On 8 January 2014 the Secretary of State for Northern Ireland, Theresa Villiers, announced the publication of the Corporation Tax (Northern Ireland) Bill. This provides for the devolution of Corporation Tax rate setting powers to the Northern Ireland Assembly with effect from 1 April 2017, provided that certain conditions are met.

Background

The proposed devolution of Corporation Tax rate setting powers (CT-RSP) to Northern Ireland (NI) has its origins in the coalition government’s May 2010 Programme for Government which contained a commitment to, “… producing a government paper examining potential mechanisms for changing the Corporation Tax rate in Northern Ireland.” This was followed by a consultation process under the then Secretary of State, Owen Paterson.

The subsequent four years of discussions culminated in the announcement in the Autumn Statement on 3 December 2014 that Northern Ireland would get devolved CT-RSP, subject to fulfilling certain conditions, which were incorporated in the Stormont House Agreement published on 23 December 2014. Subsequently, on 8 January 2015, the Corporation Tax (Northern Ireland) Bill was published, providing a clear pathway towards securing devolution of CT-RSP from 1 April 2017. 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.

Clearly the prevailing rate of Corporation Tax is only one of a large number of factors that a business takes into consideration in deciding upon an investment location. However, the chief driver behind the devolution of CT-RSP is the belief that a lower NI CT rate will encourage additional foreign direct investment into NI. A more competitive rate of CT is seen as an important supplement to the other attractions that NI has for international businesses – a highly skilled workforce, a competitive employment environment and robust legal and regulatory regimes.

What are the next steps?

In her statement on 8 January 2015 the Secretary of State confirmed the Government’s aim for the Bill to reach it final stages in March 2015 and to achieve Royal Assent before the General Election in May 2015.

However, Ms Villiers highlighted that, as indicated in the Stormont House Agreement, progress on the Bill through Parliament would be in parallel with a balanced Budget, legislation on Welfare Reform and an agreed implementation plan to put the Assembly’s finances on a sustainable basis for the future.

Provided the Bill is passed, the earliest possible implementation date (i.e. the date from which the Assembly can set the NI CT rate) is 1 April 2017. It is worth noting that the Bill contains a commencement clause; powers will only be commenced from 1 April 2017 provided that the Executive can demonstrate its finances are on sustainable footing for the long term, and that other measures included in the Stormont House agreement are successfully implemented.

Provided that the powers are devolved from 1 April 2017, the final step on the implementation path will be for the NI Executive to determine the rate and the timescale over which the NI CT rate would be adopted and whether a new rate is phased in over a transitional period thus mitigating the fiscal risks of a one-off, cliff-edge reduction.

It should be noted that the Assembly will have the power to set the NI CT rate only. Powers over other UK corporation tax rules, including reliefs and allowances, will remain with the UK Parliament, although these will be modified to preserve their value in respect of eligible companies operating ‘qualifying trades’ as outlined in the Bill.

The Bill

At the launch, the Secretary of State outlined the Government’s “overarching principles”, relating to tax devolution, insofar as the devolution must:

• Encourage genuine economic activity in Northern Ireland
• Be attractive to businesses and ensure that any administrative burden is proportionate
• Satisfy EU State Aid rules.
• Ensure that the cost to the Northern Ireland Executive remains proportionate and is kept to a minimum

The NI CT regime, as per the Bill, has been designed with the intention of reflecting these principles.

The NI CT rate will only apply to trading profits from so-called ‘Northern Ireland Companies’ carrying on a ‘qualifying trade’. Trades such as banking and insurance will be specifically excluded from the new regime. From the Secretary of State’s statement this exclusion seems to be because these sectors are thought likely to show less benefit in generating employment relative to the potential loss of tax. All non-trading activities (for example, rental income from property) are also excluded.

In announcing the Bill, the Secretary of State commented that notwithstanding these exclusions, some 34,000 companies in Northern Ireland could meet the ‘qualifying trades’ criteria and would stand to benefit.

In terms of identifying the amount of a company’s profit to be taxed at the NI CT rate, the Secretary of State confirmed that there would be two separate regimes for this; one for ‘SMEs’ and another for ‘Large companies’.

For large companies, there will be a requirement to identify the amount of profit attributable to trading activity in Northern Ireland. In many cases this will result in the need to split the profits of a business between those arising from activity carried on in NI and those arising from activity carried on elsewhere in the UK or the world. The existing transfer pricing, and permanent establishment, principles, together with their ongoing evolution under the OECD BEPS Discussion Papers, will clearly be in point.

For SMEs though, there will instead be a “simple” ‘in/out’ test to determine if trading profits are taxable at the NI CT rate or the main UK rate. While the Secretary of State explained that where the “vast majority” of trading profits arise from activity in Northern Ireland, all of an SME’s profits will be taxed at the NI CT rate, the Bill specifically requires that 75% of all the SME’s staff time and costs must relate to work carried out in Northern Ireland if the SME is to be deemed a ‘Northern Ireland Company’ and thus eligible for the NI CT rate.

As widely anticipated, the Bill includes specific rules in relation to how certain tax reliefs and capital allowances will be dealt with in relation to companies that qualify for the NI CT rate on trading profits. For example, a common concern had been that with a reduced corporation tax rate, the benefit of R&D tax relief for SMEs would be diminished. The Secretary of State quelled such concerns confirming that R&D tax relief in such cases would be adjusted upwards so as to maintain the same overall benefit as with the rest of the UK. The Bill makes similar provision for other reliefs and incentives, and also for the treatment of profits and losses in Northern Ireland and the rest of the UK.

Potential implications for business

Clearly, as mentioned earlier, a reduced rate of Corporation Tax will influence the attractiveness of NI as an investment location for FDI.

However, this will come with a number of practical implications for businesses – with the fundamental one being how businesses will quantify the appropriate level of profit that will be subject to the NI CT rate. For SMEs, the Government hopes that the ‘in/out’ test will reduce the administrative burden, but how simple that test turns out to be in practice is another matter. Large companies will need to identify the profits that relate to activity carried on in NI that will benefit from the NI CT rate; companies and groups that do business across both NI and the rest of the UK will find they will have an increased compliance burden in both determining, and then supporting evidentially, the quantum of that profit.

In addition, as the NI CT regime has different tax rates for different types of income, there could well be complexities in determining which rate of tax applies to certain sources of income and the nature of the costs deductible from each source.

Furthermore, and wholly within the UK context, there could be implications for transactions which, to date, have been free of tax consequences – for example, transfers of assets and trades between UK group companies, and the offset, or transfer, of commercially incurred tax losses between Northern Ireland activities and activities elsewhere in the UK.

The implications for businesses, though, extend well beyond the shores of NI, and will be influenced not only by the NI CT regime, but also by the tax regime in each business’s home country.

For some overseas parented groups, a reduced rate of tax may have minimal impact. Where a NI subsidiary typically distributes substantially all of its profits to a parent located in a country which taxes the receipt of overseas dividends (i.e. such as the US) any tax reduction in NI may simply be replaced with an increased tax liability in the parent country.

The same could be true for groups parented in countries that levy tax on the profits of overseas subsidiaries, regardless of whether or not those profits have been distributed.

Clearly, when one looks at a lower NI CT rate in the broader international context, the implications become much more complex, and specific to each organisation.

Conclusion

There remain some short term uncertainties in relation to the timing of the commencement of a lower rate of Corporation Tax in Northern Ireland and what that rate will be. However, the progress made in the last few weeks and months presents a number of medium to longer term opportunities for business that are either already in Northern Ireland or have a commercial interest in operating here in the future. It is therefore important that businesses take account of these recent developments, and in particular the detail of the Bill published on 8 January 2015, and begin assessing their potential implications.

In the March 2015 issue of tax.point we will provide a detailed tax analysis of the Corporation Tax (Northern Ireland) Bill.

Martin Fleetwood is a Partner and Michael Heinicke is a Senior Manager with the PricewaterhouseCoopers tax team in Belfast. Email: martin.fleetwood@uk.pwc.com

Tele: +44 (0)2890 415486

Email: michael.heinicke@uk.pwc.com
Tele: +44 (0) 28 9041 5052