Corporation Tax

Further guidance on estimating quarterly payments and on the use of penalty powers in quarterly instalment payment cases

Introduction

Quarterly payments of Corporation Tax for large companies were introduced at the same time as CTSA. Instalments are based on the company's estimate of the tax liability on its profits for an accounting period and the first two instalments fall due before the end of the accounting period.

Statistics to date have shown that companies have made considerable efforts to comply with the quarterly instalment system and we recognise the work they have already undertaken. During the Review of Links with Business and other dialogue, businesses have indicated that they would welcome further guidance on a practical and realistic approach to paying by instalments and a level of reassurance that general methods adopted are acceptable for the purposes of the regulations.

The following aims to provide practical guidance on estimating quarterly payments and reassurance on the application of the penalty provisions within the framework of the current regulations.

General guidance

Commercial Practice and Governance
The Revenue expects that in estimating their quarterly payments companies will follow normal commercial practice and apply corporate governance and standards appropriate to their size and nature. The following guidance is intended to supplement their internal commercial processes and to provide an indication of acceptable practice.

There is no requirement for companies to seek advance clearance for their intended approach. But a company that is in any doubt about the acceptability of its method of estimating profits (for example, because it wishes to adopt a practical method that is outside the scope of this guidance, or is uncertain about the application of the guidance to its particular circumstances) is encouraged to discuss it with the office to which it files its tax return. A copy of internal Revenue guidance issued to Large Business Office inspectors, on the approach to enquiring into quarterly instalment payments, is attached for information at Annex A.

Liability and Payment
The Revenue's approach to quarterly instalment payments is based on a clear distinction between 'liability' and 'payment'.

Liability: the Regulations say that an amount of the company's total liability 'shall be treated as becoming due and payable' in instalments - that is, the amount depends on the total liability: it cannot be known for certain until after the end of the accounting period and it will change each time that the liability changes; the final figures may not be known until years after the end of the accounting period.

Payment: the first 2 or 3 instalments at least have to be made before the company can know with any degree of certainty what liability it is likely to return and must therefore be made on the basis of what it estimates that liability will be. By definition each estimate can only be made on the basis of the information available at the time. An event which happens unexpectedly, in month 8 or later, cannot be taken into account in estimating the liability and therefore the first instalment to pay in month 7.

The roles of Interest and Penalties in the Quarterly Payments system

The instalment payment regulations include provisions for debit interest on late payments and credit interest on overpayments and for penalties on unpaid tax.

Interest

Some degree of over- and under-payment is inevitable because initial payments rely on estimation of future profits and as a result companies will incur interest charges or become entitled to interest payments or a combination of the two. It should be emphasised that the interest represents no more than compensation for the loss of use of the money by the Exchequer or, in the case of an overpayment, by companies.

Quarterly instalment payments are payments 'on account' of a company's overall tax liability, and companies should therefore make top up interim payments where necessary. Equally companies may reduce subsequent payments or claim repayments if their revised calculations indicate that overpayments of tax have been made.

Penalty charges

The penalty provision is in regulation 13 of the instalment payments regulations. It provides for a penalty (under TMA1970/S59E (4)) of not more than twice the amount of interest on any unpaid amount in respect of the total liability of the company for that accounting period. The press release published in June 1999 outlined that penalty charges were intended where there was an indication that a company had deliberately or recklessly failed to comply with its payment obligations under the regulations, or fraudulently or negligently made a claim for repayment. They were to be sought in only the most serious cases involving flagrant abuse of the regulations and before seeking a penalty the case must be submitted to Head Office for approval. The normal rights of appeal of Section 100B(1) apply to any such penalty.

When the system was introduced it was anticipated that penalties would be sought only in a very few cases. This has been borne out by experience so far.

Companies and groups will need to take their own view as to the extent to which they wish to manage and minimise their exposure to interest charges and therefore of the steps they wish to take to arrive at their quarterly payments. This note focuses on 'acceptable' methods of estimating quarterly instalments which the Revenue regards as sufficient to ensure that the company does not risk incurring a penalty for non-compliance with the instalment regulations. It should be noted that any underpayments will still be subject to debit interest, even though the basis of estimating profits falls squarely within the following guidance.

Estimating the Tax Liability

The theme that runs through the following guidance is that in deciding what amounts to pay companies should consider known transactions, events or factors that might make a significant difference to their liability and should take a view on what their impact will be. The Revenue will not use hindsight to challenge that view.

Many companies prepare management accounts or other internal management information during the year as part of their financial forecasting, budgeting and reporting procedures. Where possible, companies should make use of these systems in estimating their tax liability. A full CT computation is not required. For example, if experience indicates a pattern to the company's effective rate of tax in relation to the management account figures, it may be possible simply to apply that and to adjust for any major changes.

Records

There is no statutory requirement to create or retain records specifically for the purpose of quarterly instalments, although nearly all records relevant to quarterly instalments will also be relevant to the company's tax return and therefore covered by paragraphs 21 to 23 of Schedule 18, Finance Act 1998. The Regulations authorise the Revenue to require a company to provide information about the computation of quarterly instalment payments or as to the reasons for non-payment.
In practice companies will have some records of the calculations they undertake, including notes of specific items which they have considered for inclusion or exclusion. These would be of great value to companies, if any review of their instalment payments were made, so it will be in their interest to retain them. See Annex B.

Specific areas of guidance

Group Relief and Losses

Groups may take into account the group relief that is likely to be available from companies that are incurring losses. Where they do not have a Group Payment Arrangement, they will need to decide what is the likely extent of the loss and which company or companies will receive the group relief. (This will not, of course, commit them to surrender relief in this way when or after they submit the returns.) Where a Group Payment Arrangement is in place, it will be acceptable for payments to be based on the overall group position, without reference to where losses are located, unless the group is aware that this will make a major difference.

'One off' transactions - Chargeable gains in particular

One off transactions can have a substantial effect on a company's liability, but it can be difficult to know whether or when they will happen and to estimate their impact. Examples are:

• Chargeable gains and losses
• Loan relationships
• Forex gains, or losses, that have not yet been realised
• Intangibles
• Overseas dividends, which may or may not be received and whose quantum may be uncertain.

Liability in respect of chargeable gains can cause particular difficulties, for example:

• where a major disposal has occurred early in the year, but it is unclear whether a reinvestment that will qualify for rollover relief will take place or a further disposal that will yield a loss will occur in time; or
• where a major disposal is anticipated, but it is unclear whether it will take place before the end of the year or not until the next one; or
• where the opportunity to make a major disposal arises unexpectedly late in the year; or
• where a major change in business strategy, which leads to a major disposal or series of disposals, is made late in the year.

A company can only make its quarterly instalment payments on the basis of the information available to it at the time. The fact that the expected rollover relief has not materialised, or that an expected loss has not been realised, or that it was not certain that a gain would arise either before the end of the accounting period or at all, will therefore be accepted by the Revenue as the reason for underpayment of quarterly instalment payments. The Revenue also recognises that there will be occasions when information about intended transactions is confidential or market sensitive at the time an instalment payment has to be made and therefore cannot be taken into account.

It should be stressed that this guidance applies to transactions of a one off or exceptional nature. For transactions giving rise to chargeable gains which form a normal part of the company's business (for example, the investment gains of life companies), the guidance below on market movements on investment returns is more appropriate.

Market Movements

In some sectors, movements in the financial and other markets are a principal driver. Where companies maintain their internal records and management accounts in a foreign currency, their final accounting profit and tax liability are dependent on the year-end exchange rates. Concern has been expressed that volatility of the markets can increase profits in a way that could not have been forecast.

Significant market movements may therefore cause, and will be accepted by the Revenue as the reason for, fluctuating instalment payments. Any reasoned view on future market trends will be accepted as the basis for estimating instalments. For example:

• Where a company's normal commercial forecasting includes expected market movements, we would generally expect that also to form the basis of estimates for quarterly instalment payments.
• In other cases it might be reasonable to assume and pay instalments on the basis that there will be no significant change in financial market trends for the rest of the year.

Changes in law or practice including

• Developments in case and statute law
• Accounting practice
• Regulatory requirements
• International developments

When companies make their self-assessment, they have to do so on the basis of their view of the law. They should do the same when calculating their quarterly instalment payments. The Revenue will therefore accept that payments have been properly made where companies take a view on the likely outcome of a case that is not final at the time. Equally, where consultation is taking place on proposed legislation, it is acceptable for companies to take a view on the timing and details of the new provisions.

Similarly, companies cannot be expected to take into account the following kinds of change of which they are unaware when they make a quarterly instalment payment or which occur after they have done so:

• changes in accountancy practice, or in the way that accountancy practice is applied for tax purposes;
• changes in regulatory requirements which may affect the way in which the business is conducted or may have a direct impact on the tax liability; or
• changes in foreign accountancy practice or tax law that affect the income from overseas branches or subsidiaries.

Open enquiries on previous years, which may have an impact on the current year (for example Capital Allowances, Revenue/Capital expenditure)

The conclusions at the end of an enquiry into a company's tax return may impact upon subsequent accounting periods. In particular it may be agreed that certain expenditure is not an allowable deduction or that an asset does not qualify for capital allowances. Where an enquiry was open on the return for a previous year or years, the Revenue will accept that payments have been properly made where companies took a view on the likely outcome of the enquiry.

Annex A The LBO Bulletin, issued in November 2000, which sets out the need for a pragmatic approach by Inspectors in applying the penalty regulations.
It specifies Dick Medland as the contact point for queries.

Annex B A list of Question & Answers.

Annex A

Large Business Office Information Bulletin no 143, issued on 21 November 2000

Purpose
To provide advice to LBO Inspectors on interpreting the position on CTSA returns where there is liability to quarterly instalment payments. This IB lists factors which may make it difficult for groups to estimate their liabilities.

Message
You are now starting to receive and risk assess returns for CTSA accounting periods that have liability to quarterly instalments. The following supplemental guidance on quarterly instalment payments has been discussed and agreed with the Large Corporates Forum.
General guidance on making quarterly instalment payments is at section 12.10 of the Guide to Corporation Tax Self-Assessment. The Revenue's policy on enquiring into them is set out in Press Release 110/99 and reproduced in Tax Bulletin 42 and at EH1426-1431. We will do so only "where there are indications that [it] may have deliberately or recklessly failed to comply with its payment obligations under the regulations, or fraudulently or negligently made a claim for repayment." The significance of the last part is that there is no power to enquire into a repayment claim before the filing date. Repayments claimed should be made and the position reviewed after the filing date. The relevant guidance is at EH1400-1432. See in particular EH1400-1407 and 1411 about which cases to consider and the interaction between enquiries into a company's quarterly instalment payments and an enquiry into its return.

Factors Which May Make It Difficult for Large Groups to Estimate their Liabilities Accurately
The first two quarterly instalments for a standard 12 month accounting period have to be paid during the year itself, and the third is due before the accounts and computations can be prepared. Examples of the factors that may make it difficult for large groups to estimate their liabilities accurately are

• establishing in-year the income chargeable to UK tax, when existing reporting is on a world-wide or European basis, or by reference to management units rather than legal entities
• mergers and de-mergers which may make it difficult to know what activities are going to be taxable on the group for the year and to gather together figures from systems that have not yet been integrated
• seasonal variations in business activities
• lumpy dividend remittances from outside the group
• uncertainty about whether a disposal will go through before the end of the year and therefore when the CG will arise
• exchange rate fluctuations
• international tax issues including DTR, CFC liability and transfer pricing
• delay in establishing the income from joint ventures.

Substantial variations from payment to payment and between payment and the self assessed liability may therefore occur in the first three payments, although the position should usually be more accurate by the fourth instalment. Groups may choose to round up their payments, ending up with substantial overpayments, in order to prevent any liability to debit interest.

ANNEX B