Following agreement last month by local politicians, the Corporation Tax (Northern Ireland) Bill was introduced on 8 January 2015 which provides for the devolution of Corporation Tax rate setting powers to the Northern Ireland Assembly. It will take with effect from 1 April 2017, however, there will remain conditionality around budgets and public sector spending being seen to be on a stable footing prior to the power being exercised.
Whilst a decision on the rate of corporation tax will ultimately be made by the Northern Ireland Assembly, it is generally accepted that the rate will be reduced, either directly or in stages, to 12.5% and parity with the rate prevailing in the Republic of Ireland.
It is estimated that 34,000 companies of all sizes, including SMEs operating in Northern Ireland will be affected by this rate. This document considers what a lower corporation tax rate will mean for local businesses; the highlights include:
- The reduced rate will apply to trading profits only;
- Profit on capital disposals and property income are expressly excluded;
- Certain sectors are excluded due to the difficulty of managing avoidance strategies across the UK – lending, banking, oil, gas and reinsurance (and others to be confirmed);
- Back-office functions of those excluded sectors which are located in Northern Ireland may benefit from the NI rate.
- Some of the emerging themes are:
- Cost control measures on the administration of new arrangements
- Anti-avoidance measures (international/FDI issues will be governed by existing legislation and UK avoidance risks will be managed under new regulations)
- Groups operating in the UK will need to account on a regional basis to show what profit or losses are actually being generated in Northern Ireland and GB;
- Small companies will be exempted from regional accounting to save on compliance costs which will benefit small or local businesses will small operations in GB;
- R&D tax credits will be grossed up so that the value enjoyed by companies investing in R&D will be the same across the UK for each £ invested (i.e. the credit will not be based on12.5% but the prevailing UK rate)
- Specific provisions will be introduced to ensure the benefits of The Patent Box will remain in place
What local businesses need to do Companies operating in Northern Ireland should, as part of their business planning, consider the importance of the rate for their business and put in place strategies to fully avail of any opportunities which may arise and to mitigate against any risks.
The types of issues likely to arise across most businesses are as follows:
- Business structure: A significant number of NI businesses currently trade as partnerships and sole traders - it is particularly common in the service industry, construction and the professions. Incorporations will be required for these businesses to avail of the benefits. Equally, with a new tax compliance regime, good corporate governance will be an essential part of navigating the new regulations and securing the maximum benefit.
- People: Business owners should consider whether they have the right people in place to exploit the opportunities which may arise. Talent in the workplace will be a premium asset, and businesses should be sure to position themselves early to recruit and retain the best talent. Terms and condition and remuneration strategies should be carefully considered.
- Supply chain/competitors: What is the likely impact of the changes on your cost line and revenue line? Possible scenarios should be considered, and plans developed to ensure you get the benefit of the change in rate. The time may be right to lock key trading partners into longer supply arrangements.
- Infrastructure: As well as the people, business owners should consider their infrastructure - is it ready to support /accommodate growth? What are the Capex requirements to ensure the business has the tools and space to make the most of growth opportunities?
- Financial considerations: Does the business have access to finance to fund expansion? Will you be looking to use reserves, the bank or are equity investors a consideration?