Corporation Tax - A changing landscape

With all the challenges presented by both Brexit and the coronavirus pandemic, the UK Budget announced back in Spring 2021, has received little press attention.

The headlines have focused on measures aimed to help ease the financial loss of lockdowns, such as the furlough scheme, and reduction of VAT rates for the hospitality sector.

As we all have been expecting, Treasury are ultimately faced with an issue of balancing the books, and will need to recoup the grant monies used to prop up the economy.

One of the most significant measures taken was the increase in the main rule of corporation tax from 19% to 25%, effective from 1 April 2023.

NI businesses have been particularly tested over the last couple of years, not only from the coronavirus pandemic but also with the need to adapt to the implementation of the NI Protocol.

Now faced with a corporation tax rate which is double that of their counterparts across the border in the Republic of Ireland, the competition for cost-effective business is going to become more challenging than ever.

Looking at developments around the world, the OECD have agreed and implemented a deal with more than 130 countries to set a global minimum corporation tax rate of 15%. This deal includes the EU and most notably, the Republic of Ireland.

Ireland has long been an attractive area for large multinational companies and foreign direct investment due to the low corporation tax rates of 12.5%.

Whilst the Irish government were initially hesitant to agree to an increase of corporation tax and potentially risk losing their appeal to businesses, they sought assurances to ensure that only businesses with global revenues over €750 million would be subject to the new higher rate of 15%.  

The European Commission are aiming to deliver a directive this year to implement the OECD rules.

This will leave Northern Ireland in a unique position having to compete with a massive differential in corporation tax rate from across the border.

 Corporation tax was pushed on the agenda for years, with legislation put in place back in 2015 to devolve corporation tax to Stormont.

There are many political scuffles as to why this legislation has not implemented a reduction in the local corporation tax rate, particularly surrounding the required reduction of the block grant funding received from Westminster.

With the impending increase to a 25% rate of corporation tax and lows as much as 12.5% in the Republic of Ireland, the need to revisit the special Northern Ireland corporation tax rate has been considered by The Independent Fiscal Commission NI in their Interim 2021 report. 

As businesses recover and seek to consolidate post-pandemic, higher corporation tax rates will not be met with a warm welcome.

Any tax paid is a sunk cost which impacts the shareholder value and accordingly businesses should review cash flow projections, corporation tax forecasts and consider all the available mitigations such as the efficient use of unutilised losses (perhaps arising during the pandemic), tax effective investment to maximise capital allowances, and much more.