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Correct a system that punishes those who fail to do the impossible Back  
Companies are required to pay the bulk of their corporation tax one month ahead of the year end. Underpayments attract penal rates of interest. This system imposes unnecessary hardship on companies and penalises them for failing to do the impossible. It needs to be changed, writes Brian Daly.
Corporation tax payments
A company is obliged to pay 90p.c. of its final corporation tax liabilities, not later than the 21st day of the penultimate month prior to its year end. In other words, it must make the payment between five and six weeks prior to its year end.
Brian Daly

The practical implication of that requirement is that the payment computations, which are a complex matter, are likely to be based on management accounting figures up to a date two months at best, and in some cases, three months prior to the year end.

So, what is the problem? The problem is mainly that if the pre year end payment of tax by the company falls short of 90p.c. of its final tax liability, the shortfall will attract a penal rate of interest of approx. 10p.c. That rate of interest is far in excess of the rate at which most companies or the government can borrow money. It is conspicuously higher than the rate of interest which the Revenue pay on refunds of overpaid tax. There can be no doubt but that the rate of interest is designed, not so much to compensate the government for any delay in paying tax, but to severely punish the taxpayer.

Is it fair to punish a company for an error in the computation of its final tax liability, when the computation must be carried out approximately two months prior to year end, and based on accounting information that may be even older? A penal rate of interest is an appropriate reaction to a wrongdoing. Surely it is not an appropriate reaction to a failure to perform the impossible?

The idiocy of the situation is acknowledged in the parallel systems that apply to individuals, and to ‘small companies’. For these purposes a ‘small company’ is one whose corporation tax liability in the preceding period does not exceed ?50,000. The tax payment requirements of individuals and for small companies permit them to compute their payment on account by reference to their chargeable profits for the preceding period. This sensible solution acknowledges the absurdity of the alternative approach of requiring that the payment on account be a precise percentage of the profits of a period that still has approximately two months to run, and whose final outcome cannot be foreseen with any accuracy.

In practice what the system requires is that a company should either expose itself to penal rates of interest should it underpay the tax, or, by opting for safety and significantly overpaying the tax, make what amounts to a compulsory loan to the government.

The point at issue here is not that corporation tax for a period should in large measure be paid before the end of that period. The problem lies in the requirement that the pre year end payment be computed by reference to the profits of the current periods (unknown and incapable of being known) rather than the already ascertained profits of the previous period.

Increased Expense
The system is unreasonable also in the added expense it imposes. The preparation of a tax computation is no simple matter. It involves a considerable level of expert knowledge of taxation and extensive analysis of accounting records to isolate data that is significant for tax purposes only.

Under the present system a company has to go through this process at least twice. The first occasion will be approximately two months prior to year end, in order that it may calculate its first tax payment. The second occasion will be approximately five months after the year end, when it will need to calculate its second (and very often its final) tax payment.

The administrative cost is considerably increased by requiring that the pre year end tax payment be computed by reference to the current year’s likely tax outturn, rather than by reference to the already ascertained and computed tax liability of the previous period.

Forecasting Profits
There are many factors which make it impossible, two months before the end of an accounting period, to determine with any accuracy the final tax liability of the company for the period. The basic commercial outturn for the period cannot be known two months ahead of its end. The precise timing of capital expenditure, as to whether the incurring of the liability occurs before the year end, or after the year end can affect leasing companies especially. It can also be relevant as to whether certain interest payments and pension payments are made before the year end, or immediately after it, regardless of the period to which they relate.

In a group context the final tax outturn of any individual company within the group will be determined not only by its own results but by the possibility of other group members having losses available for surrender to it. Whether or not these losses will arise, and what decisions will be made within the group as to the companies to whom they are to be surrendered, are questions that need to be resolved before you can determine the final tax liability of a company.

Another major variable is the amount of capital gains on the disposal of assets. The time for recognition of a capital gain is generally determined by the date of the contract for the disposal of the asset in question. It is rarely possible two months in advance, to say with any certainty what contracts for the disposal of assets might be entered into prior to the year end.

There are other problems inherent in accountancy that affect the matter. It is not unusual in the preparation of management accounts, that expenses such as bad debts are computed by reference to the percentage of overall debts, or of debts having a certain age profile, based on previous experience. However it is usual, when preparing a final tax computation, to identify the individual debts against which provision is required, in order to ensure that a deduction is obtained for the expense. Management accounts, for that reason, may not be sufficient to compute a tax liability.

A tax liability, where a company prepares its final accounts under IFRS, will be based on those accounting principles. But many companies may not follow those principles fully in their management accounts. Decisions on stock writedowns are frequently not made until year end. Final exchange movements in the last several weeks of an accounting period can have a major impact on final outturn, as can the timing of closing out any foreign exchange hedging arrangements. Insurance companies may be affected by unusual runs of claims in that last two months of their year.

All of those points merely say the same thing. A tax liability cannot be computed with any precision when it has to be done up to two months ahead of the year end. It is therefore inappropriate to penalise a company for its failure to achieve precision in its forecasting of its tax liability.

The current system is unfair, and irrational. It is a simple matter to correct. It should be corrected now.

Recent experience has shown that the Revenue are willing to listen to and engage with industry where there are legitimate concerns about inequities in the tax system. This is, of course, always subject to Revenue’s desire to protect the Exchequer against any unintended side effects. An excellent example of recent cooperation in this regard was the relaxation in the leasing ring fences which was a carefully crafted compromise involving a very constructive dialogue between, amongst others, Revenue and industry representatives. It is to be hoped that industry’s reasonable concerns regarding the corporation tax payment system will also be listened to - not just by Revenue but also by the Minister for Finance who is the ultimate decision maker on such matters.

Capital Gains Tax
Tax on capital gains from the disposal of ‘development land’ is not subjected to corporation tax, as are all other forms of capital gains of the company. Instead they are subjected to capital gains tax.

Capital gains tax is payable from the 31st October, in respect of chargeable gains arising up to the 30th September in the same year, and on the 31st January in respect of chargeable gains arising since the previous 30th September.

It is about time that this politically inspired distinction regarding development land was buried, and with it two of the tax payment dates that a company may have to keep track of.

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