Northern Ireland rate of Corporation Tax: changes to small and medium-sized enterprise regime
Published 5 December 2016
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Who is likely to be affected
Companies who are small and medium-sized enterprises (SMEs) trading in Northern Ireland (NI) currently or who may trade there in the future.
General description of the measure
The Northern Ireland Corporation Tax (NI CT) rate will apply to certain trading profits in NI.
This measure makes amendments to the NI CT regime to allow all SMEs with trading activity in NI the potential to benefit from NI CT. It also makes changes to NI CT to ensure it is robust against abuse and ready for commencement if the NI Executive demonstrates its finances are on a sustainable footing.
Policy objective
NI CT addresses the common objective of the UK government and the NI Executive to re-balance the NI economy, by providing a devolved fiscal instrument to encourage genuine economic activity and employment in NI.
Under the current rules, SMEs which do not have at least 75% of employment time and costs in NI have all trading profits taxed at the UK Corporation Tax (CT) main rate.
The changes give greater flexibility to SMEs and a fairer outcome: all SMEs with trading activity in NI will have the potential to benefit from the NI CT regime; while avoidance risks are managed to maintain the regime’s focus on encouraging genuine economic activity in NI.
Background to the measure
In March 2015, Parliament passed the Corporation Tax (Northern Ireland) Act 2015 which, subject to commencement regulations, will devolve corporation tax rate setting powers to the NI Assembly. The government has committed to commencing the regime if the NI Executive demonstrates its finances are on a sustainable footing. The NI Executive has publicly indicated its intention for the regime to begin in April 2018, and that the rate will be set at 12.5%.
Industry representations were made during the passage of the Bill seeking an option for SMEs which do not meet the 75% employment test to access the NI rate on the same terms as large companies.
HM Revenue and Customs (HMRC) is regularly assessing the risk of potential manipulation and abuse of NI CT, and the measure includes steps to ensure the regime is robust to abuse.
Detailed proposal
Operative date
The measure will have effect for accounting periods beginning on or after the first day of the financial year appointed by the Treasury in regulations.
Current law
Current law on NI CT is contained in Part 8B of the Corporation Tax Act 2010, as inserted by the Corporation Tax (Northern Ireland) Act 2015. Schedule 1 to that Act also made amendments to the Capital Allowances Act 2001 to make provision for NI CT.
Part 8B provides rules to identify profits of a company which are chargeable at the NI rate. This includes at Chapter 6 a regime for large companies and a separate simplified regime at Chapter 7 for SMEs.
Larger companies with both NI and rest of UK activity must use rules based on existing profit attribution principles to allocate profits to a NI trading presence (termed a Northern Ireland Regional Establishment (NIRE)). This effectively means that the company treat their NI trading activity as if it were a separate business from its activity in the rest of the UK, and allocate profits to each appropriately.
There is a simplified regime for SME companies, many of which would find this profit attribution an excessive administrative burden. SMEs with more than 75% of their employment time and costs in NI are not required to allocate profits to NI and the rest of the UK: instead all of their trading profits are charged at the NI rate. SMEs which do not have at least 75% of employment time and costs in NI have all trading profits taxed at the UK CT main rate.
Chapter 4 provides the basic definitions for the regime, including that of ‘NI company’. An SME company must also be a NI employer to be a NI company. A NI employer is a company which meets the 75% employment test which itself relies on the definition of a company’s workforce as consisting of directors of the company, employees of the company and externally provided workers in relation to the company.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to give an option for an SME which is not a NI employer but has a NIRE to elect to use the large company rules for identifying profits and losses to which the NI rate applies.
The meaning of NI company in Chapter 4 is expanded to provide for this election, and similar provision is made for partnerships, by amending the meaning of NI firm in Chapter 16. The large company rules in Chapter 7 are extended to apply to SMEs which are not NI employers and which have made the election. Amendments are also made to refine the workforce conditions in section 357KE to ensure they are robust to abuse.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
The measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The measure only affects companies and so is not expected to impact on individuals and households or on family formation, stability or breakdown.
Equalities impacts
Allowing SMEs which are not NI employers to elect to use the large company regime will not have any equalities impact.
Impact on business including civil society organisations
This measure gives greater flexibility for SMEs by providing an option to access the NI CT regime not available under the existing rules. If they do not want to exercise the option there is no increase in the administrative burden they bear, and they can stay with the simplified approach allowed for under the existing rules, which mitigates the impact on SMEs through an annual in/out test. Over 96% of SMEs with trading activity in NI have at least 75% of their employment in NI and so would not be affected by the thresholds applied in the in/out test.
The large company rules require allocation of profits between NI trading activity and trading activity in the rest of the UK using profit attribution principles with which SMEs are not familiar. If a business uses the option, it is expected that there will be additional one off and ongoing costs in setting up and applying the required profit attribution and transfer pricing methodologies. Up to 500 businesses with less than 75% of their employment in NI will need to evaluate whether the increase in administrative burden associated with using the large companies rules outweighs the benefits of accessing the NI CT regime.
Operational impact (£m) (HMRC or other)
There will be a one off Information Technology cost estimated at £120,000 to implement this measure. It is expected that negligible additional resource will be needed to monitor this measure.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and receipts and communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact James Coward on Telephone: 03000 579560 or email: ct.devolution@hmrc.gsi.gov.uk.