The Northern Ireland corporation tax regime explained
The regime at a glance
Who? |
SME companies that also meet the “NI employer” condition |
Large companies that are “NI regional establishments” |
What? |
Qualifying profits of a qualifying trade that is not an excluded trade |
Certain qualifying “back” office activities, by election |
When? |
From 1 April 2018, subject to Treasury regulations |
What you can do now
A 12.5 percent rate of corporation tax for Northern Ireland (NI) will be a welcome boost for many businesses operating in the region, irrespective of size. However, the legislation is complex. With just over two years to implementation, companies might be fooled into thinking the lower rate is just that and will simply apply to them.
Get to grips with the subtleties and nuances of the Act now, whether you act for client companies in the province or are in business as a company. Look at your company or client portfolio and identify where they sit in relation to the Act. Assess the potential implications early to take advantage of the regime right from the start.
Take stock now and consider your company or client’s strategic response to this important change. There are significant opportunities there for the taking.
The path to corporation tax devolution
No-one knows better than this Institute the long and winding path to corporation tax devolution for NI. In January 2016, a memorandum of understanding was published, setting out the responsibilities of HM Revenue and Customs and the Department of Finance and Personnel in setting up and operating the NI Corporation Tax (NICT) rate.
How rates are set
At the time of writing, there are very specific rate-setting arrangements. The NICT rate-setting power may not be exercised unless Treasury regulations have been made. These regulations must specify the first financial year for which an NICT rate may be set. If such regulations are made, the NI Assembly will not be required to set a particular rate. The NICT rate will be set by the NI Assembly by passing a resolution before the beginning of the financial year to which the rate applies.
If no rate is set for a particular year, the rate in the previous year continues to apply. If the NI Assembly never sets a rate, then the rate will default to the UK main rate for the relevant financial year.
These Treasury regulations are subject to very specific conditions. As set out in the November 2015 Fresh Start agreement, this requires the continued commitment of the NI executive to “take all the actions necessary to demonstrate that its finances are on a sustainable footing for the long term including successfully implementing measures in the Stormont House Agreement, this Agreement and subsequent reform measures”.
The UK main rate
The UK main rate is set at 20 percent for the financial years 2015 and 2016 starting on 1 April for each of those years. The Finance (No.2) Act 2015 legislated further decreases in the main rate to 19 percent and 18 percent respectively. A 19 percent rate will operate in the financial years 2017–2019 inclusive with an 18 percent rate set for the financial year 2020.
The Corporation Tax (Northern Ireland) Act 2015
The Act received Royal Assent on 26 March 2015 and runs to some 96 pages with 17 individual chapters. The provisions of the Act insert a new Part 8B in the Corporation Taxes Act 2010. A useful explanatory memorandum summarises the main provisions of the Act.
Who?
The NICT rate will apply only to NI profits. These are qualifying trading profits made by companies that are “Northern Ireland” companies in the relevant accounting period. A company will be a Northern Ireland company for these purposes if the company carries on a qualifying trade in the period and either the SME condition or the large company condition is met.
The tests for different enterprise sizes are discussed in more detail below. It is each of these tests that introduce the territorial aspect to the NICT regime with different rules for different enterprises.
Note that Chapter 16 of the Act brings corporate partnerships with a NI trade into the regime, but with very specific modifications to the legislation to accommodate them.
Qualifying SMEs
A company must meet two distinct strands to be a qualifying SME. The company must be both an SME and a Northern Ireland employer, in the relevant period.
A company will be an SME if it meets the EU definition contained in Commission Recommendation 2003/361/EC (6 May 2003). That requires the company to have a maximum number of staff of 250 and either annual turnover of less than €50m or a balance sheet total of less than €43m.
An SME will be a Northern Ireland employer when:
- 75 percent or more of the total workforce’s working time spent in the UK, is spent in NI itself; and
- 75 percent or more of the company’s workforce expenses for working time spent in the UK are attributable to time spent in NI
The SME test thus takes the format of an “in/out” provision – this means 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. 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 UK main rate.
Qualifying large companies
A ‘large company’ is a company that is not an SME and one that has a ‘NI Regional Establishment’ (NIRE) for the relevant period. A NIRE exists if the large company has either:
- A fixed place of business in NI through which the business is wholly or partly carried on, or
- An agent who has the authority to conclude business in NI on behalf of the large company
This NIRE requirement is designed to ensure the large company has a genuine NI presence and is broadly similar to the UK permanent establishment rules.
What?
The NI rate will apply to qualifying profits of a “qualifying trade”, (one that is within the charge to UK corporation tax and is not an excluded trade). Non-trading activities (e.g. property income, investment income) are excluded. These will, therefore, continue to be taxed at the relevant UK main rate.
Examples of excluded trades are oil activities (taxed as ring-fence trades), lending and investment (i.e. many financial services businesses), investment management, long-term insurance business and re-insurance. However, the trades of lending and investment, investment management and re-insurance can, by election, be deemed to be a qualifying trade, but only where “back-office activities” are being carried on. HM Treasury is to be given the power to issue regulations to define what is meant by “back-office activities”.
As a result of these definitions, a NI company will, therefore, be required to split its profits and losses into ‘NI profits/losses’ and ‘mainstream profits/losses’.
In particular, large companies must also apply rules similar to those governing the allocation of profits to a permanent establishment, apportioning their profits between those arising in NI and those arising elsewhere in the UK. These are essentially to be established under arm’s-length principles.
The Act also contains rules modifying the existing corporation tax loss relief rules to accommodate the existence of different tax rates and loss carryforward and group/consortium relief rules.
Capital allowance claims will need to be streamed between activities subject to the NI rate and those falling under the main UK rate. And there are complex provisions for dealing with intangible assets held for the purpose of a NI trade.
The Act also includes additional rules for calculating various tax reliefs (for R&D, contaminated land, and the creative sectors) with the broad objective of preserving the value of those reliefs given the would be differential between the UK rate and the NI rate.
The UK Patent Box regime legislation will also be amended to provide for a mainstream deduction and a NI deduction in calculating the patent box profits.
Contacts
Brian Keegan, Director of Taxation |
Leontia Doran, UK Taxation Specialist |
Tel: 00353 163 7347 |
Tel: 00353 1523 3914 |
© Chartered Accountants Ireland 2016 |
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The authors of this briefing have taken all due care and consideration to ensure that all statements presented as facts are true and accurate at the time of publication. No liability for errors or omissions is accepted, nor for the consequences of any person acting or failing to act on the basis of the content as published. The content of this rbriefing should not be regarded as a substitute for expert professional advice. |
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Source: Chartered Accountants Ireland. www.charteredaccountants.ie |
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