Accountants who are hoping that Hector will give them a break after a hectic January spent struggling through piles of troublesome self-assessment forms are now in for a severe disappointment.
The comforting expression on Hector’s face as he gazes out from the cover of the Inland Revenue’s leaflet on its new corporation tax self-assessment system may not appear too alarming. But the new system, which is becoming known by its abbreviation CTSA, is already very much with us, and is indeed screaming for attention.
Large companies or groups with 31 July year-ends should last week have made their first payments of corporation tax under CTSA’s radical new quarterly instalment system. This applies to all companies and groups that are expecting to make annual profits of #1.5m or more.
Calculating the correct amount of this tax payment represents a near-impossible challenge to those accountants without the talents of Mystic Meg, as it is meant to represent a portion of the current accounting year’s tax liability.
In other words, companies are having to pay tax on profits before they know what those profits are going to be. Corporate tax managers admit that the size of the tax payment will be at best an educated guess, and, in many cases, will be a stab in the dark. Those that get it wrong face interest charges of 8% on the amount eventually deemed to be underpaid.
Around 68,000 UK companies have 31 July year-ends. Although small compared to the number which have December year-ends, this figure is significant enough to take the minds of many general practitioners and big firm tax experts away from thoughts of romance on 14 February – the date of the first payment deadline.
Those accountants with clients affected by the deadline therefore had a mere fortnight after the 31 January deadlines for income tax to concentrate their minds on the complex new payment system.
Tom Hughes-Parry is vice-chairman of the General Practitioner Board’s tax group at the English ICA, and a partner of Exeter-based general practice Beer Alpin. He says: ‘Until income tax self-assessment was sorted out, discussions with many clients about corporation tax self-assessment would simply have been information overload.’
Many clients also have other things on their mind, and not just Valentine’s Day. BDO Stoy Hayward tax partner Paul Eagland points out: ‘Corporate attention may have been deflected from the introduction of this new system because of preparations for the introduction of the euro and the millennium bug.’
He adds: ‘These rules will impact far wider than the tax department – hitting accounting, treasury and third-party contracts. The issues run deeper still for growing businesses that need to ensure their systems can cope with the changes, particularly accurately predicting taxable profits, thus avoiding penalty payments.’
So what steps should accountancy firms be taking to get ready for the new system?
Rosalind Upton is a tax partner at Ernst & Young and heads up an in-firm steering group designed to ensure it has all its bases covered as the new system begins to bite.
When asked about the main issues CTSA raises for tax advisers she refers immediately to the tax payment system, further evidence that this is likely to become the CTSA bugbear.
‘We need to make sure we know whether it is us or our clients who are responsible for making the payments,’ she says.
She says Ernst & Young’s engagement letters have been revamped to deal with the changes the new system will mean in the relationship between tax adviser and client.
‘Traditionally we could commit to telling them how much tax to pay but now we can’t. All we can do is do our best with the information available,’ she says.
Ernst & Young has introduced all its tax staff to the new system with training courses. Even those who do not normally deal with tax compliance have been sent on the courses because of the impact the new system will have on tax planning and strategy.
But staff at the firm are not the only ones needing to be educated about the new system. Upton says client education about the new system is an important part of the preparations.
Among the firm’s efforts are newsletters describing the new system and desk calendars showing the numerous deadlines under the new system. However, Upton admits that, despite the good intentions of many clients, both newsletters and calendars stand a high chance of being binned before they get read.
‘Client awareness at the moment is fairly low. What tends to bring the new system to life is when you include it on the agenda at a tax-planning meeting. Face-to-face communication is far more effective than newsletters, which are normally just filed away.’
Upton is also critical of the government’s approach to CTSA, in particular the long delays in the publication of draft regulations which, it is hoped, will give details of how groups of companies should make their payments on account. She says: ‘The government is causing UK businesses numerous headaches with its haphazard attitude to CTSA. These regulations are vital to thousands of companies. It is unacceptable that the new regime has already started and firms are still unable to deal properly with the new burdens imposed on them.’
Another major change CTSA will bring is an increase in the investigatory powers of the Revenue. Frank Haskew, of the English ICA’s tax faculty, sees this as the main problem that CTSA will bring for companies. ‘This will be a major difference. We will see a massive shift to investigation of company tax returns. It is essential that people keep proper records that tie in with their tax returns.’
‘Firms will have to warn clients that they will be subject to a much stricter regime and ask them it they are confident that their tax returns will withstand scrutiny,’ he advises.
He also refers to the rules under the CTSA system that apply to a company’s disclosure of its controlled foreign company and transfer pricing arrangements.
‘Anything with an offshore element needs to be very carefully thought through. It is essential that they get things right, or they will be facing penalties and interest.’
Anyone involved in corporate tax should waste no time in getting their head around the new system. Expensive interest charges, fines and even Revenue investigations could result if companies get it wrong.
CTSA – THE NEW RULES
CTSA makes companies fully responsible for the disclosure, filing and payment of corporation tax. The Revenue will no longer issue corporate tax assessments, and will require companies and groups with annual profits exceeding #1.5m to make quarterly payments of tax on account.
The new payments system will be phased in over the next four years, and requires the first quarterly payment to made seven months and 14 days into a company’s accounting period. For example, for a company with a 31 December year-end, tax instalments will be due on 14 July and 14 October during its accounting year, and 14 January and 14 April the following year.
At the end of the phase-in period, companies will be expected to be paying 100% of their tax liabilities under this system. Companies will also have to keep records supporting their tax calculations for six years after the end of the accounting period to which they relate.
The Revenue has also been given increased powers of investigation, and will move to an audit-based system of policing.
Don’t do the crime if you can’t pay the fine … CTSA: the penalties
– Extra 100% of tax adjustment – maximum fine that can be imposed by Revenue if inspectors make an adjustment of tax due following an investigation
– Extra 20% – levy when tax return outstanding for more than 24 months
– Extra 10% of tax outstanding – levy when tax return outstanding for more than 18 months
– #3,000 – fine for failure to meet new record-keeping requirements under CTSA
– #1,000 – fine for return filed over three months late when companies are in default in two preceding years
– #500 – fine for return filed late when company in default in two preceding years
– #300 – fine for filing return more than three months late
– #100 – fine for filing return late
DATES TO REMEMBER
2 JULY 1998: Companies with accounting periods starting on or after this date fall within new system
14 FEBRUARY 1999: First major payment deadline under corporate self-assessment, affecting large profitable companies with 31 July year-ends
APRIL 1999: Inland Revenue expected to publish detailed guidance notes on CTSA
5 APRIL 1999: ACT no longer payable on dividends
1 JULY 1999: CTSA comes into effect for companies with accounting periods ending on or after this date
31 DECEMBER 1999: Revenue expected to produce guidance on CTSA payments for groups of companies.
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