Corporation Tax (Northern Ireland) Bill

Written evidence submitted by KPMG Belfast (CT 01)

     Corporation Tax (Northern Ireland) Bill

I refer to the call for written evidence to the Commons Public Bill Committee which was issued on 29 January 2015 in relation to the Corporation Tax (Northern Ireland) Bill and make submission to same.

1. Introduction

I am the Head of Tax at KPMG in Belfast and am the spokesperson for Grow NI, which is the umbrella grouping representing almost all of the major business organisations in Northern Ireland. The main objective of Grow NI has been to call for the introduction of corporation tax rate varying powers to the Northern Ireland Assembly so as to facilitate the rebalancing of the Northern Ireland economy.

2. Summary

I would make the following key points with respect to the current bill:

(i) The key policy objectives as stated by HM Treasury and HM Revenue & Customs are to incentivise investment in Northern Ireland, minimise the compliance burden on companies, reduce the costs for the Northern Ireland Executive and to comply with the EU legal requirements. I believe that all of these objectives have been successfully met and I would commend HM Treasury and HM Revenue & Customs for their work in this area.

(ii) The proposed "Northern Ireland rate" will only apply to trading profits generated by a "Northern Ireland company" and will not apply to non-trading income or profits. This will provide the requisite incentive to companies operating in Northern Ireland to engage in activities most likely to generate additional employment in Northern Ireland. The legislation is therefore appropriately targeted.

(iii) The creation of a separate regime for SMEs will provide the necessary simplification for small and medium sized companies to benefit from the Northern Ireland rate whilst not having to incur significant additional compliance costs. However, consideration should be given to whether an SME could in certain specific circumstances be granted the ability to elect into the Northern Ireland Regional Establishment Regime.

(iv) The Northern Ireland Regional Establishment rules are consistent with the existing UK tax framework for permanent establishments and have been designed so as to give access to the Northern Ireland regime in respect of activity carried on in Northern Ireland by large companies and groups. The additional compliance requirements are at a level which most large groups are currently equipped to deal with.

(v) The exclusion of trades consisting of lending activity, relevant regulated activity and insurance activity will remove most of the financial services industry from the regime. Whilst this will clearly limit the scope of the regime, it should prevent undue exploitation from this highly mobile sector. The carving out of back office activities of financial service companies from excluded trades is welcome but the complexity involved in defining a back office activity may result in financial service companies with back office activities transferring out such activities into separate Northern Ireland companies.

(vi) There is inevitable complexity in relation to certain aspects of the legislation interfacing with the existing UK Corporation Taxes Act. This is especially the case with respect to intangible assets. However, this is an inevitable consequence of potentially having two different corporation tax rates in the United Kingdom and the additional complexity must be weighed against the ability to artificially exploit a tax rate arbitrage.

3. Specific comments

(i) Section 357KE – the definition of "Northern Ireland Workforce conditions" requires that 75% or more of working time that is spent in the United Kingdom is spent in Northern Ireland. I understand that HMRC has carried out statistical research to indicate that most indigenous Northern Ireland companies should fulfil this condition. However there are companies who have a mobile workforce and who occasionally will fail this condition. An example would be companies in the construction sector where occasionally contracts would require a significant proportion of their workforce to work temporarily in Great Britain. It would not be possible to circumvent this problem by creating a GB subsidiary company if the workforce was fluctuating between GB and Northern Ireland. In such circumstances, there would be merit in enabling such an SME to elect into the Northern Ireland Regional Establishment regime so that at least the Northern Ireland element of its profits would qualify for the NI rate rather than all of its profits falling outside the NI rate. Whilst the default position would be that all SMEs fell into the SME regime, such companies would have the option to elect to transfer into the NIRE regime. If a SME company elected into the NIRE regime then it would be choosing to incur the additional compliance costs associated with being within the NIRE regime. To safeguard against any abusive behaviour, a lower threshold such as 50% of employees being based in Northern Ireland would be required in order for an SME to be entitled to elect into the NIRE regime.

(ii) Section 375XI – I note that the Treasury is to be given powers to make regulations to make provision about the meaning of back office activities for the purposes of this part. Given the difficulty in defining back office activity, it would be more appropriate for HMRC to provide detailed guidance on this matter as soon as possible. It is not good policy to specifically not define something initially but indicate that it could be defined in the future by means of regulation.

February 2015