On 26 March 2015 the Corporation Tax (Northern Ireland) Act 2015 was enacted. The draft guidance is designed for internal use by HMRC staff.
The Corporation Tax (Northern Ireland) Act allows for devolution of power to the Northern Ireland (NI) Assembly to set a NI rate of Corporation Tax (CT) to apply to certain trading income. The Assembly indicated it intends to set a rate of 12.5 percent from 1 April 2018. The Government has publicly stated that the required Treasury Regulation to commence the regime will not be made until the NI Executive demonstrates that its finances are sustainable for the long term. This will include successful implementation of measures in the Stormont House Agreement and the ‘Fresh Start’ Implementation Plan (which includes the key issue of welfare reform). The Government will ultimately decide when it is appropriate to create the regulation and effectively activate the NI legislation. Official UK Government figures have suggested that the NI CT rate will benefit 34,000 businesses in Northern Ireland directly, including 26,000 small businesses.
The draft guidance sets out HMRC’s interpretation of the legislation and how it works. It is broken down into several chapters:
The general rule is that only ‘Northern Ireland profits’ will be taxed at the NI CT rate, all other profits will remain taxable at the mainstream UK rate. Qualifying profits will be ‘trading profits’, with the main exclusions being oil & gas exploration and exploitation activities, lending and investment, investment management, long term insurance business and reinsurance.
SMEs will only qualify for the NI CT rate provided at least 75 percent of the staff time and costs relate to work carried out in NI. Growing SMEs with operations outside NI may need to review their existing corporate structures to ensure these conditions can be met to maximise the benefit of the NI CT rate.
For large companies, NI profits are established by allocating trading income and expenses on a ‘separate enterprise principle’ to their NIRE in line with established transfer pricing rules.
One area of early discussion focused on the issue of qualifying ‘back office’ activities. The rules allow certain financial traders, whether SMEs or large companies, to make an election within 12 months of the period end to treat their NI ‘back office’ activities as falling within the NI CT rate on a ‘cost + 5 percent’ markup basis. The draft guidance states that ‘back office’ activities are of a “support or administrative nature…but are generally not direct contributors to its core trading functions. Depending on the precise nature of the company’s trade, they will cover personnel, IT support, routine settlement, record maintenance, accounting and regulatory compliance activity. They will not include the activities of key personnel engaged in taking the decisions and assessing the risks which are at the heart of the trade”. It will therefore be necessary to analyse a function in context to determine qualifying back office activities.
Comments on the draft guidance are requested by 1 January 2017.
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