Draft bill would allow Northern Ireland to set its own corporation tax rate from 2017, says UK government

The Corporation Tax (Northern Ireland) Bill forms part of last month's Stormont House Agreement between the Northern Ireland executive and the UK government, which intends to finalise the legislation before the general election in May. It is intended to address the unique position of Northern Ireland within the UK as it shares a border with the Republic of Ireland, which has a 12.5% rate of corporation tax compared to the UK's 21% rate.

Around 34,000 Northern Ireland businesses, including 26,500 smaller businesses, could benefit if the corporation tax was lowered, according to UK government figures.

"There is strong support for this change across all five of the parties in the Northern Ireland Executive and the business community, who believe it would provide a major incentive for domestic businesses to invest further in Northern Ireland and significantly increase foreign direct investment," said Theresa Villiers, the UK government's Northern Ireland secretary.

"Given the land border shared with a lower corporation tax jurisdiction, this measure has the potential to create thousands of new jobs and stimulate crucial growth in Northern Ireland's private sector, leading to a stronger, re-balanced economy. In the light of an economy that for many years has been over-dependent on the public sector, allowing the assembly to set its own rate for corporation tax offers the prospect of a transformative change in Northern Ireland," she said.

The draft legislation would give the Northern Ireland assembly the power to set the corporation tax rate over most trading profits, although most financial services activities and oil and gas taxation would remain within the main UK taxation regime. Power over the corporation tax base, including reliefs and allowances generally, would also remain with the UK parliament, although the bill contains some rules on reliefs and allowances in sectors including the creative sector, and for research and development. The taxation of non-trading profits, such as income from property, would remain within the UK regime.

A special regime is included in the draft legislation to reduce the administrative burden on smaller companies, while the rules on establishment for larger companies are based on existing international rules. UK SMEs with employees in Northern Ireland would be taxed in one jurisdiction only based on an 'in/out' test, where the Northern Ireland rate would be applicable if at least 75% of their staff time and staff costs related to work in Northern Ireland. Large companies with a presence in both Northern Ireland and the rest of the UK would be required to treat their Northern Ireland trading activity as a separate business under the usual rules governing permanent establishment, and to apportion profits appropriately between the two.

The progress of the draft legislation is dependent on the parties in the Northern Ireland executive meeting certain conditions as agreed during 11 weeks of negotiations at Stormont House. These include legislating for agreed changes to the welfare system; setting a "credible" budget for 2015/16; and making the changes needed to put the executive's finances on a "stable footing" in the long-term.

"Northern Ireland, which has for years looked enviously at the Republic of Ireland's popular profile by virtue of its 12.5% rate of corporation tax, will welcome the devolution of corporation tax rates with open arms - but the news is not quite as rosy as it first appears," said corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com.

"The UK government, being keen to ensure that the tax powers granted to Northern Ireland are not abused, has taken steps to try to ensure the regime cannot be exploited for tax avoidance purposes; and non-trading profits, property rental income being a key example, will continue to be taxed at the main UK rate. Anyone operating inside and outside Northern Ireland can also expect an extra compliance burden in operating two separate tax regimes and the need to correctly allocate profits and losses between Northern Ireland and the rest of the UK," she said.