The trickiness of accounting periods

The Finance Bill ‘enacts’ the chancellor’s Budget proposals andn Beardsworth. introduces a quarterly payments on account system for large companies, being those whose taxable profits exceed #1.5m. ‘Enacts’, because the relevant clause is a disappointment, leaving virtually all matters of substance to the yet to be published regulations. Skillful drafting, perhaps, but I would prefer the detail to be in the Bill, and not left to secondary legislation.

But my main concern is with the practical impact.

For accounting periods ending after 1 July 1999 – next year for most businesses – large companies will need to be smarter and able to forecast their annual profits during the year, as adjusted for tax. Companies will be penalised, primarily by way of interest charges, for forecasting errors.

Granted, the rules are eased by permitting calculations to be performed, and payments made, on a group basis, and by reducing the interest differential between overpayments and underpayments – but major problems still exist.

Changes to year-ends

To see the effect of the changes, finance directors of larger companies should ask themselves if they can predict the taxable profits of their company for the current accounting period and what level of confidence they have in their answer.

For those less than sure about their responses, changes are needed. They should review their systems and processes, and use the current accounts year as a dry-run for CTPOA. The aim should be to reduce to acceptable levels the likely interest differential cost – in other words, the margin between the interest that has to be paid if instalments are based on an underestimate of profits and the interest due to be received if they are based on an overestimate.

The problems of CTPOA are particularly acute for those businesses that are most seasonal, especially those whose fourth quarters are key and volatile. Holiday companies with 30 September year-ends, or retailers with 31 January dates will probably have to accept the interest cost of misforecasting as a new, normal cost of business.

Some businesses have inappropriate year-ends, perhaps for historical reasons: CTPOA could encourage them to change.

CTPOA also does not sit easily with companies that make appreciable capital gains, particularly where disposals are in their final quarter. A Q4 capital gain will probably bring with it an interest cost for insufficient prior payments on account.

Capital expenditure plans will also need reviewing when making CTPOA calculations. For instance, a deferral of Q4 planned capital expenditure, so reducing the year’s capital allowances, will have knock-on effects on quarterly instalments.

The new group provisions only permit amalgamation of 51% groups. But what, for instance, of construction companies that operate through 50% or less joint venture companies? It seems they will be unable to enter into group arrangements, and thus be liable to suffer the interest differential, even though consortium relief will in the normal course net the joint venture’s results against its parents.

What will be the position, say, of a large worldwide group with a small UK subsidiary? Will the UK company be within CTPOA? Similarly, will the undistributed overseas profits of subsidiaries of a UK parent need to be included when working out whether the parent is within CTPOA?

Lobbying for results

Differing comments have been made on such points, and no doubt the regulations will clarify this and other issues. My suspicion, based on the current legislation which applies ‘largeness’, is that overseas affiliates will need to be counted. This can sometimes be detrimental, particularly to smaller or start-up UK subsidiaries.

Companies strongly affected could make representations, both now and when the regulations appear. Lobbying too can work: pressure resulted in changes to ISAs, for example.

The new rules would be more acceptable if payments were based on prior years’ profits; on trading profits only; or on some compromise, such as 50% of prior and 50% of current year trading results.

Allan Beardsworth is a partner in the Leeds office of Deloitte & Touche.