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Tuesday, 23rd April 2024
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Plucking the business goose Back  
The Finance Bill requires Irish companies to pay six years’ tax over a five-year period. In addition the arrangements by which they will make these payments are such as are likely to expose many compliant tax-paying companies to interest charges on overdue tax. This will be despite their honest endeavours to meet the legal obligations.
I believe it was Finance Minister Colbert who described the art of taxation as the plucking of a goose with the least amount of hissing. The Minister has proven himself a fiscal artist in his December 2001 Budget, if we are to judge by the lack of protest from the business community at being required to pay six years’ tax in a five year period.

Six for five
This requirement comes from the Minister’s apparently innocent decision to require companies to make their tax payments by reference to current year profits rather than prior year profits.
Of course companies pay tax every year, if they have a liability. Whether they pay it on the basis of prior year profits, or current year profits (or indeed future year profits, should that ever occur to the Minister) does not matter a great deal to anyone.
In a time of sharply rising profits a Minister may obtain a once off boost to tax payments if he moves immediately from a prior year basis (such as companies were on) to a current year basis. That would yield some once-off advantage, but probably no huge advantage. Assuming corporate profits are growing at about the same rate as the economy, one could safely say that it would not increase the tax yield by more than 10 per cent.
What the Minister has done is much more clever. He has been kind to business and has phased in the move to a current basis. By phasing it in he has managed to oblige business to pay tax both on a prior year basis and on a current year basis. And this is the secret to the Minister’s ability to extract six years’ tax over a five-year period out of business.
There is this to be said for the Minister’s action, that he probably had no alternative, given that he had failed to control Government expenditure. But in the detail lies the sting. The manner in which this raid upon business has been implemented may yet cause the business goose to hiss far more than at the requirement to lay six eggs in place of five.

Pass the crystal ball
The problem is a simple one. The first preliminary tax payment on account of corporation tax must be paid one month before the end of an accounting period. It follows therefore that the company making the payment will not know at the time it makes it what its final profits for the period will be and accordingly what its final tax liability for the period will be. This is an unavoidable aspect of the system.
It is no different to the problem faced by individuals liable to self-assessment who are also obliged to make preliminary tax payments on a current year basis, and at a time when they do not know what their final income and tax liability for a year may be.
But in dealing with individuals some glimmer of common sense was permitted to intrude. An individual is permitted to base his preliminary tax payments on his prior year tax liability. Should his preliminary tax payment fall short of 90 per cent of his current year tax liability, interest charges will not arise if the amount he has paid is at least 100 per cent of his prior year tax liability. Thus the individual is not penalised for not possessing a crystal ball and not being able to tell what his final income for the year and tax liability for the year will be, at the time he is obliged to make his preliminary tax payment.
No such common sense approach has been adopted for most companies. Some companies, those whose prior year tax liability does not exceed E50,000 will be permitted to base their preliminary tax payment on their prior year tax liability. But companies with more substantial tax liabilities are not given that concession.
What is required of those companies is that the tax payment they make one month ahead of their accounting period end should be equal to at least 18 per cent (rising to 90 per cent by 2006) of their final tax liability. If the payment they make falls short of that target, not only is interest charged on the short-fall, but the due date for the final balance of tax (normally payable 30 days after date of assessment and normally equal to 10 per cent or less of the final tax liability), will become due on the same date as the second instalment of preliminary tax is due i.e. six months after the end of the accounting period.

Just pay and pay
In order to meet the target of at least 18 per cent (rising to 90 per cent in 2006) of the final tax liability in a payment one month prior to year-end, a company is going to need pretty reliable management accounts prepared up to the tenth month of the year, and pretty reliable forecasts of the outturn of the final two months. It is also going to have to prepare a detailed tax computation based on these management accounts and on these forecasts.
The preparation of a corporation tax computation is not a simple matter. Neither is it an inexpensive matter. It involves quite a lot of time by trained specialists. The new system will require that this time be spent twice – once before the year-end in working on management accounts and forecasts, and once after the year-end when final accounts are available.
What is a company to do? Realistically, the chance that a payment will fall short of the 18 per cent (eventually 90 per cent) of current tax liability target is quite high. It would seem that a company must not only incur the expense of a pre year end accounting and computational effort, but, if they wish to avoid interest charges, must consider deliberately overpaying the tax by a comfortable margin.

Democracy verbatim
This is a silly system. It is an uncivil way to treat the business community, which is the source of much of our wealth, and of the tax revenues of this State. It is a sad commentary on our democratic institutions that these problems were not referred to during the Committee Stage debates on the Finance Bill.
The following extract from those debates (and almost the entirety of the debate on the relevant section) may interest readers.
Mr McCreevy: ‘Was I not a great man to think of it?’
Mr McDowell: ‘It is a clever trick’.
Mr McCreevy: ‘I must compliment the man who wrote to me and told me this years ago. I kept it at the back of my mind’.
Mr McDowell: ‘For a rainy day. It’s started pouring, of course’.
Mr McCreevy: ‘Strangely, the Department’s lads did not come up with that idea either’.

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