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CAI response to Public Bill Committee call for evidence – the Corporation Tax (Northern Ireland) Bill

Chartered Accountants Ireland

CA House

47–49 Pearse Street

Dublin 2

Private and confidential

Ian Hook

Senior Executive Officer

Scrutiny Unit

7 Millbank

London

SW1P 3JA

10 February 2015

Dear Ian,

Public Bill Committee call for written evidence: the Corporation Tax (Northern Ireland) Bill

Introduction

  1. The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to respond to the call for written evidence on the Corporation Tax (Northern Ireland) Bill issued by the Public Bill Committee on 30 January 2015. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided below. We would be happy to discuss any aspect of these comments further.
  2. About Chartered Accountants Ireland

    Chartered Accountants Ireland (The Institute) is a membership body representing 23,000 influential members throughout the globe. Our role is to educate, represent and support our members. Our members work in senior positions in practice and industry. We are committed to restoring confidence at every level of the economy. We work with governments and businesses to raise awareness of the importance of sound financial advice.

    Chartered Accountants Ireland was established as the Institute of Chartered Accountants in Ireland by Royal Charter in 1888. Its activities and those of its members are governed by its Bye-Laws and by Rules relating to professional and ethical conduct. These provisions are contained in the Handbook which is available to all members.

    Chartered Accountants Ireland is governed by a Council and it is responsible for determining policy and monitoring its implementation. Council is led by the Officer Group and supported by the Management Team and staff. A number of committees with voluntary member involvement also play a key role.

    About the Northern Ireland Tax Committee

    The Northern Ireland Tax Committee is the Chartered Accountants Ireland committee responsible for advising Council on taxation issues in Northern Ireland. It interacts primarily with HM Revenue & Customs, Government and with other representative bodies. The committee makes annual submissions on relevant tax consultations and draft legislation.

General

  1. Firstly we wish to commend those responsible for the drafting of the Bill; it is comprehensive, fit for purpose and clearly written with the stated key policy objectives in mind.
  2. Given the short timescale to respond to this call for evidence, we wish to briefly comment on the clauses of the Bill which enable Small and Medium Sized companies (SMEs) to access the Northern Ireland (NI) rate. We understand that Committee stage is due to complete on 12 February 2015.

The SME test

  1. Chapter 4 of the Bill contains rules requiring SMEs with employees in NI to establish whether their profits and losses are chargeable in NI. This is achieved if the NI employer condition is met meaning at least 75% of United Kingdom staff time and staff costs relate to work in NI. If this condition is met, then all of their trading profits will be chargeable at the NI rate, if not, all will be chargeable at the UK main CT rate.
  2. According to the HMRC’s Briefing Paper “Corporation Tax: devolution of rate-setting power to Northern Ireland”, the NI rate will affect an estimated 34,000 companies of all sizes, including 26,500 SMEs though “the burden will vary greatly depending on their size, existing tax arrangements, whether they have any NI based trading activity in a given year, and whether their activity is wholly based in NI.”
  3. This makes the SME test in Chapter 4 of the draft Bill 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 sector

  1. The second limb of the SME condition in Chapter 4 requires the SME to be a NI employer in relation to that period by meeting the 75% staff costs and staff time test. Whilst it is acknowledged that this particular aspect 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.
  2. It should be highlighted that the construction sector in NI may be particularily affected by this test. For many years, the NI economy has been heavily reliant on the construction sector as a vital sector of NI’s economy. During the boom years, the sector played a key role in economic development. At its peak in 2007, construction accounted for 14% of Gross Value Added in NI compared to only 9% for the whole of the UK.
  3. House building represented approximately 45% of the total construction industry and its demise in particular has been a major blow. At that time, according to the Construction Employers’ Federation (CEF), which represents over 70% of the industry, every £1 invested in construction generated £2.84 in economic activity. It was also a major employer, providing over 90,000 jobs in 2007 while thousands of other people including solicitors, carpet manufacturers and white good retailers also relied on the sector. Since 2008/2009 when the property market collapsed, the sector has borne the brunt of the recession.
  4. Performance in the construction sector remains weak and it is especially affected as the barriers to finance remain in place and the Stormont departmental budgets face cuts in excess of 20%. Construction companies are particularily stymied by stumbling blocks affecting borrowers such as high deposits, prohibitive interest rates, lending restrictions and valuations. The availability of a lower rate of corporation tax could be critical to the recovery and renaissance of this sector.
  5. Many construction companies work on projects outside NI with employees often travelling to work on sites just across the border in the Republic of Ireland in addition to other parts of the UK mainland. These companies are providing vital employment and make an extremely valuable contribution to the NI economy. It seems inequitable to us that such companies will not be able to access the NI rate by virtue of failing the SME NI condition test.
  6. It seems to us that a solution to this particular issue would be to allow SMEs which do not meet the NI employer condition access to the NI rate under the provisions in Chapter 5 of the Bill which deal with companies having a Northern Ireland regional establishment (NIRE).

The “in/out” provision

  1. The test takes the format of an “in/out” provision meaning an SME will lose out if it cannot meet the NI employer condition in Chapter 4. A year of grace is provided for if the SME was a NI Employer for the period of 12 months prior to the accounting period in which it does not meet the test. This permits some latitude in meeting the NI Employer test and is welcomed.
  2. 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.
  3. Whilst we fully understand the rationale behind the SME test, it seems to us that the “in/out” nature of the test will create an uneven playing field between SMEs and those able to access the NI rate under the NIRE tests in Chapter 5.
  4. 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.
  5. The natural solution to this is simple. SMEs failing the SME tests in Chapter 4 should be able to choose to access the NI rate under the NIRE rules in Chapter 5 by electing into the regime for large companies. This would enable those businesses to assess the costs v benefits of doing so. The time/cost involved in such an assessment is likely to be a one-off in many cases. If a company is able to successfully establish that it has a NIRE and it extrapolates the results of that NIRE in the first period it elects into the NIRE, in subsequent accounting periods it will have an established template for doing so.
  6. This election could be irrevocable in order to create more certainty for both the NI Assembly and the companies involved.

Freedom of Information

  1. We note the scope of the Freedom of Information Act in regard to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website and will be available to all of our members and the general public. We confirm that this submission has not been previously published or circulated elsewhere.
  2. Once again, the Committee extends its thanks to and commends those involved in drafting the Bill.
  3. Do not hesitate to contact Brian Keegan brian.keegan@charteredaccountants.ie or Leontia Doran leontia.doran@charteredaccountants.ie of this office should you require anything further.

Yours sincerely,

Paddy Harty

Chairman

Northern Ireland Tax Committee, Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie.