We are seeing significant activity in the funding market in Northern Ireland. In 2018, there were 220 deals announced that Northern Irish firms took part in, and the value of these deals exceeded £2bn which is a marked increase of 28% from 2017.
These figures show that businesses are keen to expand and, in order to do so, they require essential funding to develop and follow their growth plans.
In the uncertainty of the current economic climate, raising finance can prove to be a major challenge for businesses. Whether finance is required to meet long or short-term goals, organisations must consider the costs and benefits of the method they choose. Businesses should explore the alternative options available to them before deciding on funding. In addition to choosing the right funding to enable and support the growth of business, companies should also consider the taxation impacts of financing.
2018 also showed an increase from the previous year in the number of applications for banking finance by small and medium entities. The figures are encouraging especially as nine out of ten applicants were approved for bank lending in Northern Ireland. Even when using traditional bank or loan financing there can be taxation impacts that companies should consider. Generally, from a tax perspective, interest payments on loans can be deducted in arriving at taxable profits. However, there are several pieces of legislation that need to be considered to ensure that this deduction is not restricted.
A tax review of major proposed financing could help to highlight any potential restrictions that would increase tax and thus constrain cash flow. Companies should take into account taxation impacts into their business investment appraisals to ensure any potential costs are identified at an early stage.
With the threat of Brexit looming, companies should also consider any overseas funding held. If a UK company is paying interest on a long-term loan to an overseas lender, there may be a requirement to withhold tax. Additionally, there is a risk of taxable foreign exchange movements if the loan is denominated in a non-Sterling currency. Careful consideration should be given to overseas funding as it can impact cash flow and tax liabilities.
Raising finance in a business needs to be considered from many angles including the growth strategy, risk profile and the opportunities. However, as the costs of raising finance can be significant it is at the point of going for funding that future taxation impacts should be considered as they could impact the funding method or structure chosen.