The early bird catches the worm when it comes to tax change
Planning ahead is key if businesses are to take the fullest advantage of the new corporation rate
Now that the initial fanfare surrounding the corporation tax (Northern Ireland) Act has subsided, local businesses are beginning to address the reality that companies with trading activities in Northern Ireland will be taxed at a different rate to competitor companies in the UK.
The initial indications were that the Northern Ireland corporation tax (NICT) rate will be set at 12.5%, and will be available in 2018.
Overall, 34,000 companies are expected to benefit, including approximately 26,500 SMEs. However, following the Chancellor's announcement that the main rate of corporation tax will be reduced to 17% from 2020, perhaps the Executive will need to consider reducing the NICT rate further to, say, 10% to achieve the desired competitive advantage for local business, and Northern Ireland as a region.
With only about a third of economic activity in Northern Ireland currently being generated by the private sector, rebalancing the local economy through private sector growth and foreign direct investment (FDI) has been a key objective.
It can be no accident that the current proposed NICT rate mirrors the 12.5% rate applied in the Republic of Ireland, which has attracted FDI from the leading global tech companies and nine of the world's top 10 pharmaceutical companies.
Northern Ireland may be the most successful region in the UK for inward investment on a per capita basis, however, in absolute terms, only 48 of more than 1,000 new foreign investments into the UK during 2014/15 were made in Northern Ireland.
In contrast, Ireland boasted more than 200 foreign direct projects during the same period. There is therefore considerable scope for improved FDI success in Northern Ireland.
While Northern Ireland corporates will be the major beneficiaries from the NICT rate, it is also aimed at all companies that create employment locally and so will only apply to trading activities carried on in Northern Ireland.
Companies that derive a substantial amount of their turnover from investments or rentals will not be eligible.
SMEs will only qualify for the NICT rate provided at least 75% of the staff time and costs relate to work carried out in Northern Ireland.
SMEs, particularly growing SMEs with operations outside Northern Ireland, should not be complacent in meeting these criteria, and some may wish to review existing corporate structures to maximise the benefit of the NICT rate in their overall operations.
For large companies only the trading activities carried on in Northern Ireland will be taxed at the NICT rate.
HMRC will expect a suitable transfer pricing methodology to be applied in determining the correct allocation of economic activity to the local operations.
Northern Ireland corporates should expect to incur additional cost in complying with the new NICT rate. As with all tax considerations, early planning is recommended.
For further information or advice Paul Tynan can be contacted at firstname.lastname@example.org Grant Thornton (NI) LLP specialises in audit, tax and advisory