive a fundamental change in the economy,” agrees Thompson.

Coulter says: “It could be a dramatic crossroads for Northern Ireland.”

If and until Stormont is granted tax-setting powers, the environment is still good.

Johnston notes that the province’s large public sector has been largely immune from austerity measures and warns that any cuts could have an adverse effect.

“If they bring austerity cuts into the public sector here it would cause a hiccup as there would be less money flowing around the system,” he points out.

But generally, the legal market is confident.

Blair, noting a number of sizeable deals for big clients, says: “These are transactions that haven’t been in the local market for the past few years. That indicates wider interest and shows third parties are looking at the Northern Ireland market, seeing it as somewhere where they want to do business again.”

“As for the legal market, if you’re well-positioned with the right specialisms, you can look ahead with a degree of confidence,” concludes Coulter.