3. Issues raised during consultation
1.1 In his Budget last summer, the Chancellor implemented the first stage of his reform of corporation tax, abolishing payable tax credits, and cutting the main rate of corporation tax by 2 per cent to 31 per cent, its lowest level ever. Abolishing payable tax credits removed a distortion in the system which encouraged the distribution of profits as dividends rather than their retention and reinvestment. He also moved to abolish foreign income dividends (FIDs) with effect from April 1999.
1.2 The second stage of the reform of corporation tax was announced by the Chancellor in his pre-Budget report last November. He put forward proposals to solve permanently the problems connected with advance corporation tax (ACT) and particularly surplus ACT by abolishing ACT altogether and replacing it with a modern system of quarterly payments of corporation tax for larger companies. He explained that he would consult on the details of this new system.
1.3 The Inland Revenue published a consultative document "A modern system for corporation tax payments" on 25 November 1997. This document set out the framework of the proposed changes, and invited companies and others to make representations.
1.4 In his Budget of March 1998, the Chancellor confirmed the proposals set out in the consultative document, subject to some changes arising out of the consultation process. These changes are described in chapter 3.
1.5 This feedback document provides a summary of the responses received in response to the consultative document. Primary legislation to give effect to these changes will be brought forward in this year's Finance Bill, but a large amount of the detail will be dealt with in regulations. Draft regulations will be published to allow for further consultation on the fine details of the instalments regime and of the shadow ACT scheme.
2.1 The Inland Revenue received 110 written responses to the consultative document: 31 from companies within the FT-SE 100, 40 from other companies, 10 from accountancy firms, 19 from representative bodies and 10 from other bodies and individuals. In addition, meetings were held by representatives of the Inland Revenue and the Treasury with many interested parties, including large and medium-sized companies, either individually or in groups.
2.2 Nearly all those who responded welcomed the consultative approach. They appreciated the clarity of style and the plain English used in the consultative document. But some regretted the period of uncertainty between the July 1997 announcement that FIDs would be abolished and the statement in the November 1997 pre-Budget report that ACT was to be scrapped.
2.3 Nearly all respondents welcomed the abolition of ACT. It was recognised that ACT has long been a burden for companies, especially for those with substantial foreign income. Companies said that scrapping ACT would:
2.4 Most companies accepted that, once ACT is abolished, a system of instalment payments of corporation tax by larger companies would inevitably have to be introduced to replace the cash flow to the Exchequer from ACT.
2.5 The further 1% reduction in the main rate of corporation tax to 30% from 1 April 1999 was universally welcomed. Many commented that the lower rate of corporation tax would be good for investment.
3.1 The consultation process was designed to provide companies and others with the opportunity to comment on and influence the outcome of the proposed modernisation of the system of corporation tax payments. The Government found the comments made extremely helpful in deciding the best way forward. And, having carefully considered all the suggestions made, the Government decided to make the changes to the package outlined below.
3.2The Government listened to medium-sized companies, large companies and other commentators who said that, for medium-sized companies:
3.3 Having weighed up the points made about the difficulties that medium-sized companies could face, the Government concluded that medium-sized companies, as well as small companies, should not have to pay any of their corporation tax in quarterly instalments.
3.4 This change will maintain the position of the UK tax system as one of the most attractive regimes internationally for small and medium-sized companies. Many other countries do not operate reduced rates of corporation tax for companies categorised as small or medium-sized. And they avoid splitting companies into different categories by applying instalments far lower down the scale. For example, companies with a tax liability of around only £400 in Canada and £100 in France must still pay tax by instalments.
3.5 The Government initially considered that having a middle course between companies not paying by instalments at all and those paying all of their corporation tax by instalments would help to ease the transition to instalments for small, growing companies. But it was always recognised that the inclusion of medium-sized companies on the lines set out in the consultative document would have required an extra layer of complexity in the new system. This is because two instalments regimes would have existed side by side, one for medium-sized companies and another for large companies. So the decision to exclude medium-sized companies also enables further simplification of the new, modern system for corporation tax payments. And growing companies have been catered for by the change described in paragraph 3.6.
3.6 Concerns were expressed by some companies that they might not know that they were supposed to pay their corporation tax by instalments until after some of the instalments were due (because of unexpected upturns in profits for example). So the Government has decided that growing small and medium-sized companies will be protected from having unexpectedly to pay their corporation tax by instalments if they become large.
3.7 This will be achieved by providing that companies will not have to pay their corporation tax by instalments in an accounting period in which they become large if:
and
3.8 Where there are associated companies, the threshold shown will be reduced to the figure found by dividing that threshold by one plus the number of associates at the end of the preceding accounting period.
3.9 The number of associated companies is important as it has an impact on whether a company is categorised as small, medium-sized or large. And it is important for companies to be able to calculate the number of associates based on the position at the end of their previous year in order to provide certainty as to whether they should pay their tax in quarterly instalments.
3.10 This gives companies time to plan ahead so that they can prepare for paying by instalments, rather than finding themselves suddenly confronted with a quarterly payments regime.
3.11 Companies said that the current interest rates applying to underpaid and overpaid corporation tax needed to be reviewed if an instalments regime based on current year liabilities was to be introduced. They said that:
3.12 Some companies also suggested that interest rates should be at the same level for overpayment and underpayment of corporation tax.
3.13 The Government decided that the spread in interest rates should be narrowed. And it agreed that making interest chargeable and deductible would bring the interest regime more into line with commercial reality.
3.14 But there remains a need for some differential between the rates applying to underpaid and overpaid tax in order to stop the Inland Revenue from being used as a bank. The examples below illustrate this.
Example A - Keep the interest rate for both underpaid and overpaid tax at banks' base rate.
In this situation, a company at the bottom end of the large range (earning, say, just over £1.5 million a year) that was only charged interest on underpaid tax at base rate would effectively be able to access an uncommercially cheap borrowing rate. Research we conducted with a number of financial institutions established that the rate at which they would lend money to companies at this end of the range would be well in excess of banks' base rate.
Example B - Make the interest rate for underpaid and overpaid tax base rate plus 2 percentage points.
In this scenario, a very large company would be able to borrow more cheaply elsewhere and thereby make a significant profit simply by placing funds on deposit with the Government.
3.15 The problem lies in getting the right balance between those companies at the top end of the large range and those at the bottom. Setting the rates at 2 percentage points above base rate for underpayments and 0.25 below for overpayments should ensure that large companies will not be penalised for making honest errors in computing their instalment payments.
3.16 A further change, applying to accounting periods ending on or after 1 July 1999, is that interest on income tax repaid to a company will be paid from the day after the end of the company's accounting period. This is nine months sooner than the date from which interest is currently paid.
3.17 Large companies responding to the consultation said that they felt they should be able to make instalment payments on a group-wide basis, rather than company by company. They explained that this would help them cope with the switch to instalment payments.
3.18 The Government agreed that groups containing large companies should be free to pay their corporation tax on this group basis. The Inland Revenue will introduce this facility as soon as possible.
3.19 It is anticipated that few instances of penalties being charged will arise each year, the main sanction for late or inadequate instalment payments being an interest charge. Many companies asked for clarification as to when penalties would and would not be chargeable if a company failed to make an instalment payment, or made instalment payments of insufficient size when they should have done so. To give greater certainty on this, the Inland Revenue will publish a Statement of Practice in due course.
3.20 The consultative document envisaged that an anti-avoidance measure would be applied to any case where, inter-alia, a company changed its accounting date and thereby delayed the onset of instalments. The point was made that, where a company was taken over or merged with another company, the company should not be penalised if it chose to align its accounting date with the other companies in its new group. The Government agreed with this, and so has decided that a change of accounting date in these circumstances will not be subject to the anti-avoidance provision.
3.21 Many who responded to the consultation considered that companies would face difficulties in estimating accurately their current year corporation tax liabilities.
3.22 Companies were concerned that the volatility and seasonality of profits, particularly in certain sectors, would make current year estimates difficult. Many items occurring late in a company's accounting period could produce quite significant shifts in tax profits which could result in earlier estimates being inaccurate. Examples of such items included capital gains or losses, foreign exchange movements, bad debts, or controlled foreign company charges.
3.23 Many of these concerns appeared to have their origins in the natural disinclination of companies to embrace a system in which they could not be sure that a penal interest charge would not arise. It was made clear that the culture which has grown up around the existing interest rate spread looks upon an interest charge as a penalty. By narrowing the interest rate differential, a company will not be penalised for making honest mistakes in working out its instalment payments, as underpayments or overpayments will be repaid or charged at a rate approximating commerciality. It was recognised by some respondents that, if the interest rate spread was narrowed, the perception of interest as something to be avoided at all costs should gradually change and, consequentially, many of the fears about the current year basis should dissipate.
3.24 Some companies drew comparisons with other countries that base their instalment payments on the previous year's results and argued that the UK should follow this route. But such comparisons ignored the fact that, where the previous year's results are used, companies are required to file their returns much earlier than in the UK, and that any balancing payments are required much earlier than month 21 (which is when companies generally thought they should fall due, as for mainstream corporation tax currently). In France, for example, companies have to file their returns by three months from their year ends and must make any balancing payment by three and a half months from the end of their accounting periods.
3.25 A number of suggestions were put forward advocating some use of the previous year liability as the basis for instalment payments. But there was little consensus on the precise nature of any system incorporating a previous year basis. Suggestions received included:
3.26 However, those who suggested a previous year basis always made clear that the Inland Revenue would have to provide the option to switch to a current year basis in the event of a downturn in a company's profits.
3.27 In addition, most large companies who attended meetings told us that they already produced profit forecasts in-year and could therefore cope with making instalment payments based on estimated current year liabilities.
3.28 Using the previous year tax liability as a basis for instalment payments was often presented as providing certainty for both companies and the Inland Revenue. However, switching to a previous year basis for instalment payments would have thrown up other difficulties, which are illustrated below.
3.29 Previous year liabilities would not generally be agreed with the Inland Revenue by the time instalment payments were due. In fact, the tax returns for the previous year would not normally have been completed (due 12 months after the end of the accounting period) until after the second instalment had been paid (due in month 10 of the accounting period) and so uncertainty would have remained.
3.30 New companies would have no previous year liability and would have had to make current year estimates. New companies have been catered for by the provisions explained at paragraphs 3.6 to 3.10.
3.31 If a company disposed of an activity, then the previous year's results would not provide an accurate barometer for its current position.
3.32 If a previous year basis was to be adopted, the Inland Revenue would have required a tax return to establish the necessary charge to tax in time to validate the first instalment (due at month 7). As the filing date for companies is currently 12 months after the end of the accounting period, a previous year basis would have had to be combined with an earlier filing requirement. Many companies said they would not want to have to file their returns earlier than they do at present.
3.33 There would be problems if a company had accounting periods of different lengths. Companies could shorten an accounting period so that it only covered a shortened period of low profitability. That short accounting period would then form the basis for their payments in the following (say, 12 month) accounting period, thereby artificially reducing the level of their instalment payments. This possibility would mean that further anti-avoidance rules would have had to be introduced, again adding complexity.
3.34 It did not seem fair that one large company should be able to pay corporation tax much later than another company making the same level of profits just because it had made less than that other company in the previous year. The example below illustrates this.
3.35 Example
Year ending 31/12/2001
Company A has profits of £50m, corporation tax liability of £15m
Company B has profits of £2m, corporation tax liability of £0.6m
Year ending 31/12/2002
Company A has profits of £50m, corporation tax liability of £15m
Company B has profits of £50m, corporation tax liability of £15m
On the previous year basis, company A, with static profits, would have to make four instalment payments of £3.75 million for 2002, whereas company B, whose profits were rising sharply would be considerably advantaged, only having to make instalment payments of £150,000 each. On a current year basis, the two companies would have made similar payments, which would be fair in the light of their similar profit levels. By matching corporation tax payments with current year profits the new system will also more closely relate the tax charge to when profits are earned.
3.36 Allowing companies to make instalment payments based on previous year or estimated current year liabilities would have required them to make two lots of computations, would have made the system far more difficult for the Inland Revenue to administer, and would have added considerable complexity to the tax regime.
3.37 Companies understandably wanted to reserve the option to use the current year basis should profits reduce. This suggested that, if necessary, they could cope with a system of current year estimation.
3.38 Many of the perceived problems with the current year basis have been addressed by the changes that have been made to the original proposals. For example, medium-sized companies, who may have found it most difficult to estimate their corporation tax liabilities in-year, will not now have to do so because they will not have to make instalment payments (see paragraphs 3.2 to 3.5).
3.39 Other difficulties that companies expressed about basing instalment payments on estimated current year liabilities stemmed from fears that the interest consequences would penalise inaccurate estimation. But the changes to interest rates described in paragraphs 3.11 to 3.16 will avoid large companies suffering excessive interest consequences for making honest mistakes in working out their instalment payments.
3.40 Uncertainty about whether a company should be making instalment payments or not has been greatly removed. This has been achieved by allowing that, broadly, growing small and medium-sized companies will not have to pay their corporation tax by instalments if they become large but were small or medium-sized in their previous accounting period (see paragraphs 3.6 to 3.10).
3.41 Some respondents commented that companies who earned a large proportion of their profits towards the end of their accounting period would be unfairly treated under a current year system as they would have to make their earlier instalment payments based on profits they had yet to earn. But the schedule of instalments payable in months 7, 10, 13 and 16 after the start of the accounting period means that the average payment date is not until the beginning of month 12, after which point very few large companies would expect to earn over half of their profits. So the payment requirements are still reasonable for companies who may earn the lion's share of their profits towards the end of their accounting periods.
3.42 Some companies were concerned that making instalment payments based on current year forecasts would result in price-sensitive information being held by the Inland Revenue. But the Inland Revenue already deals with a considerable amount of price-sensitive material, and has procedures in place to ensure that confidentiality is preserved. Large companies already publish profit forecasts, and in many cases must provide profit warnings if forecasting suggests a drop in profits. Other companies said in their representations that fears about the new system releasing price-sensitive information into the public arena were unfounded.
3.43 The Government considers that it is right in principle to use a current year basis, because it matches corporation tax payments with the profits being made. The new system will be flexible enough to allow companies to make top-up payments if they realise they have made insufficient instalment payments and normally to have back any instalment payments already made if they later conclude they ought not to have been paid.
3.44 The UK system will provide an attractive regime for companies, and compare well with systems operating in the US, and Australia, both of which operate instalments systems based on current year liabilities, but require companies with far lower profit levels to pay by instalments. And the US requires companies to pay 100% of their tax in-year, compared to 50% in-year in the UK. Countries which offer companies the choice of paying on a previous year or a current year basis generally require a very early payment of any outstanding tax liability not covered by instalments (two months from the end of their accounting period in Canada and Japan) and early filing of tax returns (two months from the year end in Japan, five months from the year end in Germany).
3.45 Draft regulations on the detail of the shadow ACT scheme will be published at or around the time of the publication of the Finance Bill and comments will be invited.
3.46 Many suggestions were received from companies, including :
3.47 All of these suggestions were designed to increase the amount of surplus ACT recovery for certain sets of companies. However, adopting some of the proposals listed above would have reduced the recovery possibilities that other companies could expect through the operation of the shadow ACT scheme. Companies with big ACT surpluses stand to benefit most from the scrapping of ACT and so would be overly advantaged if they were able to gain further by obtaining a swift recovery of their surplus ACT.
3.48 As was said in the consultative document, the Government remains committed to substantially preserving companies' existing expectations with regards to past surplus ACT, no more and no less. Some companies have argued that their existing expectations should be measured including their ability to pay FIDs. But this would be to ignore the fact that FIDs had already been prospectively abolished in July 1997, well before the statement about existing expectations that was made in November 1997. As a number of commentators have said that, it would be unrealistic to retain FIDs in a shadow form.
3.49 There was also some pressure from groups whose profits are largely generated in the UK that the changes were already benefitting multi-national groups in comparison to them. Any more generous treatment of past surplus ACT would have been looked upon unfavourably by those groups. Moreover companies will, of course, have had the opportunity to reduce their ACT surpluses by paying FIDs between July 1997 and April 1999.
3.50 Other respondents considered that the shadow ACT scheme was an imaginative way of ensuring that the existing position regarding past ACT surpluses was not unfairly changed. Some considered the shadow ACT scheme too complex, and that this was contrary to the expressed desire for simplification. But the shadow ACT scheme will do no more than replicate much of what went before, whilst allowing for some pruning of the ACT rules. This does result in some simplification, particularly as the shadow ACT rules only need concern companies and groups containing companies with ACT surpluses, representing a small minority of the total company population.
3.51 Most of the other comments received dealt with the inevitable cash flow impact of moving from a system of paying corporation tax nine months after the accounting period to a system of quarterly instalment payments.
3.52 Most larger companies said that the cash flow implications of the transition to an instalments system would not have an effect on their investment decisions. However, it was recognised that the cash flow impact of the change could be difficult for some medium-sized companies to absorb, which contributed to the decision to exclude them from the instalments system.
3.53 Some companies, in particular those companies which had never paid ACT because they had never paid dividends, suggested that a longer period of transition would ease the cash flow impact. But other companies were unattracted to a long period of transition. (Indeed some companies suggested that the transitional period should be shorter). On balance, it was felt that the further 1% cut in the main rate of corporation tax from 1 April 1999, combined with the four year phase-in allowed appropriately for the cash flow impact of the change to instalments to be softened whilst avoiding too lengthy a transitional period.
3.54 Another suggestion, put forward by representative groups and individual companies, was to increase the £1.5 million threshold above which companies are considered as large. But this would have been costly, and Ministers felt that the current level was not unreasonable and tied in with limits in existing legislation. Only around 20,000 large companies will pay corporation tax by instalments, out of a total of 700,000 companies that are subject to corporation tax.
3.55 Others suggested that the transition should be gentler for those companies which did not pay dividends, as they did not stand to gain from the abolition of ACT. But such a system would have been very complex to introduce, and would have required two systems to be run in tandem. In addition some of the companies involved would have been difficult to identify.
3.56 Some put forward the idea that capital allowances should be temporarily enhanced to reduce the cash flow impact of instalments. As the four year transitional period was already in place to reduce the cash flow impact, and introducing enhanced capital allowances for large companies would have been costly without having a significant effect on most companies affected by instalments, this suggestion was not taken on board.
3.57 The modern system of corporation tax payments means that, after the transition large companies will on average pay their corporation tax at the start of month 12 after their accounting period begins. The Government believes that this is fair. Where companies do not make the right level of payments, they should provide the Exchequer with restitution that compensates for the loss of cash flow. This compensation will usually just take the form of interest at a commercial rate.
4.1 The scrapping of ACT has been widely welcomed by companies and others. It will simplify the corporation tax regime, and enable companies to take a range of business decisions without regard to its effects. And combined with the further 1 per cent cut to 30 per cent in the main rate of corporation tax, the Government considers that this change will provide a better environment for long-term investment.
4.2 Quarterly accounting for gilt interest (QAGI) is also being abolished as part of this package. Payments of corporation tax by larger companies means that QAGI is no longer needed. This represents a further simplification of the tax system and allows for 60 pages of legislation to be repealed.
4.3 The new system for payments of corporation tax will bring the United Kingdom into line with other major industrial countries, whilst still providing a more generous regime than in most of those countries. And only around 3 per cent of all companies will have to pay their corporation tax in quarterly instalments.
4.4 The constructive participation in this consultation process by individual companies and representative bodies has been welcomed by the Government. The input from the business community has been invaluable in refining and developing the package of proposals for implementation. The Government is grateful to all those who have taken the time to respond.
1.1Under the current system of corporation tax, which has been in operation in the UK since 1973, a company must account for advance corporation tax (ACT) when it pays a dividend. The company is then able (subject to certain restrictions) to set off the ACT paid against its mainstream corporation tax liability. But the existence of ACT, and particularly surplus ACT which results in the effective double taxation of overseas profits, has distorted companies' business decisions and led to some inefficient investment. In attempting to mitigate this problem the foreign income dividend (FID) regime was introduced from 1994, but this provided only a partial solution.
1.2 The abolition of payable tax credits in July 1997 meant that FIDs had to be scrapped from 1999. And the objective of these changes is to provide a permanent, complete solution to the problems of ACT and surplus ACT by abolishing ACT altogether from 1999. This will eliminate surplus ACT for the future and reduce the complexity of the current tax system. The cash flow from ACT will be replaced with a system of quarterly instalments for corporation tax paid by large companies.
1.3 The changes will be accompanied by a further 1% cut in the main rate of corporation tax, to 30 per cent, from April 1999 to ease the transition to instalments.
1.4 The main details of the Government's proposals were set out in the consultative document "A modern system for corporation tax payments" which was published in November 1997.
2.1 It was open to the Government to make no changes to the system but this would have left unsolved the problems of the harmful double taxation of overseas profits, the distorting effect of ACT on business decisions, and the impediment to the effective use of capital by companies (through share buybacks etc.). In addition, doing nothing would have meant that the attractiveness of the UK as a holding company location would have declined.
2.2 Another option would have been to introduce one of a number of possible replacements for foreign income dividends, as floated by the Paymaster General during the Finance Bill debates in July 1997:
a) Relax the 80% non-resident shareholding qualification for the special international holding company rules apply
b) Allow surplus ACT to be reclaimed by companies which derive 90% of their income from overseas
c) Limit the amount of FIDs a company could pay to the amount it had paid historically
d) Allow companies to pay no more than a specified proportion of their dividends as FIDs
None of these options would have provided any more than a "sticking plaster" solution and would have helped some but not all of the companies affected; there has been little enthusiasm from the corporate sector for any of them.
2.3 During the consultation period, the Government has received widespread support for its basic policy aims of abolishing ACT and replacing it with some system of instalment payments of corporation tax. Once fully in place, the new system will mean that all large companies will be on an equal footing and that investment and distribution decisions can be made without worrying about the ACT consequences.
3.1 These proposals simplify the tax system and produce no compliance costs for small and medium-sized companies. Only large companies, who generally have taxable profits of at least £1.5 million, will have any compliance costs, but they will also have some compliance savings.
3.2 Some companies are grouped together with very large numbers of associated companies, and therefore count as large even though their own corporation tax profits are below £1.5 million. They will not have to make instalment payments if their corporation tax liabilities are below £5,000.
3.3 Large companies will have to estimate their current year tax liabilities in order to make their instalment payments. This forecasting will present the main compliance cost of the changes. But most large companies already make regular forecasts of their current year profits, so the additional cost is mainly in forecasting their tax position. And this cost must be offset against the compliance savings accruing from the scrapping of ACT.
3.4 All companies will benefit from not having to complete forms CT61Z when paying or receiving dividends, and will realise administrative savings from not having to pay and account for ACT on those dividends. There will also be much less frequent reporting of other details currently required on form CT61Z. And companies will no longer have to concern themselves with the complex rules for FIDs. In addition, those companies who feared they would suffer from surplus ACT in the future will no longer have to devote management time to considering how to alleviate the problem.
3.5 A shadow ACT scheme will be introduced to govern the recovery by companies of past surplus ACT once ACT has been abolished. Operating this new scheme will create a compliance cost for those companies that have surplus ACT (who represent only a minority of companies). But, as the rules for the shadow ACT scheme will closely resemble the existing rules for ACT, the recurrent compliance cost for those companies who do have surplus ACT when ACT is abolished will be matched by a compliance saving in not having to deal with "real" ACT in the future. This has been confirmed in consultations with companies.
3.6 To ease the compliance costs for large companies, the Government will provide arrangements to allow groups of companies to make their corporation tax payments on a group basis, with payments being allocated to individual companies when they file their tax returns.
3.8 The groups in the table represent the following:
A = Small/medium-sized company or group paying at marginal or small companies' rate of corporation tax
B = Authorised Unit Trust
C = UK-based group paying at the main rate of corporation tax
D = Large multinational group without existing surplus ACT
E = Large multinational group with surplus ACT
3.9 In addition to the recurring costs and savings mentioned above there will be some non-recurring costs for those companies who need to consider their approach to instalments and/or the shadow ACT scheme. Inevitably the size of the sample above is small and does not reflect the position for all companies. It is recognised that some companies subject to instalments may not already produce forecasts and so will face greater compliance costs than others.
3.10 It is difficult to quantify the total UK compliance cost savings but the recurrent saving could be of the order of £25 million a year.
4.1 The changes do not affect the self-employed at all and there are no compliance costs for small and medium-sized companies. Those small and medium-sized companies who are paying dividends will have a compliance saving. This is because they benefit from the abolition of ACT, but will not be affected by instalments.
4.2 In the original proposals it was suggested that medium-sized companies (i.e. companies with taxable profits of between £300,00 and £1.5 million) should pay 50% of their corporation tax liability by instalments. But the Government has listened to concerns raised by the medium-sized sector about the cashflow impact of instalments and the compliance costs of estimating current year liabilities. So, in responding to these concerns, the Government has decided to exempt medium-sized companies from instalments.
4.3 A further concern of small and medium-sized companies was that if they became large unexpectedly during a year, they could face the situation where they had not paid instalments when they should have done. To alleviate this, and to provide greater certainty, the Government has decided that companies will not have to pay their corporation tax by instalments in an accounting period in which they become large if their taxable profits for that accounting period do not exceed £10 million and they were small or medium-sized for the previous year.
5.1 The Inland Revenue will face some costs in catering for the changes. These will largely be incurred in building computer systems that can cope with the new method of payment by instalments.
6.1 We received just over 100 written representations to the consultative document, and in addition had meetings with around 80 companies around the country. An analysis of the response to the consultation document is found in the main body of this feedback document.
7.1 The changes are intended to enhance the attractiveness of the UK as a location for international companies and investment funds. The abolition of ACT provides a welcome simplification to company tax legislation and removes the distorting effect of ACT on business decisions. Instalments will only apply to large companies (i.e. broadly those with taxable profits in excess of £1.5 million) and will be phased in over a four year period to ease the transition. Costs of compliance for these large companies are likely to be offset by savings. Many small and medium-sized companies will also see compliance savings. There will be some additional Inland Revenue costs in moving to the new system, but the smoothing of Exchequer inflows that will be provided by receipts from instalments will enable the Government to better predict its income and manage its funding more effectively. In all, it is estimated that the benefits flowing from the abolition of ACT to the corporate sector as a whole will exceed both the effects on compliance costs/savings and the administrative costs incurred by the Inland Revenue.
Alex Plant
Inland Revenue
Company Tax Division
Room S 95 West Wing
Somerset House
Strand
LONDON
WC2R 1LB
April 1998
| Home | ||||
