01 August 2015

The information contained within the following news articles have been pre published. The articles were published on the dates indicated and the information contained within these issues include references to taxation, legislation, regulation and other issues or concerns that may no longer apply

How to benefit from the proposed reduction in Corporation Tax Rates

15/08/2011

It has now been established that the rate of Corporation Tax is due to reduce over the next three years from 26% to 23%.  Specifically here in Northern Ireland, the Government have issued a consultation paper on potentially reducing the NI rate further to help compete with Ireland’s rate of 12%.

 

So, how can companies take advantage of at least a 3% reduction in tax?

As we have struggled with the recession over the last few years many companies have been reluctant to make large investments and have therefore potentially built up significant cash in the bank.  Obviously this presents a familiar problem.  We all know that banks are paying very low interest rates at present so the likely return on this money is minimal.  In addition to this they will pay corporation tax on any interest payments at the rate applicable for the current year.

If the company is taxed on an historic cost accounting period, then they should be able to take advantage of a tax deferral.  This is achieved by the company investing in an offshore investment bond.  Why does it have to be ‘offshore’ and does ‘offshore’ imply increased risk?  An onshore bond will effectively pay basic rate income tax within the investment fund and this cannot be reclaimed by the company and therefore it isn’t efficient.  Offshore doesn’t imply more risk as an offshore bond can invest in the same range of equity funds an onshore bond can use or can even simply hold cash on deposit with a large number of banks etc…

By using the offshore bond, the company will only face a tax charge when they take withdrawals from the bond.  The table below shows the effect of this deferral using the assumption of investing in the same bank deposit account yielding 3%.

 

In the above offshore example if the company was to fully encash the bond and the prevailing rate of tax was 23% then the net proceeds would be £1,096,641.93.  As you can see the company have gained by being able to defer the tax.  The situation would be even better if we see further reductions in the Northern Ireland Corporation tax rates and also is we consider an equity based return.  Given the volatility in the markets over recent weeks it may not be a bad time to ‘get in’ when the markets are cheap.

Paul Dixon

Chartered Financial Planner

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