There are concerns in relation to the provisions that would enable Small and Medium Sized companies (SMEs) to access the Northern Ireland rate.

Responding to the Public Bill Committee call for evidence, the Northern Ireland Tax Committee commends the drafting of the Bill as being comprehensive, fit for purpose and clearly written with the stated key policy objectives in mind. The Committee also took the opportunity to highlight two particular areas of concern in relation to SMEs.

According to HMRC, the NI rate will affect an estimated 34,000 companies of all sizes, including 26,500 SMEs. This makes the SME test in Chapter 4 of crucial import as it has the potential to allow almost 80% of companies operating in NI access to the NI rate.

Mobile workforces and the construction industry

Chapter 4 of the Bill contains the rules requiring SMEs to meet the NI employer condition. This requires that at least 75% of United Kingdom staff time and staff costs relate to work in NI.

Whilst it is acknowledged that this condition has been drafted to ensure the NI rate can only be accessed by companies carrying on genuine economic activity in NI and employing NI employees, this particular test has the potential to disadvantage those SMEs in NI with mobile workforces.

The construction sector, as a key contributor to the Northern Ireland economy, is highlighted as one such sector vulnerable to the NI employer condition. The availability of a lower rate of corporation tax could be critical to the recovery and renaissance of this sector.

The “in/out” test

Currently the SME test in Chapter 4 takes the format of an “in/out” provision meaning an SME will lose out if it cannot meet the NI employer condition. A year of grace is provided if the SME was a NI employer for the previous 12 months. This permits some latitude in meeting the NI employer test and is welcomed by the Committee. However if the SME fails the NI employer test for a second consecutive accounting period then none of its profits will qualify for the NI rate and it will be subject to the main UK rate.

The “in/out” nature of the test therefore has the potential to create an uneven playing field between SMEs and those able to access the NI rate under the NIRE tests (see later).

Many SMEs in NI are indigenous businesses who have survived the economic crisis by recognising the need to seek turnover and growth opportunities outside its own jurisdiction by making its workforce more global and mobile. These businesses should not be disadvantaged for doing so.

Committee recommendation

A solution proposed by the Committee in its submission would be to allow SMEs which do not meet the NI employer condition to access the NI rate under the provisions in Chapter 5 instead. Chapter 5 of the Bill deals with companies having a Northern Ireland regional establishment, which do not meet the SME size condition in Chapter 4. This would enable those businesses to assess the costs v benefits of doing so.