Next steps in NI devolution - corporation tax
Anne-Marie Roberts examines the implications of devolving corporation tax to Northern Ireland.
The Chancellor, George Osborne, announced the plans for tax devolution to Northern Ireland in the Autumn Statement. The new powers will give the Northern Ireland Assembly the powers to vary the rate of corporation tax levied on certain profits generated in Northern Ireland. The powers have been introduced in response to the differential in corporation tax rates between the Republic of Ireland (12.5%) and Northern Ireland (21%).
The UK Government has committed to passing the new legislation before the General Election in response to the agreement reached on 23 December 2014 between the parties in Northern Ireland on budget and welfare reforms.
The draft legislation is available on the UK Parliament website. The legislation amends the Corporation Tax Act 2010 to provide for identification of the profits chargeable at the Northern Ireland rate. This includes a separate regime for large companies and SMEs. The UK main rate for the financial year will not apply to the profits and losses to which the Northern Ireland rate applies.
These proposals will require UK companies with activities in Northern Ireland to allocate their taxable profits or losses between their activities in Northern Ireland ("Northern Ireland profits") and their activities in the rest of the UK and much of the draft legislation covers how this allocation should be made. This is a significant administrative burden on companies with activities in Northern Ireland, and there is some recognition of this in the draft legislation.
SMEs have a simple test to address this issue while other companies have another 85 pages of legislation to comply with. For an SME, all its profits are "Northern Ireland profits" if at least 75% of its staff time and costs relate to work carried out in Northern Ireland. The definition of SME is based on the European Commission guidelines – the limits are less than 250 staff, turnover below €50 million and a balance sheet less than €43 million. An SME then does a simple yes or no test on its employees to determine if it has "Northern Ireland profits" and is taxed accordingly.
The Northern Ireland rate will also apply to a corporate partner's share of a partnership share if the company and the partnership are SMEs and the partnership's employee time and costs fall largely in Northern Ireland.
For companies and corporate partners who do not fall into this category, them there is work to determine if they have a regional establishment in Northern Ireland. The rules are broadly similar to the UK permanent establishment rules. If they do have a presence in both NI and the rest of the UK then the results of the company have to be allocated using the legislative provisions. In effect, the company would treat its Northern Ireland trading activity as if it were a separate business from its activity in the rest of the UK, and apportion profits appropriately between the two.
There are exclusions from the types of trades and activities income that can be taxed under the Northern Ireland regime and these are:
- Lending and investing activities;
- Asset management;
- Long-term insurance (mainly life insurance);
- Reinsurance of both general and long-term insurance; and
- Profits subject to the Oil and Gas Regime ring-fence and activities of oil and gas contractors working on the UK Continental Shelf.
Companies with excluded trades and activities other than those relating to Oil and Gas or long-term insurance may make a one-off election for their back-office functions of those excluded trades of activities to qualify for the NI regime.
There are other changes to the UK rules to facilitate a potential rate differential between Northern Ireland and the rest of the UK.
This is a change that will have wide implications, not just for the 34,000 businesses that the Government has identified as operating in Northern Ireland. These changes are being badged as a way to stimulate growth and entrepreneurship in Northern Ireland but a lower rate in Northern Ireland would introduce an element of tax competition across the UK that may have unexpected consequences. It also raises questions about whether devolution of tax powers across the UK is being undertaken on a coherent and consistent basis. The Smith Commission rejected the proposals for Scotland to have the power to vary the rate of corporation tax and yet here is a proposal from the UK Government for Northern Ireland to be given those powers. These are interesting times.